[Title 26 CFR ]
[Code of Federal Regulations (annual edition) - April 1, 2020 Edition]
[From the U.S. Government Publishing Office]



[[Page i]]

          

                               Title 26

                           Internal Revenue
                       ________________________

                  Part 1 (Sec.  1.1551 to end of part 1)

                         Revised as of April 1, 2020

          Containing a codification of documents of general 
          applicability and future effect

          As of April 1, 2020
                    Published by the Office of the Federal Register 
                    National Archives and Records Administration as a 
                    Special Edition of the Federal Register

[[Page ii]]

          U.S. GOVERNMENT OFFICIAL EDITION NOTICE

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          Use of ISBN Prefix

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[[Page iii]]




                            Table of Contents



                                                                    Page
  Explanation.................................................       v

  Title 26:
          Chapter I--Internal Revenue Service, Department of 
          the Treasury (Continued)                                   3
  Finding Aids:
      Table of CFR Titles and Chapters........................     853
      Alphabetical List of Agencies Appearing in the CFR......     873
      Table of OMB Control Numbers............................     883
      List of CFR Sections Affected...........................     901

[[Page iv]]





                     ----------------------------

                     Cite this Code: CFR
                     To cite the regulations in 
                       this volume use title, 
                       part and section number. 
                       Thus, 26 CFR 1.1551-1 
                       refers to title 26, part 
                       1, section 1551-1.

                     ----------------------------

[[Page v]]



                               EXPLANATION

    The Code of Federal Regulations is a codification of the general and 
permanent rules published in the Federal Register by the Executive 
departments and agencies of the Federal Government. The Code is divided 
into 50 titles which represent broad areas subject to Federal 
regulation. Each title is divided into chapters which usually bear the 
name of the issuing agency. Each chapter is further subdivided into 
parts covering specific regulatory areas.
    Each volume of the Code is revised at least once each calendar year 
and issued on a quarterly basis approximately as follows:

Title 1 through Title 16.................................as of January 1
Title 17 through Title 27..................................as of April 1
Title 28 through Title 41...................................as of July 1
Title 42 through Title 50................................as of October 1

    The appropriate revision date is printed on the cover of each 
volume.

LEGAL STATUS

    The contents of the Federal Register are required to be judicially 
noticed (44 U.S.C. 1507). The Code of Federal Regulations is prima facie 
evidence of the text of the original documents (44 U.S.C. 1510).

HOW TO USE THE CODE OF FEDERAL REGULATIONS

    The Code of Federal Regulations is kept up to date by the individual 
issues of the Federal Register. These two publications must be used 
together to determine the latest version of any given rule.
    To determine whether a Code volume has been amended since its 
revision date (in this case, April 1, 2020), consult the ``List of CFR 
Sections Affected (LSA),'' which is issued monthly, and the ``Cumulative 
List of Parts Affected,'' which appears in the Reader Aids section of 
the daily Federal Register. These two lists will identify the Federal 
Register page number of the latest amendment of any given rule.

EFFECTIVE AND EXPIRATION DATES

    Each volume of the Code contains amendments published in the Federal 
Register since the last revision of that volume of the Code. Source 
citations for the regulations are referred to by volume number and page 
number of the Federal Register and date of publication. Publication 
dates and effective dates are usually not the same and care must be 
exercised by the user in determining the actual effective date. In 
instances where the effective date is beyond the cut-off date for the 
Code a note has been inserted to reflect the future effective date. In 
those instances where a regulation published in the Federal Register 
states a date certain for expiration, an appropriate note will be 
inserted following the text.

OMB CONTROL NUMBERS

    The Paperwork Reduction Act of 1980 (Pub. L. 96-511) requires 
Federal agencies to display an OMB control number with their information 
collection request.

[[Page vi]]

Many agencies have begun publishing numerous OMB control numbers as 
amendments to existing regulations in the CFR. These OMB numbers are 
placed as close as possible to the applicable recordkeeping or reporting 
requirements.

PAST PROVISIONS OF THE CODE

    Provisions of the Code that are no longer in force and effect as of 
the revision date stated on the cover of each volume are not carried. 
Code users may find the text of provisions in effect on any given date 
in the past by using the appropriate List of CFR Sections Affected 
(LSA). For the convenience of the reader, a ``List of CFR Sections 
Affected'' is published at the end of each CFR volume. For changes to 
the Code prior to the LSA listings at the end of the volume, consult 
previous annual editions of the LSA. For changes to the Code prior to 
2001, consult the List of CFR Sections Affected compilations, published 
for 1949-1963, 1964-1972, 1973-1985, and 1986-2000.

``[RESERVED]'' TERMINOLOGY

    The term ``[Reserved]'' is used as a place holder within the Code of 
Federal Regulations. An agency may add regulatory information at a 
``[Reserved]'' location at any time. Occasionally ``[Reserved]'' is used 
editorially to indicate that a portion of the CFR was left vacant and 
not dropped in error.

INCORPORATION BY REFERENCE

    What is incorporation by reference? Incorporation by reference was 
established by statute and allows Federal agencies to meet the 
requirement to publish regulations in the Federal Register by referring 
to materials already published elsewhere. For an incorporation to be 
valid, the Director of the Federal Register must approve it. The legal 
effect of incorporation by reference is that the material is treated as 
if it were published in full in the Federal Register (5 U.S.C. 552(a)). 
This material, like any other properly issued regulation, has the force 
of law.
    What is a proper incorporation by reference? The Director of the 
Federal Register will approve an incorporation by reference only when 
the requirements of 1 CFR part 51 are met. Some of the elements on which 
approval is based are:
    (a) The incorporation will substantially reduce the volume of 
material published in the Federal Register.
    (b) The matter incorporated is in fact available to the extent 
necessary to afford fairness and uniformity in the administrative 
process.
    (c) The incorporating document is drafted and submitted for 
publication in accordance with 1 CFR part 51.
    What if the material incorporated by reference cannot be found? If 
you have any problem locating or obtaining a copy of material listed as 
an approved incorporation by reference, please contact the agency that 
issued the regulation containing that incorporation. If, after 
contacting the agency, you find the material is not available, please 
notify the Director of the Federal Register, National Archives and 
Records Administration, 8601 Adelphi Road, College Park, MD 20740-6001, 
or call 202-741-6010.

CFR INDEXES AND TABULAR GUIDES

    A subject index to the Code of Federal Regulations is contained in a 
separate volume, revised annually as of January 1, entitled CFR Index 
and Finding Aids. This volume contains the Parallel Table of Authorities 
and Rules. A list of CFR titles, chapters, subchapters, and parts and an 
alphabetical list of agencies publishing in the CFR are also included in 
this volume.
    An index to the text of ``Title 3--The President'' is carried within 
that volume.

[[Page vii]]

    The Federal Register Index is issued monthly in cumulative form. 
This index is based on a consolidation of the ``Contents'' entries in 
the daily Federal Register.
    A List of CFR Sections Affected (LSA) is published monthly, keyed to 
the revision dates of the 50 CFR titles.

REPUBLICATION OF MATERIAL

    There are no restrictions on the republication of material appearing 
in the Code of Federal Regulations.

INQUIRIES

    For a legal interpretation or explanation of any regulation in this 
volume, contact the issuing agency. The issuing agency's name appears at 
the top of odd-numbered pages.
    For inquiries concerning CFR reference assistance, call 202-741-6000 
or write to the Director, Office of the Federal Register, National 
Archives and Records Administration, 8601 Adelphi Road, College Park, MD 
20740-6001 or e-mail [email protected].

SALES

    The Government Publishing Office (GPO) processes all sales and 
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ELECTRONIC SERVICES

    The full text of the Code of Federal Regulations, the LSA (List of 
CFR Sections Affected), The United States Government Manual, the Federal 
Register, Public Laws, Public Papers of the Presidents of the United 
States, Compilation of Presidential Documents and the Privacy Act 
Compilation are available in electronic format via www.govinfo.gov. For 
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Government Publishing Office. Phone 202-512-1800, or 866-512-1800 (toll-
free). E-mail, [email protected].
    The Office of the Federal Register also offers a free service on the 
National Archives and Records Administration's (NARA) website for public 
law numbers, Federal Register finding aids, and related information. 
Connect to NARA's website at www.archives.gov/federal-register.
    The e-CFR is a regularly updated, unofficial editorial compilation 
of CFR material and Federal Register amendments, produced by the Office 
of the Federal Register and the Government Publishing Office. It is 
available at www.ecfr.gov.

    Oliver A. Potts,
    Director,
    Office of the Federal Register
    April 1, 2020.







[[Page ix]]



                               THIS TITLE

    Title 26--Internal Revenue is composed of twenty-two volumes. The 
contents of these volumes represent all current regulations issued by 
the Internal Revenue Service, Department of the Treasury, as of April 1, 
2020. The first fifteen volumes comprise part 1 (Subchapter A--Income 
Tax) and are arranged by sections as follows: Sec. Sec.  1.0-1.60; 
Sec. Sec.  1.61-1.139; Sec. Sec.  1.140-1.169; Sec. Sec.  1.170-1.300; 
Sec. Sec.  1.301-1.400; Sec. Sec.  1.401-1.409; Sec. Sec.  1.410-1.440; 
Sec. Sec.  1.441-1.500; Sec. Sec.  1.501-1.640; Sec. Sec.  1.641-1.850; 
Sec. Sec.  1.851-1.907; Sec. Sec.  1.908-1.1000; Sec. Sec.  1.1001-
1.1400; Sec. Sec.  1.1401-1.1550; and Sec.  1.1551 to end of part 1. The 
sixteenth volume containing parts 2-29, includes the remainder of 
subchapter A and all of Subchapter B--Estate and Gift Taxes. The last 
six volumes contain parts 30-39 (Subchapter C--Employment Taxes and 
Collection of Income Tax at Source); parts 40-49; parts 50-299 
(Subchapter D--Miscellaneous Excise Taxes); parts 300-499 (Subchapter 
F--Procedure and Administration); parts 500-599 (Subchapter G--
Regulations under Tax Conventions); and part 600 to end (Subchapter H--
Internal Revenue Practice).

    The OMB control numbers for title 26 appear in Sec.  602.101 of this 
chapter. For the convenience of the user, Sec.  602.101 appears in the 
Finding Aids section of the volumes containing parts 1 to 599.

    For this volume, Susannah C. Hurley was Chief Editor. The Code of 
Federal Regulations publication program is under the direction of John 
Hyrum Martinez, assisted by Stephen J. Frattini.

[[Page 1]]



                       TITLE 26--INTERNAL REVENUE




       (This book contains part 1, Sec. 1.1551 to end of part 1)

  --------------------------------------------------------------------
                                                                    Part

chapter i--Internal Revenue Service, Department of the 
  Treasury (Continued)......................................           1

[[Page 3]]



    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)




  --------------------------------------------------------------------


  Editorial Note: IRS published a document at 45 FR 6088, January 25, 
1980, deleting statutory sections from their regulations. In Chapter I 
cross references to the deleted material have been changed to the 
corresponding sections of the IRS Code of 1954 or to the appropriate 
regulations sections. When either such change produced a redundancy, the 
cross reference has been deleted. For further explanation, see 45 FR 
20795, Mar. 31, 1980.

                  SUBCHAPTER A--INCOME TAX (CONTINUED)
Part                                                                Page
1               Income taxes (Continued)....................           5

Supplementary Publications: Internal Revenue Service Looseleaf 
  Regulations System.

  Additional supplementary publications are issued covering Alcohol and 
Tobacco Tax Regulations, and Regulations Under Tax Conventions.

[[Page 5]]



                   SUBCHAPTER A_INCOME TAX (CONTINUED)





PART 1_INCOME TAXES (CONTINUED)--Table of Contents



                              RELATED RULES

Sec.
1.1551-1 Disallowance of surtax exemption and accumulated earnings 
          credit.
1.1552-1 Earnings and profits.

                     Certain Controlled Corporations

1.1561-0 Table of contents.
1.1561-1 General rules regarding certain tax benefits available to the 
          component members of a controlled group of corporations.
1.1561-2 Special rules for allocating reductions of certain section 
          1561(a) tax-benefit items.
1.1561-3 Allocation of the section 1561(a) tax items.
1.1563-1 Definition of controlled group of corporations and component 
          members and related concepts.
1.1563-2 Excluded stock.
1.1563-3 Rules for determining stock ownership.
1.1563-4 Franchised corporations.

  Individual Shared Responsibility Payment for Not Maintaining Minimum 
                           Essential Coverage

                      PROCEDURE AND ADMINISTRATION

                         INFORMATION AND RETURNS

1.5000A-0 Table of contents.
1.5000A-1 Maintenance of minimum essential coverage and liability for 
          the shared responsibility payment.
1.5000A-2 Minimum essential coverage.
1.5000A-3 Exempt individuals.
1.5000A-4 Computation of shared responsibility payment.
1.5000A-5 Administration and procedure.

                   Tax on Certain Foreign Procurement

1.5000C-0 Outline of regulation provisions for section 5000C.
1.5000C-1 Tax on specified Federal procurement payments.
1.5000C-2 Withholding on specified Federal procurement payments.
1.5000C-3 Payment and returns of tax withheld by the acquiring agency.
1.5000C-4 Requirement for the foreign contracting party to file a return 
          and pay tax, and procedures for the contracting party to seek 
          a refund.
1.5000C-5 Anti-abuse rule.
1.5000C-6 Examples.
1.5000C-7 Effective/applicability date.

                           Returns and Records

                Records, Statements, and Special Returns

1.6001-1 Records.
1.6001-2 Returns.

                        Tax Returns or Statements

1.6011-1 General requirement of return, statement, or list.
1.6011-2 Returns, etc., of DISC's and former DISC's.
1.6011-3 Requirement of statement from payees of certain gambling 
          winnings.
1.6011-4 Requirement of statement disclosing participation in certain 
          transactions by taxpayers.
1.6011-5 Required use of magnetic media for corporate income tax 
          returns.
1.6011-6 [Reserved]
1.6011-7 Specified tax return preparers required to file individual 
          income tax returns using magnetic media.
1.6011-8 Requirement of income tax return for taxpayers who claim the 
          premium tax credit under section 36B.
1.6012-1 Individuals required to make returns of income.
1.6012-2 Corporations required to make returns of income.
1.6012-3 Returns by fiduciaries.
1.6012-4 Miscellaneous returns.
1.6012-5 Composite return in lieu of specified form.
1.6012-6 Returns by political organizations.
1.6013-1 Joint returns.
1.6013-2 Joint return after filing separate return.
1.6013-3 Treatment of joint return after death of either spouse.
1.6013-4 Applicable rules.
1.6013-6 Election to treat nonresident alien individual as resident of 
          the United States.
1.6013-7 Joint return for year in which nonresident alien becomes 
          resident of the United States.
1.6014-1 Tax not computed by taxpayer for taxable years beginning before 
          January 1, 1970.
1.6014-2 Tax not computed by taxpayer for taxable years beginning after 
          December 31, 1969.
1.6015-0 Table of contents.
1.6015-1 Relief from joint and several liability on a joint return.
1.6015-2 Relief from liability applicable to all qualifying joint 
          filers.
1.6015-3 Allocation of deficiency for individuals who are no longer 
          married, are legally separated, or are not members of the same 
          household.
1.6015-4 Equitable relief.

[[Page 6]]

1.6015-5 Time and manner for requesting relief.
1.6015-6 Nonrequesting spouse's notice and opportunity to participate in 
          administrative proceedings.
1.6015-7 Tax Court review.
1.6015-8 Applicable liabilities.
1.6015-9 Effective date.
1.6016-1 Declarations of estimated income tax by corporations.
1.6016-2 Contents of declaration of estimated tax.
1.6016-3 Amendment of declaration.
1.6016-4 Short taxable year.
1.6017-1 Self-employment tax returns.

                           Information Returns

1.6031(a)-1 Return of partnership income.
1.6031(b)-1T Statements to partners (temporary).
1.6031(b)-2T REMIC reporting requirements (temporary). [Reserved]
1.6031(c)-1T Nominee reporting of partnership information (temporary).
1.6031(c)-2T Nominee reporting of REMIC information (temporary). 
          [Reserved]
1.6032-1 Returns of banks with respect to common trust funds.
1.6033-1 Returns by exempt organizations; taxable years beginning before 
          January 1, 1970.
1.6033-2 Returns by exempt organizations (taxable years beginning after 
          December 31, 1969) and returns by certain nonexempt 
          organizations (taxable years beginning after December 31, 
          1980).
1.6033-3 Additional provisions relating to private foundations.
1.6033-4 Required use of magnetic media for returns by organizations 
          required to file returns under section 6033.
1.6033-5 Disclosure by tax-exempt entities that are parties to certain 
          reportable transactions.
1.6033-6 Notification requirement for entities not required to file an 
          annual information return under section 6033(a)(1) (taxable 
          years beginning after December 31, 2006).
1.6034-1 Information returns required of trusts described in section 
          4947(a)(2) or claiming charitable or other deductions under 
          section 642(c).
1.6035-1 [Reserved]
1.6035-2 Transitional relief.
1.6036-1 Notice of qualification as executor or receiver.
1.6037-1 Return of electing small business corporation.
1.6037-2 Required use of magnetic media for income tax returns of 
          electing small business corporations.
1.6038-1 Information returns required of domestic corporations with 
          respect to annual accounting periods of certain foreign 
          corporations beginning before January 1, 1963.
1.6038-2 Information returns required of United States persons with 
          respect to annual accounting periods of certain foreign 
          corporations.
1.6038-2T Information returns required of United States persons with 
          respect to annual accounting periods of certain foreign 
          corporations beginning after December 31, 1962 (temporary).
1.6038-3 Information returns required of certain United States persons 
          with respect to controlled foreign partnerships (CFPs).
1.6038-4 Information returns required of certain United States persons 
          with respect to such person's U.S. multinational enterprise 
          group.
1.6038-5 Information returns required of certain United States persons 
          to report amounts determined with respect to certain foreign 
          corporations for global intangible low-taxed income (GILTI) 
          purposes.
1.6038A-0 Table of contents.
1.6038A-1 General requirements and definitions.
1.6038A-2 Requirement of return.
1.6038A-3 Record maintenance.
1.6038A-4 Monetary penalty.
1.6038A-5 Authorization of agent.
1.6038A-6 Failure to furnish information.
1.6038A-7 Noncompliance.
1.6038B-1 Reporting of certain transfers to foreign corporations.
1.6038B-1T Reporting of certain transactions to foreign corporations 
          (temporary).
1.6038B-2 Reporting of certain transfers to foreign partnerships.
1.6038D-0 Outline of regulation provisions.
1.6038D-1 Reporting with respect to specified foreign financial assets, 
          definition of terms.
1.6038D-2 Requirement to report specified foreign financial assets.
1.6038D-3 Specified foreign financial assets.
1.6038D-4 Information required to be reported.
1.6038D-5 Valuation guidelines.
1.6038D-6 Specified domestic entities.
1.6038D-7 Exceptions from the reporting of certain assets under Section 
          6038D.
1.6038D-8 Penalties for failure to disclose.
1.6039-1 Returns required in connection with certain options.
1.6039-2 Statements to persons with respect to whom information is 
          reported.
1.6039I-1 Reporting of certain employer-owned life insurance contracts.
1.6041-1 Return of information as to payments of $600 or more.
1.6041-2 Return of information as to payments to employees.
1.6041-3 Payments for which no return of information is required under 
          section 6041.
1.6041-4 Foreign-related items and other exceptions.

[[Page 7]]

1.6041-5 Information as to actual owner.
1.6041-6 Returns made on Forms 1096 and 1099 under section 6041; 
          contents and time and place for filing.
1.6041-7 Magnetic media requirement.
1.6041-8 Cross-reference to penalties.
1.6041-9 Coordination with reporting rules for widely held fixed 
          investment trusts under Sec. 1.671-5.
1.6041-10 Return of information as to payments of winnings from bingo, 
          keno, and slot machine play.
1.6041A-1 Returns regarding payments of remuneration for services and 
          certain direct sales.
1.6042-1 Return of information as to dividends paid in calendar years 
          before 1963.
1.6042-2 Returns of information as to dividends paid.
1.6042-3 Dividends subject to reporting.
1.6042-4 Statements to recipients of dividend payments.
1.6042-5 Coordination with reporting rules for widely held fixed 
          investment trusts under Sec. 1.671-5.
1.6043-1 Return regarding corporate dissolution or liquidation.
1.6043-2 Return of information respecting distributions in liquidation.
1.6043-3 Return regarding liquidation, dissolution, termination, or 
          substantial contraction of organizations exempt from taxation 
          under section 501(a).
1.6043-4 Information returns relating to certain acquisitions of control 
          and changes in capital structure.
1.6044-1 Returns of information as to patronage dividends with respect 
          to patronage occurring in taxable years beginning before 1963.
1.6044-2 Returns of information as to payments of patronage dividends.
1.6044-3 Amounts subject to reporting.
1.6044-4 Exemption for certain consumer cooperatives.
1.6044-5 Statements to recipients of patronage dividends.
1.6045-1 Returns of information of brokers and barter exchanges.
1.6045-2 Furnishing statement required with respect to certain 
          substitute payments.
1.6045-3 Information reporting for an acquisition of control or a 
          substantial change in capital structure.
1.6045-4 Information reporting on real estate transactions with dates of 
          closing on or after January 1, 1991.
1.6045-5 Information reporting on payments to attorneys.
1.6045A-1 Statements of information required in connection with 
          transfers of securities.
1.6045B-1 Returns relating to actions affecting basis of securities.
1.6046-1 Returns as to organization or reorganization of foreign 
          corporations and as to acquisitions of their stock.
1.6046A-1 Return requirement for United States persons who acquire or 
          dispose of an interest in a foreign partnership, or whose 
          proportional interest in a foreign partnership changes 
          substantially.
1.6046-2 Returns as to foreign corporations which are created or 
          organized, or reorganized, on or after September 15, 1960, and 
          before January 1, 1963.
1.6046-3 Returns as to formation or reorganization of foreign 
          corporations prior to September 15, 1960.
1.6047-1 Information to be furnished with regard to employee retirement 
          plan covering an owner-employee.
1.6047-2 Information relating to qualifying longevity annuity contracts.
1.6049-1 Returns of information as to interest paid in calendar years 
          before 1983 and original issue discount includible in gross 
          income for calendar years before 1983.
1.6049-2 Interest and original issue discount subject to reporting in 
          calendar years before 1983.
1.6049-3 Statements to recipients of interest payments and holders of 
          obligations to which there is attributed original issue 
          discount in calendar years before 1983.
1.6049-4 Return of information as to interest paid and original issue 
          discount includible in gross income after December 31, 1982.
1.6049-5 Interest and original issue discount subject to reporting after 
          December 31, 1982.
1.6049(d)-5T Reporting by brokers of interest and original issue 
          discount on and after January 1, 1986 (temporary).
1.6049-6 Statements to recipients of interest payments and holders of 
          obligations for attributed original issue discount.
1.6049-7 Returns of information with respect to REMIC regular interests 
          and collateralized debt obligations.
1.6049-8 Interest and original issue discount paid to certain 
          nonresident aliens.
1.6049-9 Premium subject to reporting for a debt instrument acquired on 
          or after January 1, 2014.
1.6049-10 Reporting of original issue discount on a tax-exempt 
          obligation.
1.6050A-1 Reporting requirements of certain fishing boat operators.
1.6050B-1 Information returns by person making unemployment compensation 
          payments.
1.6050D-1 Information returns relating to energy grants and financing.
1.6050E-1 Reporting of State and local income tax refunds.
1.6050H-0 Table of contents.
1.6050H-1 Information reporting of mortgage interest received in a trade 
          or business from an individual.

[[Page 8]]

1.6050H-2 Time, form, and manner of reporting interest received on 
          qualified mortgage.
1.6050H-3 Information reporting of mortgage insurance premiums.
1.6050I-0 Table of contents.
1.6050I-1 Returns relating to cash in excess of $10,000 received in a 
          trade or business.
1.6050I-2 Returns relating to cash in excess of $10,000 received as bail 
          by court clerks.
1.6050J-1T Questions and answers concerning information returns relating 
          to foreclosures and abandonments of security (temporary).
1.6050K-1 Returns relating to sales or exchanges of certain partnership 
          interests.
1.6050L-1 Information return by donees relating to certain dispositions 
          of donated property.
1.6050L-2 Information returns by donees relating to qualified 
          intellectual property contributions.
1.6050M-1 Information returns relating to persons receiving contracts 
          from certain Federal executive agencies.
1.6050N-1 Statements to recipients of royalties paid after December 31, 
          1986.
1.6050N-2 Coordination with reporting rules for widely held fixed 
          investment trusts under Sec. 1.671-5.
1.6050P-0 Table of contents.
1.6050P-1 Information reporting for discharges of indebtedness by 
          certain entities.
1.6050P-2 Organization a significant trade or business of which is the 
          lending of money.
1.6050S-0 Table of contents.
1.6050S-1 Information reporting for qualified tuition and related 
          expenses.
1.6050S-2 Information reporting for payments and reimbursements or 
          refunds of qualified tuition and related expenses.
1.6050S-3 Information reporting for payments of interest on qualified 
          education loans.
1.6050S-4 Information reporting for payments of interest on qualified 
          education loans.
1.6050W-1 Information reporting for payments made in settlement of 
          payment card and third party network transactions.
1.6050W-2 Electronic furnishing of information statements for payments 
          made in settlement of payment card and third party network 
          transactions.
1.6050Y-1 Information reporting for reportable policy sales, transfers 
          of life insurance contracts to foreign persons, and reportable 
          death benefits.
1.6050Y-2 Information reporting by acquirers for reportable policy sale 
          payments.
1.6050Y-3 Information reporting by 6050Y(b) issuers for reportable 
          policy sales and transfers of life insurance contracts to 
          foreign persons.
1.6050Y-4 Information reporting by payors for reportable death benefits.
1.6052-1 Information returns regarding payment of wages in the form of 
          group-term life insurance.
1.6052-2 Statements to be furnished employees with respect to wages paid 
          in the form of group-term life insurance.
1.6055-1 Information reporting for minimum essential coverage.
1.6055-2 Electronic furnishing of statements.
1.6060-1 Reporting requirements for tax return preparers.

          Signing and Verifying of Returns and Other Documents

1.6061-1 Signing of returns and other documents by individuals.
1.6062-1 Signing of returns, statements, and other documents made by 
          corporations.
1.6063-1 Signing of returns, statements, and other documents made by 
          partnerships.
1.6065-1 Verification of returns.

               Time for Filing Returns and Other Documents

1.6071-1 Time for filing returns and other documents.
1.6072-1 Time for filing returns of individuals, estates, and trusts.
1.6072-2 Time for filing returns of corporations.
1.6072-3 Income tax due dates postponed in case of China Trade Act 
          corporations.
1.6072-4 Time for filing other returns of income.
1.6073-1 Time and place for filing declarations of estimated income tax 
          by individuals.
1.6073-2 Fiscal years.
1.6073-3 Short taxable years.
1.6073-4 Extension of time for filing declarations by individuals.
1.6074-1 Time and place for filing declarations of estimated income tax 
          by corporations.
1.6074-2 Time for filing declarations by corporations in case of a short 
          taxable year.
1.6074-3 Extension of time for filing declarations by corporations.

                  Extension of Time for Filing Returns

1.6081-1 Extension of time for filing returns.
1.6081-2 Automatic extension of time to file certain returns filed by 
          partnerships.
1.6081-3 Automatic extension of time for filing corporation income tax 
          returns.
1.6081-4 Automatic extension of time for filing individual income tax 
          return.
1.6081-5 Extensions of time in the case of certain partnerships, 
          corporations and U.S. citizens and residents.

[[Page 9]]

1.6081-6 Automatic extension of time to file estate or trust income tax 
          return.
1.6081-7 Automatic extension of time to file Real Estate Mortgage 
          Investment Conduit (REMIC) income tax return.
1.6081-8 Extension of time to file certain information returns.
1.6081-9 Automatic extension of time to file exempt or political 
          organization returns.
1.6081-10 Automatic extension of time to file withholding tax return for 
          U.S. source income of foreign persons.
1.6081-11 Automatic extension of time for filing certain employee plan 
          returns.

               Place for Filing Returns or Other Documents

1.6091-1 Place for filing returns or other documents.
1.6091-2 Place for filing income tax returns.
1.6091-3 Filing certain international income tax returns.
1.6091-4 Exceptional cases.

                        Miscellaneous Provisions

1.6102-1 Computations on returns or other documents.
1.6107-1 Tax return preparer must furnish copy of return or claim for 
          refund to taxpayer and must retain a copy or record.
1.6107-2 Form and manner of furnishing copy of return and retaining copy 
          or record.
1.6109-1 Identifying numbers.
1.6109-2 Tax return preparers furnishing identifying numbers for returns 
          or claims for refund and related requirements.
1.6115-1 Disclosure requirements for quid pro quo contributions.

 Regulations Applicable to Returns or Claims for Refund Filed Prior to 
                             January 1, 2000

1.6109-2A Furnishing identifying number of income tax return preparer.

                      TIME AND PLACE FOR PAYING TAX

                  Place and Due Date for Payment of Tax

1.6151-1 Time and place for paying tax shown on returns.
1.6153-1 Payment of estimated tax by individuals.
1.6153-2 Fiscal years.
1.6153-3 Short taxable years.
1.6153-4 Extension of time for paying the estimated tax.

                     Extensions of Time for Payment

1.6161-1 Extension of time for paying tax or deficiency.
1.6162-1 Extension of time for payment of tax on gain attributable to 
          liquidation of personal holding companies.
1.6164-1 Extensions of time for payment of taxes by corporations 
          expecting carrybacks.
1.6164-2 Amount of tax the time for payment of which may be extended.
1.6164-3 Computation of the amount of reduction of the tax previously 
          determined.
1.6164-4 Payment of remainder of tax where extension relates to only 
          part of the tax.
1.6164-5 Period of extension.
1.6164-6 Revised statements.
1.6164-7 Termination by district director.
1.6164-8 Payments on termination.
1.6164-9 Cross references.
1.6165-1 Bonds where time to pay the tax or deficiency has been 
          extended.

                               COLLECTION

                           General Provisions

1.6302-1 Deposit rules for corporation income and estimated income taxes 
          and certain taxes of tax-exempt organizations.
1.6302-2 Deposit rules for tax withheld on nonresident aliens and 
          foreign corporations.
1.6302-3 Deposit rules for estimated taxes of certain trusts.
1.6302-4 Voluntary payments by electronic funds transfer.
1.6361-1 Collection and administration of qualified State individual 
          income taxes.

                    ABATEMENTS, CREDITS, AND REFUNDS

1.6411-1 Tentative carryback adjustments.
1.6411-2 Computation of tentative carryback adjustment.
1.6411-3 Allowance of adjustments.
1.6411-4 Consolidated groups.
1.6414-1 Credit or refund of tax withheld on nonresident aliens and 
          foreign corporations.
1.6425-1 Adjustment of overpayment of estimated income tax by 
          corporation.
1.6425-2 Computation of adjustment of overpayment of estimated tax.
1.6425-3 Allowance of adjustments.

   ADDITIONS TO THE TAX, ADDITIONAL AMOUNTS, AND ASSESSABLE PENALTIES

1.6654-1 Addition to the tax in the case of an individual.
1.6654-2 Exceptions to imposition of the addition to the tax in the case 
          of individuals.
1.6654-3 Short taxable years of individuals.
1.6654-4 [Reserved]
1.6654-5 Payments of estimated tax.
1.6654-6 Nonresident alien individuals.
1.6654-7 Applicability.
1.6655-0 Table of contents.
1.6655-1 Addition to the tax in the case of a corporation.
1.6655-2 Annualized income installment method.

[[Page 10]]

1.6655-2T Safe harbor for certain installments of tax due before July 1, 
          1987 (temporary).
1.6655-3 Adjusted seasonal installment method.
1.6655-4 Large corporations.
1.6655-5 Short taxable year.
1.6655-6 Methods of accounting.
1.6655-7 Addition to tax on account of excessive adjustment under 
          section 6425.
1.6655(e)-1 Time and manner for making election under the Omnibus Budget 
          Reconciliation Act of 1993.
1.6662-0 Table of contents.
1.6662-1 Overview of the accuracy-related penalty.
1.6662-2 Accuracy-related penalty.
1.6662-3 Negligence or disregard of rules or regulations.
1.6662-4 Substantial understatement of income tax.
1.6662-5 Substantial and gross valuation misstatements under chapter 1.
1.6662-5T Substantial and gross valuation misstatements under chapter 1 
          (temporary).
1.6662-6 Transactions between persons described in section 482 and net 
          section 482 transfer price adjustments.
1.6662-7 Omnibus Budget Reconciliation Act of 1993 changes to the 
          accuracy-related penalty.
1.6664-0 Table of contents.
1.6664-1 Accuracy-related and fraud penalties; definitions, effective 
          date and special rules.
1.6664-2 Underpayment.
1.6664-3 Ordering rules for determining the total amount of penalties 
          imposed.
1.6664-4 Reasonable cause and good faith exception to section 6662 
          penalties.
1.6664-4T Reasonable cause and good faith exception to section 6662 
          penalties.
1.6694-0 Table of contents.
1.6694-1 Section 6694 penalties applicable to tax return preparers.
1.6694-2 Penalty for understatement due to an unreasonable position.
1.6694-3 Penalty for understatement due to willful, reckless, or 
          intentional conduct.
1.6694-4 Extension of period of collection when tax return preparer pays 
          15 percent of a penalty for understatement of taxpayer's 
          liability and certain other procedural matters.
1.6695-1 Other assessable penalties with respect to the preparation of 
          tax returns for other persons.
1.6695-2 Tax return preparer due diligence requirements for certain tax 
          returns and claims.
1.6696-1 Claims for credit or refund by tax return preparers or 
          appraisers.
1.6709-1T Penalties with respect to mortgage credit certificates 
          (temporary).

                 JEOPARDY, BANKRUPTCY, AND RECEIVERSHIPS

1.6851-1 Termination assessments of income tax.
1.6851-2 Certificates of compliance with income tax laws by departing 
          aliens.
1.6851-3 Furnishing of bond to insure payment; cross reference.

                              THE TAX COURT

 Declaratory Judgements Relating to Qualification of Certain Retirement 
                                  Plans

1.7476-1 Interested parties.
1.7476-2 Notice to interested parties.
1.7476-3 Notice of determination.
1.7519-0T Table of contents (temporary).
1.7519-1T Required payments for entities electing not to have required 
          year (temporary).
1.7519-2T Required payments--procedures and administration (temporary).
1.7519-3T Effective date (temporary).

                      General Actuarial Valuations

1.7520-1 Valuation of annuities, unitrust interests, interests for life 
          or terms of years, and remainder or reversionary interests.
1.7520-2 Valuation of charitable interests.
1.7520-3 Limitation on the application of section 7520.
1.7520-4 Transitional rules.
1.7701-1 Definitions; spouse, husband and wife, husband, wife, marriage.
1.7701(l)-0 Table of contents.
1.7701(l)-1 Conduit financing arrangements.
1.7701(l)-3 Recharacterizing financing arrangements involving fast-pay 
          stock.
1.7701(l)-4 Rules regarding inversion transactions.
1.7702-0 Table of contents.
1.7702-2 Attained age of the insured under a life insurance contract.
1.7702B-1 Consumer protection provisions.
1.7702B-2 Special rules for pre-1997 long-term care insurance contracts.
1.7703-1 Determination of marital status.
1.7704-1 Publicly traded partnerships.
1.7704-2 Transition provisions.
1.7704-3 Qualifying income.
1.7704-4 Qualifying income--mineral and natural resources.
1.7872-1--1.7872-4 [Reserved]
1.7872-5 Exempted loans.
1.7872-5T Exempted loans (temporary).
1.7872-15 Split-dollar loans.
1.7872-16 Loans to an exchange facilitator under Sec. 1.468B-6.
1.7874-1 Disregard of affiliate-owned stock.
1.7874-2 Surrogate foreign corporation.
1.7874-3 Substantial business activities.
1.7874-4 Disregard of certain stock related to the domestic entity 
          acquisition.
1.7874-5 Effect of certain transfers of stock related to the 
          acquisition.

[[Page 11]]

1.7874-6 Stock transferred by members of the EAG.
1.7874-8 Disregard of certain stock attributable to serial acquisitions.
1.7874-9 Disregard of certain stock in third-country transactions.
1.7874-10 Disregard of certain distributions.
1.7874-11 Rules regarding inversion gain.
1.7874-12 Definitions.

                      PUBLIC LAW 74, 84TH CONGRESS

1.9000-1 Statutory provisions.
1.9000-2 Effect of repeal in general.
1.9000-3 Requirement of statement showing increase in tax liability.
1.9000-4 Form and content of statement.
1.9000-5 Effect of filing statement.
1.9000-6 Provisions for the waiver of interest.
1.9000-7 Provisions for estimated tax.
1.9000-8 Extension of time for making certain payments.

             RETIREMENT-STRAIGHT LINE ADJUSTMENT ACT OF 1958

1.9001 Statutory provisions; Retirement-Straight Line Adjustment Act of 
          1958.
1.9001-1 Change from retirement to straight-line method of computing 
          depreciation.
1.9001-2 Basis adjustments for taxable years beginning on or after 1956 
          adjustment date.
1.9001-3 Basis adjustments for taxable years between changeover date and 
          1956 adjustment date.
1.9001-4 Adjustments required in computing excess-profits credit.

              DEALER RESERVE INCOME ADJUSTMENT ACT OF 1960

1.9002 Statutory provisions; Dealer Reserve Income Adjustment Act of 
          1960 (74 Stat. 124).
1.9002-1 Purpose, applicability, and definitions.
1.9002-2 Election to have the provisions of section 481 of the Internal 
          Revenue Code of 1954 apply.
1.9002-3 Election to have the provisions of section 481 of the Internal 
          Revenue Code of 1954 not apply.
1.9002-4 Election to pay net increase in tax in installments.
1.9002-5 Special rules relating to interest.
1.9002-6 Acquiring corporation.
1.9002-7 Statute of limitations.
1.9002-8 Manner of exercising elections.

             PUBLIC DEBT AND TAX RATE EXTENSION ACT OF 1960

1.9003 Statutory provisions; section 4 of the Act of September 14, 1960 
          (Pub. L. 86-781, 74 Stat. 1017).
1.9003-1 Election to have the provisions of section 613(c)(2) and (4) of 
          the 1954 Code, as amended, apply for past years.
1.9003-2 Effect of election.
1.9003-3 Statutes of limitation.
1.9003-4 Manner of exercising election.
1.9003-5 Terms; applicability of other laws.

CERTAIN BRICK AND TILE CLAY, FIRE CLAY, AND SHALE; REGULATIONS UNDER THE 
                        ACT OF SEPTEMBER 26, 1961

1.9004 Statutory provisions; the Act of September 26, 1961 (Pub. L. 87-
          312, 75 Stat. 674).
1.9004-1 Election relating to the determination of gross income from the 
          property for taxable years beginning prior to 1961 in the case 
          of certain clays and shale.
1.9004-2 Effect of election.
1.9004-3 Statutes of limitation.
1.9004-4 Manner of exercising election.
1.9004-5 Terms; applicability of other laws.

 QUARTZITE AND CLAY USED IN PRODUCTION OF REFRACTORY PRODUCTS; ELECTION 
                         FOR PRIOR TAXABLE YEARS

1.9005 Statutory provisions; section 2 of the Act of September 26, 1961 
          (Pub. L. 87-321, 75 Stat. 683).
1.9005-1 Election relating to the determination of gross income from the 
          property for taxable years beginning prior to 1961 in the case 
          of clay and quartzite used in making refractory products.
1.9005-2 Effect of election.
1.9005-3 Statutes of limitation.
1.9005-4 Manner of exercising election.
1.9005-5 Terms; applicability of other laws.

                         Tax Reform Act of 1969

1.9006 Statutory provisions; Tax Reform Act of 1969.
1.9006-1 Interest and penalties in case of certain taxable years.

                        MISCELLANEOUS PROVISIONS

1.9101-1 Permission to submit information required by certain returns 
          and statements on magnetic tape.
1.9200-1 Deduction for motor carrier operating authority.
1.9200-2 Manner of taking deduction.
1.9300-1 Reduction in taxable income for housing displaced individuals.

    Authority: 26 U.S.C. 7805, unless otherwise noted.
    Section 1.1561-2 also issued under 26 U.S.C. 1561.
    Section 1.5000A-3 also issued under 26 U.S.C. 5000A(e)(4).
    Section 1.5000C-1 is also issued under 26 U.S.C. 5000C
    Section 1.5000C-2 is also issued under 26 U.S.C. 5000C

[[Page 12]]

    Section 1.5000C-3 is also issued under 26 U.S.C. 5000C
    Section 1.5000C-4 is also issued under 26 U.S.C. 5000C
    Section 1.5000C-5 is also issued under 26 U.S.C. 5000C
    Section 1.5000C-6 is also issued under 26 U.S.C. 5000C
    Section 1.6011-4T also issued under 26 U.S.C. 6001 and 6011(a).
    Section 1.6011-4T also issued under 26 U.S.C. 6011.
    Section 1.6011-6 also issued under 26 U.S.C. 6011(a).
    Section 1.6011-7 also issued under 26 U.S.C. 6011(e).
    Section 1.6012-2 is also issued under the authority of 26 U.S.C. 
6011 and 6012.
    Section 1.6013-6 also issued under 26 U.S.C. 7701(b)(11).
    Section 1.6015-1 also issued under 26 U.S.C. 6015(h).
    Section 1.6015-2 also issued under 26 U.S.C. 6015(h).
    Section 1.6015-3 also issued under 26 U.S.C. 6015(h).
    Section 1.6015-4 also issued under 26 U.S.C. 6015(h).
    Section 1.6015-5 also issued under 26 U.S.C. 6015(h).
    Section 1.6015-6 also issued under 26 U.S.C. 6015(h).
    Section 1.6015-7 also issued under 26 U.S.C. 6015(h).
    Section 1.6015-8 also issued under 26 U.S.C. 6015(h).
    Section 1.6015-9 also issued under 26 U.S.C. 6015(h).
    Section 1.6031(a)-1 also issued under section 404 of the Tax Equity 
and Fiscal Responsibility Act of 1982 (Public Law 97-248; 96 Stat. 324, 
669) (TEFRA).
    Section 1.6033-6 also issued under 26 U.S.C. 6033(i)(1).
    Section 1.6035-2 also issued under 26 U.S.C. 6035(b).
    Section 1.6035-2T also issued under 26 U.S.C. 6035.
    Section 1.6038-2 also issued under 26 U.S.C. 6038.
    Section 1.6038-2T also issued under 26 U.S.C. 6038(d).
    Section 1.6038-3 also issued under 26 U.S.C. 6038.
    Section 1.6038-4 also issued under 26 U.S.C. 6001, 6011, 6012, 6031, 
and 6038.
    Section 1.6038-5 also issued under 26 U.S.C. 6038.
    Section 1.6038A-1 also issued under 26 U.S.C. 6001.
    Section 1.6038A-2 also issued under 26 U.S.C. 6001.
    Section 1.6038A-3 also issued under 26 U.S.C. 6038A and 7701(l).
    Section 1.6038A-4 also issued under 26 U.S.C. 6038A.
    Section 1.6038A-5 also issued under 26 U.S.C. 6038A.
    Section 1.6038A-6 also issued under 26 U.S.C. 6038A.
    Section 1.6038A-7 also issued under 26 U.S.C. 6038A.
    Section 1.6038B-1 also issued under 26 U.S.C. 6038B.
    Section 1.6038B-1T also issued under 26 U.S.C 6038B.
    Section 1.6038B-2 also issued under 26 U.S.C. 6038B.
    Section 1.6038B-2T also issued under 26 U.S.C. 6038B.
    Section 1.6038D-0 also issued under 26 U.S.C. 6038D.
    Section 1.6038D-1 also issued under 26 U.S.C. 6038D.
    Section 1.6038D-2 also issued under 26 U.S.C. 6038D.
    Section 1.6038D-3 also issued under 26 U.S.C. 6038D.
    Section 1.6038D-4 also issued under 26 U.S.C. 6038D.
    Section 1.6038D-5 also issued under 26 U.S.C. 6038D.
    Section 1.6038D-6 also issued under 26 U.S.C. 6038D.
    Section 1.6038D-7 also issued under 26 U.S.C. 6038D.
    Section 1.6038D-8 also issued under 26 U.S.C. 6038D.
    Section 1.6039I-1 also issued under 26 U.S.C. 6039I.
    Section 1.6041-1 also issued under 26 U.S.C. 6041(a).
    Section 1.6041-2 also issued under 26 U.S.C. 6041(d).
    Section 1.6041-3 also issued under 26 U.S.C. 62 and 6041(a).
    Section 1.6042-3 also issued under 26 U.S.C. 6045.
    Section 1.6043-4 also issued under 26 U.S.C. 6043(c).
    Section 1.6045-1 also issued under 26 U.S.C. 6045.
    Section 1.6045-1T also issued under 26 U.S.C. 6045(g).
    Section 1.6045-2 also issued under 26 U.S.C. 6045.
    Section 1.6045-3 also issued under 26 U.S.C. 6045.
    Section 1.6045-4 also issued under 26 U.S.C. 6045.
    Section 1.6045A-1 also issued under 26 U.S.C. 6045A(a), (b), (c).
    Section 1.6045B-1 also issued under 26 U.S.C. 6045B(a), (c), (e).
    Section 1.6046-1 also issued 26 U.S.C. 6046(b).
    Section 1.6046-1T also issued under 26 U.S.C. 6046(b).
    Section 1.6046A-1 also issued under 26 U.S.C. 6046A.
    Section 1.6047-2 is also issued under 26 U.S.C. 6047(d).

[[Page 13]]

    Section 1.6049-4 also issued under 26 U.S.C. 6049 (a), (b), and (d).
    Section 1.6049-5 also issued under 26 U.S.C. 6049 (a), (b), and (d).
    Section 1.6049-5T also issued under 26 U.S.C. 6049.
    Section 1.6049-6 also issued under 6049(a), (b), and (d).
    Section 1.6049-7 also issued under 26 U.S.C. 860G(e), 1275(c) and 26 
U.S.C. 6049(d)(7)(D).
    Section 1.6049-9 also issued under 26 U.S.C. 6049(a).
    Section 1.6049-10 also issued under 26 U.S.C. 6049(a).
    Section 1.6050E-1 also issued under 26 U.S.C. 6050E.
    Section 1.6050H-1 also issued under 26 U.S.C. 6050H.
    Section 1.6050H-2 also issued under 26 U.S.C. 6050H.
    Section 1.6050H-3 also issued under 26 U.S.C. 6050H(h).
    Section 1.6050I-1 also issued under 26 U.S.C. 6050I.
    Section 1.6050I-2 also issued under 26 U.S.C. 6050I.
    Section 1.6050K-1 also issued under 26 U.S.C. 6050K.
    Section 1.6050M-1 also issued under 26 U.S.C. 6050M.
    Section 1.6050P-1 also issued under 26 U.S.C. 6050P.
    Section 1.6050P-2 also issued under 26 U.S.C. 6050P.
    Section 1.6050S-1 also issued under 26 U.S.C. 6050S(g).
    Section 1.6050S-2 also issued under 26 U.S.C. 6050S(g).
    Section 1.6050S-3 also issued under 26 U.S.C. 6050S(g).
    Section 1.6050S-4 also issued under 26 U.S.C. 6050S(g).
    Section 1.6050Y-2 also issued under 26 U.S.C. 6050Y(a).
    Section 1.6050Y-3 also issued under 26 U.S.C. 6050Y(b).
    Section 1.6050Y-4 also issued under 26 U.S.C. 6050Y(c).
    Sections 1.6055-1 and 1.6055-2 also issued under 26 U.S.C. 6055.
    Section 1.6060-1 also issued under 26 U.S.C. 6060(a).
    Section 1.6061-2T also issued under 26 U.S.C. 6061.
    Section 1.6065-2T also issued under 26 U.S.C. 6065.
    Section 1.6081-1 also issued under 26 U.S.C. 6081.
    Section 1.6081-2 also issued under 26 U.S.C. 6081.
    Section 1.6081-2T also issued under 26 U.S.C. 6081.
    Section 1.6081-3 also issued under 26 U.S.C. 6081.
    Section 1.6081-4 also issued under 26 U.S.C. 6081.
    Section 1.6081-5 also issued under 26 U.S.C. 6081.
    Section 1.6081-6 also issued under 26 U.S.C. 6081.
    Section 1.6081-6T also issued under 26 U.S.C. 6081.
    Section 1.6081-7 also issued under 26 U.S.C. 6081.
    Section 1.6081-8 also issued under 26 U.S.C. 6081(a).
    Section 1.6081-9 also issued under 26 U.S.C. 6081(a).
    Section 1.6081-10 also issued under 26 U.S.C. 6081.
    Section 1.6081-11 also issued under 26 U.S.C. 6081.
    Section 1.6109-2 also issued under 26 U.S.C. 6109(a).
    Sections 1.6302-1, 1.6302-2, 1.6302-3 and 1.6302-4 also issued under 
26 U.S.C. 6302(h).
    Section 1.6411-4 also issued under 26 U.S.C. 6402(i) and 6411(c).
    Section 1.6654-2 also issued under 26 U.S.C. 6654(n).
    Section 1.6655-5 also issued under 26 U.S.C. 6655(i)(2).
    Section 1.6662-6 also issued under 26 U.S.C. 6662.
    Section 1.6695-1 also issued under 26 U.S.C. 6060(b) and 6695(b).
    Section 1.6695-1 also issued under 26 U.S.C. 6695(b).
    Section 1.6695-2 also issued under 26 U.S.C. 6695(g).
    Section 1.6695-2T also issued under 26 U.S.C. 6695(g).
    Section 1.6851-2 also issued under 26 U.S.C 6851(d).
    Section 1.7520-1 also issued under 26 U.S.C. 7520(c)(2).
    Section 1.7520-1T also issued under 26 U.S.C. 7520(c)(2).
    Section 1.7520-2 also issued under 26 U.S.C. 7520(c)(2).
    Section 1.7520-3 also issued under 26 U.S.C. 7520(c)(2).
    Section 1.7520-4 also issued under 26 U.S.C. 7520(c)(2).
    Section 1.7701(l)-1 also issued under 26 U.S.C. 7701(l).
    Section 1.7701(l)-3 also issued under 26 U.S.C. 7701(l).
    Section 1.7701(l)-4 also issued under 26 U.S.C. 7701(l) and 
954(c)(6)(A).
    Section 1.7702-2 also issued under 26 U.S.C. 7702(k).
    Section 1.7872-5T also issued under 26 U.S.C. 7872.
    Section 1.7872-15 also issued under 26 U.S.C. 1275 and 7872.
    Section 1.7874-1 also issued under 26 U.S.C. 7874(c)(6) and (g).
    Section 1.7874-1T also issued under 26 U.S.C. 7874(c)(6) and (g).
    Section 1.7874-2 also issued under 26 U.S.C. 7874(c)(6) and (g).

[[Page 14]]

    Section 1.7874-3 is also issued under 26 U.S.C. 7874(c)(6) and (g).
    Section 1.7874-4 also issued under 26 U.S.C. 7874(c)(6) and (g).
    Section 1.7874-4T also issued under 26 U.S.C. 7874(c)(6) and (g).
    Section 1.7874-5 also issued under 26 U.S.C. 7874(c)(6) and (g).
    Section 1.7874-5T also issued under 26 U.S.C. 7874(c)(6) and (g).
    Section 1.7874-6 also issued under 26 U.S.C. 7874(c)(6) and (g).
    Section 1.7874-7 also issued under 26 U.S.C. 7874(c)(6) and (g).
    Section 1.7874-8 also issued under 26 U.S.C. 7874(c)(6) and (g).
    Section 1.7874-9 also issued under 26 U.S.C. 7874(c)(6) and (g).
    Section 1.7874-10 also issued under 26 U.S.C. 7874(c)(4) and (g).
    Section 1.7874-11 also issued under 26 U.S.C. 7874(g).
    Section 1.7874-12 also issued under 26 U.S.C. 7874(g).

    Source: Sections 1.1401-1 through 1.1403-1 contained in T.D. 6691, 
28 FR 12796, Dec. 3, 1963, unless otherwise noted.



RELATED RULES--Table of Contents





Sec. 1.1551-1  Disallowance of surtax exemption and accumulated 
earnings credit.

    (a) In general. If:
    (1) Any corporation transfers, on or after January 1, 1951, and 
before June 13, 1963, all or part of its property (other than money) to 
a transferee corporation,
    (2) Any corporation transfers, directly or indirectly, after June 
12, 1963, all or part of its property (other than money) to a transferee 
corporation, or
    (3) Five or fewer individuals are in control of a corporation and 
one or more of them transfer, directly or indirectly, after June 12, 
1963, property (other than money) to a transferee corporation, and the 
transferee was created for the purpose of acquiring such property or was 
not actively engaged in business at the time of such acquisition, and if 
after such transfer the transferor or transferors are in control of the 
transferee during any part of the taxable year of the transferee, then 
for such taxable year of the transferee the Secretary or his delegate 
may disallow the surtax exemption defined in section 11(d) or the 
accumulated earnings credit of $150,000 ($100,000 in the case of taxable 
years beginning before January 1, 1975) provided in paragraph (2) or (3) 
of section 535(c), unless the transferee establishes by the clear 
preponderance of the evidence that the securing of such exemption or 
credit was not a major purpose of the transfer.
    (b) Purpose of section 1551. The purpose of section 1551 is to 
prevent avoidance or evasion of the surtax imposed by section 11(c) or 
of the accumulated earnings tax imposed by section 531. It is not 
intended, however, that section 1551 be interpreted as delimiting or 
abrogating any principle of law established by judicial decision, or any 
existing provisions of the Code, such as sections 269 and 482, which 
have the effect of preventing the avoidance or evasion of income taxes. 
Such principles of law and such provisions of the Code, including 
section 1551, are not mutually exclusive, and in appropriate cases they 
may operate together or they may operate separately.
    (c) Application of section 269(b) to cases covered by section 1551. 
The provisions of section 269(b) and the authority of the district 
director thereunder, to the extent not inconsistent with the provisions 
of section 1551, are applicable to cases covered by section 1551. 
Pursuant to the authority provided in section 269(b) the district 
director may allow to the transferee any part of a surtax exemption or 
accumulated earnings credit for a taxable year for which such exemption 
or credit would otherwise be disallowed under section 1551(a); or he may 
apportion such exemption or credit among the corporations involved. For 
example, corporation A transfers on January 1, 1955, all of its property 
to corporations B and C in exchange for all of the stock of such 
corporations. Immediately thereafter, corporation A is dissolved and its 
stockholders become the sole stockholders of corporations B and C. 
Assuming that corporations B and C are unable to establish by the clear 
preponderance of the evidence that the securing of the surtax exemption 
defined in section 11(d) or the accumulated earnings credit provided in 
section 535, or both, was not a major purpose of the transfer, the 
district director is authorized under sections 1551(c) and 269(b) to 
allow one

[[Page 15]]

such exemption and credit and to apportion such exemption and credit 
between corporations B and C.
    (d) Actively engaged in business. For purposes of this section, a 
corporation maintaining an office for the purpose of preserving its 
corporate existence is not considered to be ``actively engaged in 
business'' even though such corporation may be deemed to be ``doing 
business'' for other purposes. Similarly, for purposes of this section, 
a corporation engaged in winding up its affairs, prior to an acquisition 
to which section 1551 is applicable, is not considered to be ``actively 
engaged in business.''
    (e) Meaning and application of the term ``control''--(1) In general. 
For purposes of this section, the term ``control'' means:
    (i) With respect to a transferee corporation described in paragraph 
(a) (1) or (2) of this section, the ownership by the transferor 
corporation, its shareholders, or both, of stock possessing either (a) 
at least 80 percent of the total combined voting power of all classes of 
stock entitled to vote, or (b) at least 80 percent of the total value of 
shares of all classes of stock.
    (ii) With respect to each corporation described in paragraph (a)(3) 
of this section, the ownership by five or fewer individuals of stock 
possessing (a) at least 80 percent of the total combined voting power of 
all classes of stock entitled to vote or at least 80 percent of the 
total value of shares of all classes of the stock of each corporation, 
and (b) more than 50 percent of the total combined voting power of all 
classes of stock entitled to vote or more than 50 percent of the total 
value of shares of all classes of stock of each corporation, taking into 
account the stock ownership of each such individual only to the extent 
such stock ownership is identical with respect to each such corporation.
    (2) Special rules. In determining for purposes of this section 
whether stock possessing at least 80 percent (or more than 50 percent in 
the case of subparagraph (1)(ii)(b) of this paragraph) of the total 
combined voting power of all classes of stock entitled to vote is owned, 
all classes of such stock shall be considered together; it is not 
necessary that at least 80 percent (or more than 50 percent) of each 
class of voting stock be owned. Likewise, in determining for purposes of 
this section whether stock possessing at least 80 percent (or more than 
50 percent) of the total value of shares of all classes of stock is 
owned, all classes of stock of the corporation shall be considered 
together; it is not necessary that at least 80 percent (or more than 50 
percent) of the value of shares of each class be owned. The fair market 
value of a share shall be considered as the value to be used for 
purposes of this computation. With respect to transfers described in 
paragraph (a) (2) or (3) of this section, the ownership of stock shall 
be determined in accordance with the provisions of section 1563(e) and 
the regulations thereunder. With respect to transfers described in 
paragraph (a)(1) of this section, the ownership of stock shall be 
determined in accordance with the provisions of section 544 and the 
regulations thereunder, except that constructive ownership under section 
544(a)(2) shall be determined only with respect to the individual's 
spouse and minor children. In determining control, no stock shall be 
excluded because such stock was acquired before January 1, 1951 (the 
effective date of section 1551(a)(1)), or June 13, 1963 (the effective 
date of section 1551(a) (2) and (3)).
    (3) Example. This paragraph may be illustrated by the following 
example:

    Example. On January 1, 1964, individual A, who owns 50 percent of 
the voting stock of corporation X, and individual B, who owns 30 percent 
of such voting stock, transfer property (other than money) to 
corporation Y (newly created for the purpose of acquiring such property) 
in exchange for all of Y's voting stock. After the transfer, A and B own 
the voting stock of corporations X and Y in the following proportions:

------------------------------------------------------------------------
                                                               Identical
             Individual                 Corp. X     Corp. Y    ownership
------------------------------------------------------------------------
A...................................          50          30          30
B...................................          30          50          30
                                     -----------------------------------
  Total.............................          80          80          60
------------------------------------------------------------------------


The transfer of property by A and B to corporation Y is a transfer 
described in paragraph (a)(3) of this section since (i) A and B own at 
least 80 percent of the voting stock of corporations X and Y, and (ii) 
taking into account each such individual's stock ownership

[[Page 16]]

only to the extent such ownership is identical with respect to each such 
corporation, A and B own more than 50 percent of the voting stock of 
corporations X and Y.

    (f) Taxable year of allowance or disallowance--(1) In general. The 
district director's authority with respect to cases covered by section 
1551 is not limited to the taxable year of the transferee corporation in 
which the transfer of property occurs. Such authority extends to the 
taxable year in which the transfer occurs or any subsequent taxable year 
of the transferee corporation if, during any part of such year, the 
transferor or transferors are in control of the transferee.
    (2) Examples. This paragraph may be illustrated by the following 
examples:

    Example 1. On January 1, 1955, corporation D transfers property 
(other than money) to corporation E, a corporation not actively engaged 
in business at the time of the acquisition of such property, in exchange 
for 60 percent of the voting stock of E. During a later taxable year of 
E, corporation D acquires an additional 20 percent of such voting stock. 
As a result of such additional acquisition, D owns 80 percent of the 
voting stock of E. Accordingly, section 1551(a)(1) is applicable for the 
taxable year in which the later acquisition of stock occurred and for 
each taxable year thereafter in which the requisite control continues.
    Example 2. On June 20, 1963, individual A, who owns all of the stock 
of corporation X, transfers property (other than money) to corporation 
Y, a corporation not actively engaged in business at the time of the 
acquisition of such property, in exchange for 60 percent of the voting 
stock of Y. During a later taxable year of Y, A acquires an additional 
20 percent of such voting stock. After such acquisition A owns at least 
80 percent of the voting stock of corporations X and Y. Accordingly, 
section 1551(a)(3) is applicable for the taxable year in which the later 
acquisition of stock occurred and for each taxable year thereafter in 
which the requisite control continues.
    Example 3. Individuals A and B each owns 50 percent of the stock of 
corporation X. On January 15, 1964, A transfers property (other than 
money) to corporation Y (newly created by A for the purpose of acquiring 
such property) in exchange for all the stock of Y. In a subsequent 
taxable year of Y, individual B buys 50 percent of the stock which A 
owns in Y (or he transfers money to Y in exchange for its stock, as a 
result of which he owns 50 percent of Y's stock). Immediately thereafter 
the stock ownership of A and B in corporation Y is identical to their 
stock ownership in corporation X. Accordingly, section 1551(a)(3) is 
applicable for the taxable year in which B acquires stock in corporation 
Y (see paragraph (g)(3) of this section) and for each taxable year 
thereafter in which the requisite control continues. Moreover, if B's 
acquisition of stock in Y is pursuant to a preexisting agreement with A, 
A's transfer to Y and B's acquisition of Y's stock are considered a 
single transaction and section 1551(a)(3) also would be applicable for 
the taxable year in which A's transfer to Y took place and for each 
taxable year thereafter in which the requisite control continues.

    (g) Nature of transfer--(1) Corporate transfers before June 13, 
1963. A transfer made before June 13, 1963, by any corporation of all or 
part of its assets, whether or not such transfer qualifies as a 
reorganization under section 368, is within the scope of section 
1551(a)(1), except that section 1551(a)(1) does not apply to a transfer 
of money only. For example, the transfer of cash for the purpose of 
expanding the business of the transferor corporation through the 
formation of a new corporation is not a transfer within the scope of 
section 1551(a)(1), irrespective of whether the new corporation uses the 
cash to purchase from the transferor corporation stock in trade or 
similar property.
    (2) Corporate transfers after June 12, 1963. A direct or indirect 
transfer made after June 12, 1963, by any corporation of all or part of 
its assets to a transferee corporation, whether or not such transfer 
qualifies as a reorganization under section 368, is within the scope of 
section 1551(a)(2) except that section 1551(a)(2) does not apply to a 
transfer of money only. For example, if a transferor corporation 
transfers property to its shareholders or to a subsidiary, the transfer 
of that property by the shareholders or the subsidiary to a transferee 
corporation as part of the same transaction is a transfer of property by 
the transferor corporation to which section 1551(a)(2) applies. A 
transfer of property pursuant to a purchase by a transferee corporation 
from a transferor corporation controlling the transferee is within the 
scope of section 1551(a)(2), whether or not the purchase follows a 
transfer of cash from the controlling corporation.
    (3) Other transfers after June 12, 1963. A direct or indirect 
transfer made after June 12, 1963, by five or fewer individuals to a 
transferee corporation,

[[Page 17]]

whether or not such transfer qualifies under one or more other 
provisions of the Code (for example, section 351), is within the scope 
of section 1551(a)(3) except that section 1551(a)(3) does not apply to a 
transfer of money only. Thus, if one of five or fewer individuals who 
are in control of a corporation transfers property (other than money) to 
a controlled transferee corporation, the transfer is within the scope of 
section 1551(a)(3) notwithstanding that the other individuals transfer 
nothing or transfer only money.
    (4) Examples. This paragraph may be illustrated by the following 
examples:

    Example 1. Individuals A and B each owns 50 percent of the voting 
stock of corporation X. On January 15, 1964, A and B each acquires 
property (other than money) from X and, as part of the same transaction, 
each transfers such property to his wholly owned corporation (newly 
created for the purpose of acquiring such property). A and B retain 
substantial continuing interests in corporation X. The transfers to the 
two newly created corporations are within the scope of section 
1551(a)(2).
    Example 2. Corporation W organizes corporation X, a wholly owned 
subsidiary, for the purpose of acquiring the properties of corporation 
Y. Pursuant to a reorganization qualifying under section 368(a)(1)(C), 
substantially all of the properties of corporation Y are transferred on 
June 15, 1963, to corporation X solely in exchange for voting stock of 
corporation W. There is a transfer of property from W to X within the 
meaning of section 1551(a)(2).
    Example 3. Individuals A and B, each owning 50 percent of the voting 
stock of corporation X, organize corporation Y to which each transfers 
money only in exchange for 50 percent of the stock of Y. Subsequently, Y 
uses such money to acquire other property from A and B after June 12, 
1963. Such acquisition is within the scope of section 1551(a)(3).
    Example 4. Individual A owns 55 percent of the stock of corporation 
X. Another 25 percent of corporation X's stock is owned in the aggregate 
by individuals B, C, D, and E. On June 15, 1963, individual A transfers 
property to corporation Y (newly created for the purpose of acquiring 
such property) in exchange for 60 percent of the stock of Y, and B, C, 
and D acquire all of the remaining stock of Y. The transfer is within 
the scope of section 1551(a)(3).

    (h) Purpose of transfer. In determining, for purposes of this 
section, whether the securing of the surtax exemption or accumulated 
earnings credit constituted ``a major purpose'' of the transfer, all 
circumstances relevant to the transfer shall be considered. ``A major 
purpose'' will not be inferred from the mere purchase of inventory by a 
subsidiary from a centralized warehouse maintained by its parent 
corporation or by another subsidiary of the parent corporation. For 
disallowance of the surtax exemption and accumulated earnings credit 
under section 1551, it is not necessary that the obtaining of either 
such credit or exemption, or both, have been the sole or principal 
purpose of the transfer of the property. It is sufficient if it appears, 
in the light of all the facts and circumstances, that the obtaining of 
such exemption or credit, or both, was one of the major considerations 
that prompted the transfer. Thus, the securing of the surtax exemption 
or the accumulated earnings credit may constitute ``a major purpose'' of 
the transfer, notwithstanding that such transfer was effected for a 
valid business purpose and qualified as a reorganization within the 
meaning of section 368. The taxpayer's burden of establishing by the 
clear preponderance of the evidence that the securing of either such 
exemption or credit or both was not ``a major purpose'' of the transfer 
may be met, for example, by showing that the obtaining of such 
exemption, or credit, or both, was not a major factor in relationship to 
the other consideration or considerations which prompted the transfer.

[T.D. 6911, 32 FR 3214, Feb. 24, 1967, as amended by T.D. 7376, 40 FR 
42745, Sept. 16, 1975]



Sec. 1.1552-1  Earnings and profits.

    (a) General rule. For the purpose of determining the earnings and 
profits of each member of an affiliated group which is required to be 
included in a consolidated return for such group filed for a taxable 
year beginning after December 31, 1953, and ending after August 16, 
1954, the tax liability of the group shall be allocated among the 
members of the group in accordance with one of the following methods, 
pursuant to an election under paragraph (c) of this section:
    (1)(i) The tax liability of the group shall be apportioned among the 
members of the group in accordance with

[[Page 18]]

the ratio which that portion of the consolidated taxable income 
attributable to each member of the group having taxable income bears to 
the consolidated taxable income.
    (ii) For consolidated return years beginning after December 31, 
1965, a member's portion of the tax liability of the group under the 
method of allocation provided by subdivision (i) of this subparagraph is 
an amount equal to the tax liability of the group multiplied by a 
fraction, the numerator of which is the taxable income of such member, 
and the denominator of which is the sum of the taxable incomes of all 
the members. For purposes of this subdivision the taxable income of a 
member shall be the separate taxable income determined under Sec. 
1.1502-12, adjusted for the following items taken into account in the 
computation of consolidated taxable income:
    (a) The portion of the consolidated net operating loss deduction, 
the consolidated charitable contributions deduction, the consolidated 
dividends received deduction, the consolidated section 247 deduction, 
the consolidated section 582(c) net loss, and the consolidated section 
922 deduction, attributable to such member;
    (b) Such member's capital gain net income (net capital gain for 
taxable years beginning before January 1, 1977) (determined without 
regard to any net capital loss carryover attributable to such member);
    (c) Such member's net capital loss and section 1231 net loss, 
reduced by the portion of the consolidated net capital loss attributable 
to such member; and
    (d) The portion of any consolidated net capital loss carryover 
attributable to such member which is absorbed in the taxable year.


If the computation of the taxable income of a member under this 
subdivision results in an excess of deductions over gross income, then 
for purposes of this subdivision such member's taxable income shall be 
zero.
    (2)(i) The tax liability of the group shall be allocated to the 
several members of the group on the basis of the percentage of the total 
tax which the tax of such member if computed on a separate return would 
bear to the total amount of the taxes for all members of the group so 
computed.
    (ii) For consolidated return years beginning after December 31, 
1965, a member's portion of the tax liability of the group under the 
method of allocation provided by subdivision (i) of this subparagraph is 
an amount equal to the tax liability of the group multiplied by a 
fraction, the numerator of which is the separate return tax liability of 
such member, and the denominator of which is the sum of the separate 
return tax liabilities of all the members. For purposes of this 
subdivision the separate return tax liability of a member is its tax 
liability computed as if it has filed a separate return for the year 
except that:
    (a) Gains and losses on intercompany transactions shall be taken 
into account as provided in Sec. 1.1502-13 as if a consolidated return 
had been filed for the year;
    (b) Gains and losses relating to inventory adjustments shall be 
taken into account as provided in Sec. 1.1502-18 as if a consolidated 
return had been filed for the year;
    (c) Transactions with respect to stock, bonds, or other obligations 
of members shall be reflected as provided in Sec. 1.1502-13 (f) and (g) 
as if a consolidated return had been filed for the year;
    (d) Excess losses shall be included in income as provided in Sec. 
1.1502-19 as if a consolidated return had been filed for the year;
    (e) In the computation of the deduction under section 167, property 
shall not lose its character as new property as a result of a transfer 
from one member to another member during the year;
    (f) A dividend distributed by one member to another member during 
the year shall not be taken into account in computing the deductions 
under section 243(a)(1), 244(a), 245, or 247 (relating to deductions 
with respect to dividends received and dividends paid);
    (g) Basis shall be determined under Sec. Sec. 1.1502-31 and 1.1502-
32, and earnings and profits shall be determined under Sec. 1.1502-33, 
as if a consolidated return had been filed for the year;

[[Page 19]]

    (h) Subparagraph (2) of Sec. 1.1502-3(f) shall apply as if a 
consolidated return had been filed for the year; and
    (i) For purposes of Subtitle A of the Code, the surtax exemption of 
the member shall be an amount equal to $25,000 ($50,000 in the case of a 
taxable year ending in 1975), divided by the number of members (or such 
portion of $25,000 or $50,000 which is apportioned to the member 
pursuant to a schedule attached to the consolidated return for the 
taxable year). (However, if for the taxable year some or all of the 
members are component members of a controlled group of corporations 
(within the meaning of section 1563) and if there are other such 
component members which do not join in filing the consolidated return 
for such year, the amount to be divided among the members filing the 
consolidated return shall be (in lieu of $25,000 or $50,000) the sum of 
the amounts apportioned to the component members which join in filing 
the consolidated return (as determined for taxable years beginning after 
December 31, 1974 under Sec. 1.1561-2(a)(2) or Sec. 1.1561-3, 
whichever is applicable, and for taxable years beginning before January 
1, 1975, under Sec. 1.561-2A(a)(2) or Sec. 1.1561-3A whichever is 
applicable).)


If the computation of the separate return tax liability of a member 
under this subdivision does not result in a positive tax liability, then 
for purposes of this subdivision such member's separate return tax 
liability shall be zero.
    (3)(i) The tax liability of the group (excluding the tax increases 
arising from the consolidation) shall be allocated on the basis of the 
contribution of each member of the group to the consolidated taxable 
income of the group. Any tax increases arising from the consolidation 
shall be distributed to the several members in direct proportion to the 
reduction in tax liability resulting to such members from the filing of 
the consolidated return as measured by the difference between their tax 
liabilities determined on a separate return basis and their tax 
liabilities (determined without regard to the 2-percent increase 
provided by section 1503(a) and paragraph (a) of Sec. 1.1502-30A (as 
contained in the 26 CFR edition revised as of April 1, 1996) for taxable 
years beginning before January 1, 1964) based on their contributions to 
the consolidated taxable income.
    (ii) For consolidated return years beginning after December 31, 
1965, a member's portion of the tax liability of the group under the 
method of allocation provided by subdivision (i) of this subparagraph 
shall be determined by:
    (a) Allocating the tax liability of the group in accordance with 
subparagraph (1)(ii) of this paragraph, but
    (b) The amount of tax liability allocated to any member shall not 
exceed the separate return tax liability of such member, determined in 
accordance with subparagraph (2)(ii) of this paragraph, and
    (c) The sum of the amounts which would be allocated to the members 
but for (b) of this subdivision (ii) shall be apportioned among the 
other members in direct proportion to, but limited to, the reduction in 
tax liability resulting to such other members. Such reduction for any 
member shall be the excess, if any, of (1) its separate this paragraph.
    (4) The tax liability of the group shall be allocated in accordance 
with any other method selected by the group with the approval of the 
Commissioner. No method of allocation may be approved under this 
subparagraph which may result in the allocation of a positive tax 
liability for a taxable year, among the members who are allocated a 
positive tax liability for such year, in a total amount which is more or 
less than the tax liability of the group for such year. (However, see 
paragraph (d) of Sec. 1.1502-33.)
    (b) Application of rules--(1) Tax liability of the group. For 
purposes of section 1552 and this section, the tax liability of the 
group for a taxable year shall consist of the Federal income tax 
liability of the group for such year determined in accordance with Sec. 
1.1502-2 or Sec. 1.1502-30A (as contained in the 26 CFR edition revised 
as of April 1, 1996), which-ever is applicable. Thus, in the case of a 
carryback of a loss or credit to such year, although the earnings and 
profits of the members of the group may not be adjusted until the 
subsequent taxable year from which the loss or credit was carried back, 
the effect of the carryback, for purposes of this section, shall be 
determined by allocating the amount of the adjustment as a part

[[Page 20]]

of the tax liability of the group for the taxable year to which the loss 
or credit is carried. For example, if a consolidated net operating loss 
is carried back from 1969 to 1967, the allocation of the tax liability 
of the group for 1967 shall be recomputed in accordance with the method 
of allocation used for 1967, and the changes resulting from such 
recomputation shall, for accrual method taxpayers, be reflected in the 
earnings and profits of the appropriate members in 1969.
    (2) Effect of allocation. The amount of tax liability allocated to a 
corporation as its share of the tax liability of the group, pursuant to 
this section, shall (i) result in a decrease in the earnings and profits 
of such corporation in such amount, and (ii) be treated as a liability 
of such corporation for such amount. If the full amount of such 
liability is not paid by such corporation, pursuant to an agreement 
among the members of the group or otherwise, the amount which is not 
paid will generally be treated as a distribution with respect to stock, 
a contribution to capital, or a combination thereof, as the case may be.
    (c) Method of election. (1) The election under paragraph (a) (1), 
(2), or (3) of this section shall be made not later than the time 
prescribed by law for filing the first consolidated return of the group 
for a taxable year beginning after December 31, 1953, and ending after 
August 16, 1954 (including extensions thereof). If the group elects to 
allocate its tax liability in accordance with the method prescribed in 
paragraph (a) (1), (2), or (3) of this section, a statement shall be 
attached to the return stating which method is elected. Such statement 
shall be made by the common parent corporation and shall be binding upon 
all members of the group. In the event that the group desires to 
allocate its tax liability in accordance with any other method pursuant 
to paragraph (a)(4) of this section, approval of such method by the 
Commissioner must be obtained within the time prescribed above. If such 
approval is not obtained in such time, the group shall allocate in 
accordance with the method prescribed in paragraph (a)(1) of this 
section. The request shall state fully the method which the group wishes 
to apply in apportioning the tax liability. Except as provided in 
subparagraph (2) of this paragraph, an election once made shall be 
irrevocable and shall be binding upon the group with respect to the year 
for which made and for all future years for which a consolidated return 
is filed or required to be filed unless the Commissioner authorizes a 
change to another method prior to the time prescribed by law for filing 
the return for the year in which such change is to be effective.
    (2) Each group may make a new election to use any one of the methods 
prescribed in paragraph (a) (1), (2), or (3) of this section for its 
first consolidated return year beginning after December 31, 1965, or in 
conjunction with an election under paragraph (d) of Sec. 1.1502-33, or 
may request the Commissioner's approval of a method under paragraph 
(a)(4) of this section for its first consolidated return year beginning 
after December 31, 1965, irrespective of its previous method of 
allocation under this section. If such new election is not made in 
conjunction with an election under paragraph (d) of Sec. 1.1502-33, it 
shall be effective for the first consolidated return year beginning 
after December 31, 1965, and all succeeding years. (See Sec. 1.1502-33 
for the method of making such new election in conjunction with an 
election under paragraph (d) of Sec. 1.1502-33.) Any other such new 
election (or request for the Commissioner's approval of a method under 
paragraph (a)(4) of this section) shall be made within the time 
prescribed by law for filing the consolidated return for the first 
taxable year beginning after December 31, 1965 (including extensions 
thereof), or within 60 days after July 3, 1968, whichever is later. Such 
new election shall be made by attaching a statement to the consolidated 
return for the first taxable year beginning after December 31, 1965, or 
if such election is made within the time prescribed above but after such 
return is filed, by filing a statement with the internal revenue officer 
with whom such return was filed.
    (d) Failure to elect. If a group fails to make an election in its 
first consolidated return, or any other election, in accordance with 
paragraph (c) of this section, the method prescribed under

[[Page 21]]

paragraph (a)(1) of this section shall be applicable and shall be 
binding upon the group in the same manner as if an election had been 
made to so allocate.
    (e) Definitions. Except as otherwise provided in this section, the 
terms used in this section shall have the same meaning as provided in 
the regulations under section 1502.
    (f) Example. The provisions of this section may be illustrated by 
the following example:

    Example. Corporation P is the common parent owning all of the stock 
of corporations S1 and S2, members of an affiliated group. A 
consolidated return is filed for the taxable year ending December 31, 
1966, by P, S1, and S2. For 1966 such corporations had the following 
taxable incomes or losses computed in accordance with paragraph 
(a)(1)(ii) of this section:

P......................................................................0
S1................................................................$2,000
S2...............................................................(1,000)


The group has not made an election under paragraph (c) of this section 
or paragraph (d) of Sec. 1.1502-33. Accordingly, the method of 
allocation provided by paragraph (a)(1) of this section is in effect for 
the group. Assuming that the consolidated taxable income is equal to the 
sum of the members taxable income and losses, or $1,000, the tax 
liability of the group for the year (assuming a 22-percent rate) is 
$220, all of which is allocated to S1. S1 accordingly reduces its 
earnings and profits in the amount of $220, irrespective of who actually 
pays the tax liability. If S1 pays the $220 tax liability there will be 
no further effect upon the income, earnings and profits, or the basis of 
stock of any member. If, however, P pays the $220 tax liability (and 
such payment is not in fact a loan from P to S1), then P shall be 
treated as having made a contribution to the capital of S1 in the amount 
of $220. On the other hand, if S2 pays the $220 tax liability (and such 
payment is not in fact a loan from S2), then S2 shall be treated as 
having made a distribution with respect to its stock to P in the amount 
of $220, and P shall be treated as having made a contribution to the 
capital of S1 in the amount of $220.

[T.D. 6962, 33 FR 9655, July 3, 1968, as amended by T.D. 7825, 42 FR 
64694, Dec. 28, 1977; T.D. 7728, 45 FR 72650, Nov. 3, 1980; T.D. 8560, 
59 FR 41675, Aug. 15, 1994; T.D. 8597, 60 FR 36680, July 18, 1995; T.D. 
8677, 61 FR 33325, June 27, 1996]

                     Certain Controlled Corporations



Sec. 1.1561-0  Table of contents.

    This section lists the table of contents for Sec. Sec. 1.1561-1 
through 1.1561-3.

Sec. 1.1561-1 General rules regarding certain tax benefits available to 
      the component members of a controlled group of corporations.

    (a) In general.
    (1) Limitation.
    (2) Definitions.
    (b) Special rules.
    (1) S Corporation.
    (2) 52-53-week taxable year.
    (c) Tax avoidance.
    (d) Effective/applicability date.

   Sec. 1.1561-2 Special rules for allocating reductions of certain 
                   Section 1561(a) tax-benefit items.

    (a) Additional tax.
    (1) Calculation.
    (2) Apportionment.
    (3) Examples.
    (b) Reduction to the amount exempted from the alternative minimum 
tax.
    (1) Calculation.
    (2) Apportionment.
    (3) Examples.
    (c) Accumulated earnings credit.
    (d) [Reserved]
    (e) Short taxable year not including a December 31st date.
    (1) General rule.
    (2) Additional rules.
    (3) Calculation of the additional tax.
    (4) Calculation of the alternative minimum tax.
    (5) Examples.
    (f) Effective/applicability date.

       Sec. 1.1561-3 Allocation of the section 1561(a) tax items.

    (a) Filing of form.
    (1) In general.
    (2) Exception for component members that are members of a 
consolidated group.
    (b) No apportionment plan in effect.
    (c) Apportionment plan in effect.
    (1) Adoption of plan.
    (2) Limitation on adopting a plan.
    (3) Termination of plan.
    (d) Effective/applicability date.

[T.D. 9476, 74 FR 68532, Dec. 28, 2009]



Sec. 1.1561-1  General rules regarding certain tax benefits available
to the component members of a controlled group of corporations.

    (a) In general--(1)--Limitation. Part II (section 1561 and 
following) of subchapter B of chapter 6 of the Internal Revenue Code 
(Code) (part II) provides

[[Page 22]]

rules to limit the amounts of certain specified tax benefit items of 
component members of a controlled group of corporations for their tax 
years which include a particular December 31st date, or, in the case of 
a short taxable year member (see section 1561(b) and Sec. 1.1561-2(e)), 
the date substituted for that December 31st date. The amount of the tax 
items enumerated in section 1561(a) available to any of the component 
members of a controlled group shall be determined for purposes of 
subtitle A of the Code as if the component members were a single 
corporation. Certain other tax items also set forth in section 1561(a) 
(for example, the additional tax imposed by section 11(b)(1) and the 
section 55(d)(3) phase out of the alternative minimum tax exemption 
amount) will be determined by combining the positive taxable income or 
positive alternative minimum taxable income of the component members of 
such a group and then allocating the amount of such items among those 
members.
    (2) Definitions. For certain definitions (including the definition 
of a controlled group of corporations and a component member) and 
special rules for purposes of this part II see section 1563.
    (b) Special rules--(1) S Corporation. For purposes of this part II, 
the term corporation includes a small business corporation (as defined 
in section 1361). However, for the treatment of such a corporation as an 
excluded member of a controlled group of corporations see Sec. 1.1563-
1(b)(2)(ii)(C).
    (2) 52-53-week taxable year. In the case of corporations electing a 
52-53-week taxable year under section 441(f)(1), the provisions of this 
part II shall be applied in accordance with the special rule of section 
441(f)(2)(A). See Sec. 1.441-2.
    (c) Tax avoidance. The provisions of this part II do not delimit or 
abrogate any principle of law established by judicial decision, or any 
existing provisions of the Code, such as sections 269, 482, and 1551, 
which serve to prevent any avoidance or evasion of income taxes.
    (d) Effective/applicability date. This section applies to any tax 
year beginning on or after December 21, 2009. However, taxpayers may 
apply this section to any Federal income tax return filed on or after 
December 21, 2009. For tax years beginning before December 21, 2009, see 
Sec. 1.1561-1T as contained in 26 CFR part 1 in effect on April 1, 
2009.

[T.D. 9476, 74 FR 68532, Dec. 28, 2009]



Sec. 1.1561-2  Special rules for allocating reductions of certain
section 1561(a) tax-benefit items.

    (a) Additional tax--(1) Calculation--(i) In general. For the purpose 
of determining the amount, if any, of the additional tax imposed by 
section 11(b)(1) (the additional tax), the taxable incomes of all of the 
component members of a controlled group of corporations shall be 
combined to determine whether either of the income thresholds for 
imposing the additional tax have been attained.
    (ii) Special rules. For purposes of paragraph (a)(1)(i) of this 
section--
    (A) Component member means a corporation that is apportioned some 
part of any applicable tax bracket amount; and
    (B) Taxable income means the positive taxable income of a component 
member for its entire tax year (even if it was not a member of the group 
for each day of that tax year) that includes the same December 31st 
testing date, which is also applicable to the other component members of 
that same controlled group.
    (2) Apportionment--(i) General rule. Any additional tax determined 
under paragraph (a)(1) of this section shall be apportioned among such 
members in the same manner as the corresponding tax bracket of section 
11(b)(1) is apportioned. For rules to apportion the section 11(b)(1) tax 
brackets among the component members of a controlled group, see Sec. 
1.1561-3(b) or (c).
    (ii) Apportionment methods. Unless the component members of a 
controlled group elect to use the first-in-first-out (FIFO) method 
described in paragraph (a)(2)(ii)(B) of this section, such members are 
required to apportion the amount of the additional tax using the 
proportionate method described in paragraph (a)(2)(ii)(A) of this 
section. These component members may elect the FIFO method by 
specifically adopting such method in their apportionment plan.

[[Page 23]]

    (A) Proportionate method. Under the proportionate method, the 
additional tax is allocated to each component member in the same 
proportion as the portion of the tax-benefit amount that inured to a 
member from utilizing lower tax brackets bears to the amount of the 
group's total tax-benefit amount inuring to it from utilizing those 
lower tax brackets. The tax-benefit amount that inures to a corporation 
from using a particular tax bracket is the tax savings that such 
corporation realizes from having a portion of its taxable income taxed 
at the lower rate attributed to that tax bracket instead of the high tax 
rates to which it would otherwise be subject. The steps for applying the 
proportionate method of allocation are as follows:
    (1) Step 1. The regular tax (not including the additional tax) owed 
by a component member under a particular tax bracket is divided by the 
total tax owed by all component members under that tax bracket;
    (2) Step 2. The percentage calculated under Step 1 is multiplied by 
the total tax-benefit amount inuring to all the members of the group 
from their use of this tax bracket. This computed amount equals the 
portion of the group's tax-benefit amount that inured to such member 
from using its portion of this tax bracket;
    (3) Step 3. The amount determined under Step 2 is divided by the 
total tax-benefit amount, inuring to all the component members of the 
group from using all the tax brackets to which any component member's 
income was subject;
    (4) Step 4. The percentage calculated under Step 3 is multiplied by 
the amount of the group's additional tax. The amount determined under 
this Step 4 equals the amount of the additional tax apportioned to such 
member for that tax bracket; and
    (5) Step 5. If a component member is liable for regular tax (not 
including the additional tax) under more than one tax bracket, that 
member must calculate the amount of the additional tax apportioned to it 
with respect to each tax bracket. Accordingly, steps 1 through 4 must be 
applied for each tax bracket applicable to that member. The sum of all 
the apportioned amounts of additional tax from each tax bracket for 
which the member is subject is the total amount of the additional tax 
apportioned to that member.
    (B) FIFO method. Under the FIFO method, the first dollars of the 
additional tax are to be allocated proportionately to the members 
starting with the lowest tax bracket (that is, the first tax bracket), 
up to the amount of the tax benefit inuring to those members from using 
that tax bracket. Any remaining amount of additional tax is then 
allocated proportionately among the component members who use the next 
higher tax bracket, and so on, until the entire amount of the additional 
tax has been fully apportioned among the members. For example, the first 
$9,500 of the additional tax liability of a controlled group is 
apportioned entirely to the member(s) that availed themselves of the 
benefit of the 15 percent tax bracket.
    (3) Examples. The provisions of this paragraph (a) may be 
illustrated by the following examples:

    Example 1. (i) Facts. A controlled group of corporations consists of 
three members: X, Y and Z. X owns all the stock of Y and Z. Each 
corporation files its separate return on a calendar year basis. For 
calendar year 2007, the component members of the controlled group have 
an apportionment plan in effect. The members apportioned 80% of the 15 
percent tax-bracket amount ($40,000) to X and the remaining 10% 
($10,000) to Y. The members apportioned 100% of the 25 percent tax-
bracket amount ($25,000) to Y. However, these members have not adopted 
the FIFO method for apportioning the additional taxes. Therefore, they 
must follow the proportionate method. For 2007, X had taxable income 
(TI) of $40,000, Y had TI of $60,000 and Z had TI of $100,000. Thus the 
total TI of the group is $200,000.
    (ii) Calculating the tax from the tax brackets and the tax benefit 
derived from such tax. (A) Regular tax of group subject to a 15 percent 
tax rate. (1) Calculating the group's tax which resulted from applying a 
15 percent tax rate. The amount of tax under the 15 percent tax bracket 
is $7,500 (15% x $50,000).
    (2) The tax-benefit amount inuring to the group from using the 15 
percent tax bracket. A tax benefit inures to those members of the group 
who avail themselves of the 15 percent tax bracket. That tax benefit 
results from having the first $50,000 of its income taxed at the 15 
percent tax rate, instead of at the 34 percent tax rate. Thus, the tax-
benefit amount inuring to this group from using the

[[Page 24]]

15 percent tax bracket is $9,500 ($17,000 (34% x $50,000) minus $7,500 
(15% x $50,000)).
    (B) Regular tax of group subject to a 25 percent tax rate. (1) 
Calculating the group's tax which resulted from applying a 25 percent 
tax rate. The amount of tax under the 25 percent tax bracket is $6,250 
(25% x $25,000 ($75,000-$50,000)).
    (2) The tax-benefit amount inuring to the group from using the 25 
percent tax bracket. A tax benefit inures to those members of the group 
who avail themselves of the 25 percent tax bracket. That tax benefit 
results from having $25,000 of its income taxed at the 25 percent tax 
rate, instead of at the 34 percent tax rate. Thus, the tax-benefit 
amount inuring to this group from using the 25 percent tax bracket is 
$2,250 ($8,500 (34% x $25,000) minus $6,250 (25% x $25,000)).
    (C) Regular tax of group subject to a 34 percent tax rate. (1) 
Calculating the group's tax which resulted from applying a 34 percent 
tax rate. The amount of tax under the 34 percent tax bracket is $42,500 
(34% x $125,000 ($200,000 (total TI)-$75,000) (amount taxed at lower 
rates)).
    (2) The tax-benefit amount inuring to the group from using the 34 
percent tax bracket. The group's total TI of $200,000 is less than the 
$15,000,000 income threshold for imposing any 3 percent additional tax 
on the group. Therefore, there is no tax benefit inuring to the members 
of this group for using the 34 percent tax bracket.
    (D) The computation of the additional tax. Since the combined TI of 
the group exceeds $100,000, a 5 percent additional tax is imposed on the 
group. That 5 percent additional tax is the lesser amount of 5 percent 
of the group's taxable income exceeding $100,000 or $11,750. Five 
percent of that excess amount of taxable income is $5,000 (5% x $100,000 
($200,000-$100,000)). Since $5,000 is less than $11,750, the group's 5 
percent additional tax is $5,000.
    (iii) Apportioning the amount of additional tax to each applicable 
tax bracket. (A) The apportioned tax under each bracket. The amount of 
tax owed by each member under each tax bracket pursuant to the 
apportionment plan is as follows:

----------------------------------------------------------------------------------------------------------------
                                                                   Amount of tax   Amount of tax   Amount of tax
                                                                  owed under the  owed under the  owed under the
                    Name of component member                          15% tax         25% tax         34% tax
                                                                      bracket         bracket         bracket
----------------------------------------------------------------------------------------------------------------
X...............................................................          $6,000               0               0
Y...............................................................           1,500          $6,250          $8,500
Z...............................................................               0               0          34,000
----------------------------------------------------------------------------------------------------------------

    (B) Apportioning the 5 percent additional tax among the component 
members of the controlled group. Since the group did not elect to adopt 
the FIFO method of apportionment, it is required to apportion the $5,000 
of its 5 percent additional tax pursuant to the proportionate method in 
the following manner:
    (1) Amount of the additional tax apportioned to X. Pursuant to the 
plan, X was liable for $6,000 of the group's $7,500 regular tax (80%) 
owed under the 15 percent tax bracket (and X is not liable for any 
regular tax under any higher tax bracket). See Step 1 of paragraph 
(a)(2)(ii)(A) of this section. X's portion of the group's tax benefit 
which it derived from using the 15 percent tax rate is $7,600 (0.8 x 
$9,500). See Step 2. The tax benefit inuring to the entire group from 
using the 15 percent and 25 percent tax brackets is $11,750 ($9,500 
(from the 15 percent tax bracket) + $2,250 (from the 25 percent tax 
bracket)). So, X's percentage portion of the group's total tax benefit 
is $7,600/$11,750 (64.68%). See Step 3. Thus, X's allocated portion of 
the 5 percent additional tax from using the 15 percent tax bracket is 
$3,234 (0.6468 x $5,000). See Step 4.
    (2) Amount of the additional tax apportioned to Y. (i) Regular tax 
apportioned to Y from using the 15 percent tax bracket. Pursuant to the 
plan, Y was liable for the remaining $1,500 of the group's $7,500 
regular tax (20%) owed under the 15 percent tax bracket. See Step 1. Y's 
portion of the group's tax benefit which it derived from using the 15 
percent tax rate is $1,900 ($9,500-$7,600, or 0.2 x $9,500). See Step 2. 
So, Y's percentage portion of the group's total tax benefit is $1,900/
$11,750 (16.17%). See Step 3. Thus, Y's allocated portion of the 5 
percent additional tax from using the 15 percent tax bracket is $809 
(0.1617 x $5,000). See Step 4.
    (ii) Regular tax apportioned to Y from using the 25 percent tax 
bracket. Pursuant to the plan, Y was liable for 100% of the group's 
regular tax owed under the 25 percent tax bracket, an amount of $6,250. 
See Step 1. Y is, therefore, entitled to 100% of the group's tax benefit 
which it derived from using this tax bracket, an amount of $2,250. See 
Step 2. So, Y's percentage portion of the group's total tax benefit is 
$2,250/$11,750 (19.15%). See Step 3. Thus, Y's allocated portion of the 
5 percent additional tax from using the 25 percent tax bracket is $957 
(0.1915 x $5,000). See Step 4. Y's total allocated portion of the 
additional tax is $1,766 ($809 + $957). See Step 5.
    Example 2. (i) Facts. The facts are the same as in Example 1, except 
that on August 31, 2007, X of the X-Y-Z controlled group sold all of the 
stock of Z to M of the M-N controlled group, a pair of corporations 
unrelated to the X-Y group. Pursuant to the terms of the sales 
agreement, the members of the M-N group properly notified the members of 
the X-Y group on a timely basis that Z's taxable income for its 2007 tax 
year, as based on the group's December 31st testing date, was $100,000.
    (ii) Controlled group analysis. On December 31st, 2007, X and Y are 
members of the selling controlled group and M, N and Z are members of 
the buying controlled group. However, pursuant to section 1563(b)(3), Z 
is treated as an additional member of the X-Y

[[Page 25]]

group on December31st 2007, since it was a member for at least one-half 
the number of days (243 out of 364) during the period beginning on 
January 1 and ending on December 30, 2007. Conversely, pursuant to 
section 1563(b)(2)(A), Z is treated as an excluded member of the M-N 
controlled group. Therefore, on December 31st, 2007, X, Y, and Z qualify 
as component members of the selling group, and only M and N qualify as 
component members of the buying group.
    (iii) Additional tax analysis. With regard to X and Y's 2007 tax 
years, X and Y together owed $5,000 of additional tax, as calculated in 
Example 1. X's allocated portion of the additional tax is $3,234, as 
calculated in the manner set forth in Example 1. Y's allocated portion 
of the additional tax is $1,766, also as calculated in the manner set 
forth in Example 1.
    Example 3. (i) Facts. The facts are the same as in Example 2, except 
that in 2012, pursuant to an IRS audit, Z's 2007 taxable income was re-
determined. It was adjusted by an income increase of $10,000. Pursuant 
to the terms of the sales agreement, the members of the M-N group timely 
notified the members of the X-Y group of Z's income adjustment.
    (ii) Additional tax analysis. For 2007 the X-Y-Z group owed a 
revised additional tax in the amount of $5,500, allocated as follows: 
$3,557.40 to X and $1,942.60 to Y. X and Y each filed an amended 2007 
tax return to report their portions of the $500 increase to the group's 
additional tax. Pursuant to their apportionment plan for allocating 
their regular tax, and as a result of defaulting to the proportionate 
method for allocating the group's additional tax, X reported $323.40 as 
its share of the group's increase to its additional tax and Y reported 
$176.60 as its share of the group's increase to its additional tax.
    Example 4. The facts are the same as in Example 1, except that the 
members elected in their apportionment plan to adopt the FIFO method for 
apportioning the additional tax. Under the FIFO method, the 5 percent 
additional tax amount of $5,000 will be apportioned entirely to those 
members who would benefit from using the 15 percent tax bracket, by 
reason that $5,000 of the group's additional tax is less than $9,500, 
which is the full tax-benefit amount inuring to a controlled group from 
having a 15 percent tax rate applied to the full income bracket subject 
to that rate. Since X derived 80 percent of the group's tax benefit by 
its use of the 15 percent tax bracket, its share of the group's 5 
percent additional tax is $4,000 (80% x $5,000), and Y's share of the 
group's 5 percent additional tax is, therefore, $1,000, which is the 
remaining amount of the group's 5 percent additional tax, attributable 
to the 15 percent tax bracket.

    (b) Reduction to the amount exempted from the alternative minimum 
tax--(1) Calculation. The alternative minimum taxable incomes of the 
component members of a controlled group of corporations shall be taken 
into account in calculating the reduction set forth in section 55(d)(3) 
to the amount exempted from the alternative minimum tax (the exemption 
amount). For purposes of the preceding sentence, alternative minimum 
taxable income means the positive alternative minimum taxable income of 
a component member for its entire tax year (even if it was not a member 
of the group for each day of that tax year) that includes the same 
December 31st testing date, which is also applicable to the other 
component members of that same controlled group.
    (2) Apportionment. Any reduction to the exemption amount shall be 
apportioned to the component members of a controlled group in the same 
manner that the amount of the exemption (provided in section 55(d)(2)) 
to the alternative minimum tax was allocated under section 1561(a). For 
rules to apportion the section 55(d)(2) exemption amount among the 
component members of a controlled group, see Sec. 1.1561-3(b) or (c).
    (3) Examples. The provisions of this paragraph (b) may be 
illustrated by the following example:

    Example. (i) Facts. A controlled group of corporations consists of 
three members: X, Y and Z. X owns all of the stock of Y and Z. Each 
corporation files its separate return on a calendar year basis. For 
calendar year 2007, the component members of this controlled group have 
an apportionment plan in effect. The group has chosen to apportion the 
entire section 55(d)(2) exemption amount of $40,000 to Z. For 2007, X 
had alternative minimum taxable income (AMTI) of $40,000, Y had AMTI of 
$60,000 and Z had AMTI of $100,000. Thus the total AMTI of the group is 
$200,000.
    (ii) Calculating the reduction to the exemption amount. Section 
55(d)(3)(A) provides that the section 55(d)(2) exemption amount shall be 
reduced (but not below zero) by an amount equal to 25 percent of the 
amount by which the AMTI of a corporation exceeds $150,000. For the 
purpose of computing the group's AMTI, the AMTI of each of the component 
members, for their tax years that have the same December 31st testing 
date, shall be taken into account. In accordance with these provisions, 
the $40,000 exemption amount is reduced by $12,500 (25% x $50,000 
($200,000-$150,000)). Pursuant to the group's allocation plan, the 
entire $12,500 reduction

[[Page 26]]

to the exemption amount is allocated to Z. Thus, after such allocation, 
Z's $40,000 exemption amount is reduced to $27,500 ($40,000-$12,500).
    (c) Accumulated earnings credit. The component members of a 
controlled group of corporations are permitted to allocate the amount of 
the accumulated earnings credit unequally if they have an apportionment 
plan in effect.
    (d) [Reserved]
    (e) Short taxable years not including a December 31st date--(1) 
General rule. If a corporation has a short taxable year not including a 
December 31st date and, after applying the rules of section 1561(b) and 
paragraph (e)(2)(i) of this section, it qualifies as a component member 
of the group with respect to its short taxable year (short-year member), 
then, for purposes of subtitle A of the Internal Revenue Code, the 
amount of any tax-benefit item described in section 1561(b) allocated to 
that component member's short taxable year shall be the amount specified 
in section 1561(a) for that item, divided by the number of corporations 
which are component members of that group on the last day of that 
component member's short taxable year. The component members of such 
group may not apportion, by an apportionment plan, an amount of such 
tax-benefit item to any short-year member that differs from equal 
apportionment of that item.
    (2) Additional rules. For purposes of paragraph (e)(1) of this 
section--
    (i) Section 1563(b) shall be applied as if the last day of the 
taxable year of a short-year member were substituted for December 31st; 
and
    (ii) The term short taxable year does not refer to any portion of a 
tax year of a corporation for which its income is required to be 
included in a consolidated return pursuant to Sec. 1.1502-76(b).
    (3) Calculation of the additional tax. A short-year member (as 
defined in paragraph (e)(1) of this section) for its short taxable year 
calculates its additional tax liability imposed by section 11(b)(1) only 
on its own income, and therefore the subsequent calculation of the 
additional tax liability with regard to the remaining members of the 
group will not include the income of this short-year member.
    (4) Calculation of the alternative minimum tax. If a component 
member has a tax year of less than 12 months, whether or not such tax 
year includes a December 31st date, see section 443(d) for the 
annualization method required for calculating the alternative minimum 
tax.
    (5) Examples. The provisions of this paragraph (e) may be 
illustrated by the following examples:

    Example 1. Formation of a new member of a controlled group-- (i) 
Facts. On January 2, 2007, corporation X transfers cash to newly formed 
corporation Y (which begins business on that date) and receives all of 
the stock of Y in return. X also owns all of the stock of corporation Z 
on each day of 2006 and 2007. X, Y and Z have an apportionment plan in 
effect, apportioning the 15 percent taxbracket amount as follows: 40% 
($20,000) to each of X and Y and 20% ($10,000) to Z. X, Y and Z each 
file a separate return with respect to the group's December 31st, 2007 
testing date. X is on a calendar tax year and Z is on a fiscal tax year 
ending on March 31. Y adopts a fiscal year ending on June 30 and timely 
files a tax return for its short taxable year beginning on January 2, 
2007, and ending on June 30, 2007.
    (ii) Y's short taxable year. On June 30, 2007, Y is a component 
member of a parentsubsidiary controlled group of corporations composed 
of X, Y and Z. Pursuant to paragraph (e)(1) of this section, the group 
may not apportion any amount of the 15 percent tax bracket to Y's short 
taxable year ending on June 30, 2007. Rather, Y is entitled to exactly 
\1/3\ of such bracket amount, or $16,667.
    (iii) The members' subsequent tax years. On December 31st, 2007, X, 
Y and Z are component members of a parent-subsidiary controlled group of 
corporations. For their tax years that include December 31st, 2007 (X's 
calendar year ending December 31st, 2007, Z's fiscal year ending March 
31, 2008 and Y's fiscal year ending June 30, 2008), X, Y and Z apportion 
among themselves the full amount of all of the applicable tax brackets 
pursuant to their apportionment plan. For example, 40% of the 15 percent 
tax-bracket amount, or $20,000, was apportioned to each of X and Y, and 
the remaining 10%, or $10,000, was apportioned to Z.
    Example 2. Allocating a tax bracket to the short taxable year of a 
liquidated member of a controlled group-- (i) Facts. On January 1, 2007, 
corporation P owns all of the stock of corporations S1, 
S2 and S3 (the P group). Each of these four 
component members of the P group, with respect to the group's December 
31st, 2007 testing date, files its separate return on a calendar year 
basis. These members have an apportionment plan in effect (the P group 
plan) under which S1 and S2 are each entitled to 
40% of the 15 percent

[[Page 27]]

tax-bracket amount ($20,000), and P and S3 are each entitled 
to 10% of the 15 percent tax-bracket amount ($5,000). On May 31, 2007, 
S1 liquidates and therefore files a return for the short 
taxable year beginning on January 1, 2007, and ending on May 31, 2007. 
On July 31, 2007, S2 liquidates and therefore files a return 
for the short taxable year beginning on January 1, 2007 and ending on 
July 31, 2007. P and S3 each file a return for their 2007 
calendar tax years.
    (ii) Apportionment of the 15 percent tax bracket to S1 
for its short taxable year. On May 31, 2007, S1 is a 
component member of the P group composed of P, S1, 
S2 and S3. Pursuant to paragraph (e)(1) of this 
section, the group may not apportion any amount of the 15 percent tax 
bracket to S1's short taxable year ending on June 30, 2007. 
Rather, S1 is entitled to exactly \1/4\ of such bracket 
amount, or $12,500.
    (iii) Apportionment of the 15 percent tax bracket to S2 
for its short taxable year. On July 31, 2007, S2 is a 
component member of the P group composed of P, S2 and 
S3. Pursuant to paragraph (e)(1) of this section, the group 
may not apportion any amount of the 15 percent tax bracket to 
S2's short taxable year ending on June 30, 2007. Rather, 
S2 is entitled to exactly \1/4\ of such bracket amount, or 
$16,667.
    (iv) Apportionment of the 15 percent tax bracket to P and 
S3 for each of their calendar tax years. On December 31st, 
2007, P and S3 are component members of the P group. 
Accordingly, for P and S3's 2007 calendar tax year, they are 
each apportioned $25,000 of the 15 percent tax bracket, pursuant to the 
applicable P group plan.
    Example 3. Liquidation of member after its transfer to another 
controlled group-- (i) Facts. The facts are the same as in Example 2, 
except that P, on April 30, 2007, sold all of the stock of S2 
to the M-N controlled group. At the time of the sale, M and N are both 
unrelated to any members of the P group. As in Example 2, S2 
liquidates on July 31, 2007, and therefore files a tax return for its 
short taxable year beginning on January 1, 2007, and ending on July 31, 
2007. Pursuant to the sales agreement, the N-M group timely notified P 
that S2 had liquidated.
    (ii) Controlled group analysis. On April 30, 2007, the date of the 
sale of S2, the P group reasonably expected that 
S2 would be treated as an excluded member with respect to its 
December 31st, 2007 testing date. On that April 30th date, S2 
had been a member of the P group for less than one-half the number of 
days of what it expected would be a full 2007 calendar tax year 
preceding December 31st, 2007 (120 days (January 1-April 30) out of 364 
days (January 1-December 30)). Yet, as a result of S2's 
subsequent liquidation by the M-N group prior to December 31st, 2007, 
S2 became a component member of the P group with respect to 
the P group's December 31st, 2007 testing date. With respect to that 
December 31st testing date, S2 thus was a member of the P 
group for more than one-half of the number of days of its tax year 
ending on July 31, 2007, which days proceeded December 31st, 2007 (120 
days (January 1-April 30 of 2007) out of 211 days (January 1-July 30 of 
2007)). The allocation of the 15 percent tax-bracket amount to the P 
group members is determined in the same manner as in Example 2 and, 
therefore, the bracket amounts allocated to P, S1, 
S2 and S3 are the same as determined in Example 2. 
The allocation of the bracket amounts would be the same if, at the time 
P sold all of the S2 stock, the parties had made a section 
338(h)(10) election.
    Example 4. Short tax year including a December 31st date. 
Corporation X owns all of the stock of corporations Y and Z. X, Y and Z 
each file separate returns. X and Y are on a calendar tax year and Z is 
on a fiscal tax year beginning October 1 and ending September 30. On 
January 2, 2007, Z liquidates. Because Z's final tax year (beginning on 
October 1, 2006 and ending on January 2, 2007) includes a December 31st 
date, that is, December 31, 2006, it is therefore not subject to the 
short taxable year rule provided by section 1561(b) and paragraph (e) of 
this section. Accordingly, Z is a component member of the X-Y-Z group, 
for the group's December 31st, 2006 testing date. Thus, the rules of 
this paragraph (e) do not limit the amount of any of the tax-benefit 
items of section 1561(a) available to Z or to this controlled group.
    (f) Effective/applicability date. This section applies to any tax 
year beginning on or after December 21, 2009. However, taxpayers may 
apply this section to any Federal income tax return filed on or after 
December 21, 2009. For tax years beginning before December 21, 2009, see 
Sec. 1.1561-2T as contained in 26 CFR part 1 in effect on April 1, 
2009.

[T.D. 9476, 74 FR 68533, Dec. 28, 2009]



Sec. 1.1561-3  Allocation of the section 1561(a) tax items.

    (a) Filing of form--(1) In general. For each tax year that a 
corporation is a component member of the same controlled group of 
corporations on a December 31st (its testing date), or, in the case of a 
short-year member (see section 1561(b) and Sec. 1.1561-2(e)), the date 
substituted for that December 31st date (its testing date), such 
corporation and all the other component members of such group each must 
file the required form (that is, Schedule O or any successor form) with 
the Federal income

[[Page 28]]

tax return for that component member's tax year that includes a 
particular testing date. Each such corporation must file that form with 
its return whether or not--
    (i) An apportionment plan is in effect; or
    (ii) Any change is made to the group's apportionment of its section 
1561(a) tax benefit items from the previous year.
    (2) Exception for component members that are members of a 
consolidated group. If any of the component members of a controlled 
group of corporations are also members of a consolidated group, the 
parent of such consolidated group shall file only one form on behalf of 
all such members. Such form shall contain the information required for 
each such member.
    (b) No apportionment plan in effect. If the component members of a 
controlled group of corporations do not have an apportionment plan in 
effect, the amounts of the section 1561(a) items must be divided equally 
among all such members. For purposes of the preceding sentence, if any 
of the component members of a controlled group of corporations are also 
members of a consolidated group, such members will each be treated as a 
separate component member of the controlled group.
    (c) Apportionment plan in effect--(1) Adoption of plan. The 
component members of a controlled group of corporations consent to the 
adoption (or amendment) of an apportionment plan by checking the box to 
that effect on such form. For purposes of this paragraph (c)--
    (i) An apportionment plan that is adopted (including a plan that has 
been amended) continues in effect until it is terminated;
    (ii) A consolidated group is treated collectively as one component 
member of such group. This treatment occurs even where a member of that 
consolidated group has joined or left the group, if after such 
corporation joins or leaves the consolidated group, that group remains 
in existence, pursuant to Sec. 1.1502-75(d); and
    (iii) The members must allocate the amounts of the section 1561(a) 
items between/among themselves as described in the plan.
    (2) Limitation on adopting a plan--(i) Sufficient statute of 
limitations period for making an assessment of tax. The members may only 
adopt or amend such a plan if there is at least one year remaining in 
the statutory period (including any extensions thereof) for the 
assessment of a deficiency against every member the tax liability of 
which would be increased by the adoption of such a plan.
    (ii) Insufficient statute of limitations period for making an 
assessment of tax. If any member cannot satisfy the requirement of 
paragraph (c)(2)(i) of this section, the members may not adopt or amend 
such a plan unless the member not satisfying such requirement has 
entered into an agreement with the Internal Revenue Service to extend 
the statute of limitations for the limited purpose of assessing any 
deficiency against such member attributable to the adoption of such a 
plan.
    (3) Termination of plan. An apportionment plan that is in effect for 
the component members of a controlled group with respect to a preceding 
December 31st is terminated with respect to the current December 31st 
if--
    (i) Each member of such group consents to the termination of such a 
plan for the current December 31st by checking the box to that effect on 
its form;
    (ii) The controlled group ceases to remain in existence (within the 
meaning of section 1563(a)) during the calendar year ending on the 
current December 31st;
    (iii) Any corporation which was a component member of such group on 
the preceding December 31st is not a component member of such group on 
the current December 31st; or
    (iv) Any corporation which was not a component member of such group 
on the preceding December 31st is a component member of such group on 
the current December 31st.
    (d) Effective/applicability date. This section applies to any tax 
year beginning on or after December 21, 2009. However, taxpayers may 
apply this section to any Federal income tax return filed on or after 
December 21, 2009. For tax years beginning before December

[[Page 29]]

21, 2009, see Sec. 1.1561-3T as contained in 26 CFR part 1 in effect on 
April 1, 2009.

[T.D. 9476, 74 FR 68536, Dec. 28, 2009]



Sec. 1.1563-1  Definition of controlled group of corporations and
component members and related concepts.

    (a) Controlled group of corporations--(1) In general--(i) Types of 
controlled groups. For purposes of sections 1561 through 1563, the term 
controlled group of corporations means any group of corporations which 
is--
    (A) A parent-subsidiary controlled group (as defined in paragraph 
(a)(2) of this section);
    (B) A brother-sister controlled group (as defined in paragraph 
(a)(3)(i) of this section);
    (C) A combined group (as defined in paragraph (a)(4) of this 
section); or
    (D) A life insurance controlled group (as defined in paragraph 
(a)(5) of this section).
    (ii) Special rules. In determining whether a corporation is included 
in a controlled group of corporations, section 1563(b) and paragraph (b) 
of this section shall not be taken into account. For rules defining a 
component member of a controlled group of corporations, including rules 
defining an excluded member and an additional member, see section 
1563(b) and paragraph (b) of this section.
    (iii) Cross reference. For the exclusion of certain stock for 
purposes of applying the definitions contained in this paragraph, see 
section 1563(c) and Sec. 1.1563-2.
    (2) Parent-subsidiary controlled group--(i) Definition. The term 
parent-subsidiary controlled group means one or more chains of 
corporations connected through stock ownership with a common parent 
corporation if--
    (A) Stock possessing at least 80 percent of the total combined 
voting power of all classes of stock entitled to vote or at least 80 
percent of the total value of shares of all classes of stock of each of 
the corporations, except the common parent corporation, is owned 
(directly and with the application of Sec. 1.1563-3(b)(1), relating to 
options) by one or more of the other corporations; and
    (B) The common parent corporation owns (directly and with the 
application of Sec. 1.1563-3(b)(1), relating to options) stock 
possessing at least 80 percent of the total combined voting power of all 
classes of stock entitled to vote or at least 80 percent of the total 
value of shares of all classes of stock of at least one of the other 
corporations, excluding, in computing such voting power or value, stock 
owned directly by such other corporations.
    (ii) Examples. The definition of a parent-subsidiary controlled 
group of corporations may be illustrated by the following examples:

    Example 1. P Corporation owns stock possessing 80 percent of the 
total combined voting power of all classes of stock entitled to vote of 
S Corporation. P is the common parent of a parent-subsidiary controlled 
group consisting of member corporations P and S.
    Example 2. Assume the same facts as in Example 1. Assume further 
that S owns stock possessing 80 percent of the total value of shares of 
all classes of stock of X Corporation. P is the common parent of a 
parent-subsidiary controlled group consisting of member corporations P, 
S, and X. The result would be the same if P, rather than S, owned the X 
stock.
    Example 3. P Corporation owns 80 percent of the only class of stock 
of S Corporation and S, in turn, owns 40 percent of the only class of 
stock of X Corporation. P also owns 80 percent of the only class of 
stock of Y Corporation and Y, in turn, owns 40 percent of the only class 
of stock of X. P is the common parent of a parent-subsidiary controlled 
group consisting of member corporations P, S, X, and Y.
    Example 4. P Corporation owns 75 percent of the only class of stock 
of Y and Z Corporations; Y owns all the remaining stock of Z; and Z owns 
all the remaining stock of Y. Since intercompany stockholdings are 
excluded (that is, are not treated as outstanding) for purposes of 
determining whether P owns stock possessing at least 80 percent of the 
voting power or value of at least one of the other corporations, P is 
treated as the owner of stock possessing 100 percent of the voting power 
and value of Y and of Z for purposes of paragraph (a)(2)(i)(B) of this 
section. Also, stock possessing 100 percent of the voting power and 
value of Y and Z is owned by the other corporations in the group within 
the meaning of paragraph (a)(2)(i)(A) of this section. (P and Y together 
own stock possessing 100 percent of the voting power and value of Z, and 
P and Z together own stock possessing 100 percent of the voting power 
and value of Y.) Therefore, P is the common parent of a parent-
subsidiary controlled group of corporations consisting of member 
corporations P, Y, and Z.


[[Page 30]]


    (3) Brother-sister controlled group--(i) Definition. The term 
brother-sister controlled group means two or more corporations if the 
same five or fewer persons who are individuals, estates, or trusts own 
(directly and with the application of the rules contained in Sec. 
1.1563-3(b)) stock possessing more than 50 percent of the total combined 
voting power of all classes of stock entitled to vote or more than 50 
percent of the total value of shares of all classes of stock of each 
corporation, taking into account the stock ownership of each such person 
only to the extent such stock ownership is identical with respect to 
each such corporation.
    (ii) Additional stock ownership requirement for purposes of certain 
other provisions of law. For purposes of any provision of law (other 
than sections 1561 through 1563) that incorporates the section 1563(a) 
definition of a controlled group, the term brother-sister controlled 
group means two or more corporations if the same five or fewer persons 
who are individuals, estates, or trusts own (directly and with the 
application of the rules contained in Sec. 1.1563-3(b)) stock 
possessing--
    (A) At least 80 percent of the total combined voting power of all 
classes of stock entitled to vote or at least 80 percent of the total 
value of shares of all classes of stock of each corporation (the 80 
percent requirement);
    (B) More than 50 percent of the total combined voting power of all 
classes of stock entitled to vote or more than 50 percent of the total 
value of shares of all classes of stock of each corporation, taking into 
account the stock ownership of each such person only to the extent such 
stock ownership is identical with respect to each such corporation (the 
more-than-50 percent identical ownership requirement); and
    (C) The five or fewer persons whose stock ownership is considered 
for purposes of the 80 percent requirement must be the same persons 
whose stock ownership is considered for purposes of the more-than-50 
percent identical ownership requirement.
    (iii) Examples. The principles of paragraph (a)(3)(ii) of this 
section may be illustrated by the following examples:

    Example 1. (i) The outstanding stock of corporations P, W, X, Y, and 
Z, which have only one class of stock outstanding, is owned by the 
following unrelated individuals:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                 Individuals                     P (%)        W (%)        X (%)        Y (%)        Z (%)                Identical ownership
--------------------------------------------------------------------------------------------------------------------------------------------------------
A...........................................           55           51           55           55           55  51.
B...........................................           45           49  ...........  ...........  ...........  (45% in P and W).
C...........................................  ...........  ...........           45  ...........  ...........
D...........................................  ...........  ...........  ...........           45  ...........
E...........................................  ...........  ...........  ...........  ...........           45
                                             -----------------------------------------------------------------------------------------------------------
    Total...................................          100          100          100          100          100
--------------------------------------------------------------------------------------------------------------------------------------------------------

    (ii) Corporations P and W are members of a brother-sister controlled 
group of corporations. Although the more-than-50 percent identical 
ownership requirement is met for all 5 corporations, corporations X, Y, 
and Z are not members because at least 80 percent of the stock of each 
of those corporations is not owned by the same 5 or fewer persons whose 
stock ownership is considered for purposes of the more-than-50 percent 
identical ownership requirement.
    Example 2. (i) The outstanding stock of corporations X and Y, which 
have only one class of stock outstanding, is owned by the following 
unrelated individuals:

------------------------------------------------------------------------
                                                      Corporations
                  Individuals                  -------------------------
                                                   X (%)        Y (%)
------------------------------------------------------------------------
A.............................................           12           12
B.............................................           12           12
C.............................................           12           12
D.............................................           12           12
E.............................................           13           13
F.............................................           13           13
G.............................................           13           13
H.............................................           13           13
                                               -------------------------
    Total.....................................          100          100
------------------------------------------------------------------------

    (ii) Any group of five of the shareholders will own more than 50 
percent of the stock in each corporation, in identical holdings. 
However, X and Y are not members of a brother-sister controlled group 
because at least 80

[[Page 31]]

percent of the stock of each corporation is not owned by the same five 
or fewer persons.
    Example 3. (i) Corporation X and Y each have two classes of stock 
outstanding, voting common and non-voting common. (None of this stock is 
excluded from the definition of stock under section 1563(c).) Unrelated 
individuals A and B own the following percentages of the class of stock 
entitled to vote (voting) and of the total value of shares of all 
classes of stock (value) in each of corporations X and Y:

------------------------------------------------------------------------
                                               Corporations
           Individuals           ---------------------------------------
                                           X                   Y
------------------------------------------------------------------------
A...............................  100% voting; 60%    75% voting; 60%
                                   value.              value.
B...............................  0% voting; 10%      25% voting; 10%
                                   value.              value.
------------------------------------------------------------------------

    (ii) No other shareholder of X owns (or is considered to own) any 
stock in Y. X and Y are a brother-sister controlled group of 
corporations. The group meets the more-than-50 percent identical 
ownership requirement because A and B own more than 50 percent of the 
total value of shares of all classes of stock of X and Y in identical 
holdings. (The group also meets the more-than-50 percent identical 
ownership requirement because of A's voting stock ownership.) The group 
meets the 80 percent requirement because A and B own at least 80 percent 
of the total combined voting power of all classes of stock entitled to 
vote.
    Example 4. Assume the same facts as in Example 3 except that the 
value of the stock owned by A and B is not more than 50 percent of the 
total value of shares of all classes of stock of each corporation in 
identical holdings. X and Y are not a brother-sister controlled group of 
corporations. The group meets the more-than-50 percent identical 
ownership requirement because A owns more than 50 percent of the total 
combined voting power of the voting stock of each corporation. For 
purposes of the 80 percent requirement, B's voting stock in Y cannot be 
combined with A's voting stock in Y since B, who does not own any voting 
stock in X, is not a person whose ownership is considered for purposes 
of the more-than-50 percent identical ownership requirement. Because no 
other shareholder owns stock in both X and Y, these other shareholders' 
stock ownership is not counted towards meeting either the more-than-50 
percent identical ownership requirement or the 80 percent ownership 
requirement.

    (iv) Special rule if prior law applies. Paragraph (a)(3)(ii) of this 
section, as amended by TD 8179, applies to taxable years ending on or 
after December 31, 1970. See, however, the transitional rule in 
paragraph (d) of this section.
    (4) Combined group--(i) Definition. The term combined group means 
any group of three or more corporations if--
    (A) Each such corporation is a member of either a parent-subsidiary 
controlled group of corporations or a brother-sister controlled group of 
corporations; and
    (B) At least one of such corporations is the common parent of a 
parent-subsidiary controlled group and also is a member of a brother-
sister controlled group.
    (ii) Examples. The definition of a combined group of corporations 
may be illustrated by the following examples:

    Example 1. A, an individual, owns stock possessing 80 percent of the 
total combined voting power of all classes of the stock of corporations 
X and Y. Y, in turn, owns stock possessing 80 percent of the total 
combined voting power of all classes of the stock of corporation Z. X, 
Y, and Z are members of the same combined group since--
    (i) X, Y, and Z are each members of either a parent-subsidiary or 
brother-sister controlled group of corporations; and
    (ii) Y is the common parent of a parent-subsidiary controlled group 
of corporations consisting of Y and Z, and also is a member of a 
brother-sister controlled group of corporations consisting of X and Y.
    Example 2. Assume the same facts as in Example 1, and further assume 
that corporation X owns 80 percent of the total value of shares of all 
classes of stock of corporation S. X, Y, Z, and S are members of the 
same combined group.

    (5) Life insurance controlled group--(i) Definition. The term life 
insurance controlled group means two or more life insurance companies 
each of which is a member of a controlled group of corporations 
described in paragraph (a)(2), (a)(3)(i), or (a)(4) of this section and 
to which Sec. 1.1502-47(f)(6) does not apply. Such insurance companies 
shall be treated as a controlled group of corporations separate from any 
other corporations which are members of a controlled group described in 
such paragraph (a)(2), (a)(3)(i), or (a)(4) of this section. For 
purposes of this section, the common parent of the controlled group 
described in paragraph (a)(2) of this section shall be referred to as 
the common parent of the life insurance controlled group.

[[Page 32]]

    (ii) Examples. The following examples illustrate the definition of a 
life insurance controlled group. In these examples, L indicates a life 
company, another letter indicates a nonlife company and each corporation 
uses the calendar year as its taxable year:

    Example 1. Since January 1, 1999, corporation P has owned all the 
stock of corporations L 1 and Y, and L 1 has owned 
all the stock of corporation X. On January 1, 2005, Y acquired all of 
the stock of corporation L 2. Since L 1 and L 
2 are members of a parent-subsidiary controlled group of 
corporations, such companies are treated as members of a life insurance 
controlled group separate from the parent-subsidiary controlled group 
consisting of P, X and Y. For purposes of this section, P is referred to 
as the common parent of the life insurance controlled group even though 
P is not a member of such group.
    Example 2. The facts are the same as in Example 1, except that, 
beginning with the 2005 tax year, the P affiliated group elected to file 
a consolidated return and P made a section 1504(c)(2) election. Pursuant 
to paragraph (a)(5)(i) of this section, L 1 and L 
2 are not members of a separate life insurance controlled 
group. Instead, P, X, Y, L 1 and L 2 constitute 
one controlled group. See Sec. 1.1502-47(f)(6).

    (6) Voting power of stock. For purposes of this section, and 
Sec. Sec. 1.1563-2 and 1.1563-3, in determining whether the stock owned 
by a person (or persons) possesses a certain percentage of the total 
combined voting power of all classes of stock entitled to vote of a 
corporation, consideration will be given to all the facts and 
circumstances of each case. A share of stock will generally be 
considered as possessing the voting power accorded to such share by the 
corporate charter, by-laws, or share certificate. On the other hand, if 
there is any agreement, whether express or implied, that a shareholder 
will not vote his stock in a corporation, the formal voting rights 
possessed by his stock may be disregarded in determining the percentage 
of the total combined voting power possessed by the stock owned by other 
shareholders in the corporation, if the result is that the corporation 
becomes a component member of a controlled group of corporations. 
Moreover, if a shareholder agrees to vote his stock in a corporation in 
the manner specified by another shareholder in the corporation, the 
voting rights possessed by the stock owned by the first shareholder may 
be considered to be possessed by the stock owned by such other 
shareholder if the result is that the corporation becomes a component 
member of a controlled group of corporations.
    (b) Component members--(1) In general--(i) Definition. For purposes 
of sections 1561 through 1563, a corporation is with respect to its 
taxable year a component member of a controlled group of corporations 
for the group's testing date if such corporation--
    (A) Is a member of such controlled group on such testing date and is 
not treated as an excluded member under paragraph (b)(2) of this 
section; or
    (B) Is not a member of such controlled group on such testing date 
but is treated as an additional member under paragraph (b)(3) of this 
section.
    (ii) Member of a controlled group of corporations. For purposes of 
sections 1561 through 1563, a member of a controlled group is a 
corporation connected with other member(s) of a controlled group under 
the stock ownership rules and the stock qualification rules set forth in 
section 1563. Under these rules, for a corporation to qualify as a 
component member of the group with respect to a group's December 31st 
testing date (or the short-year testing date for a short-year member), 
that corporation does not have to be a member of that group on that 
group's testing date. In addition, a corporation that is a member of a 
controlled group on the group's testing date does not necessarily 
qualify as a component member of that group with respect to that testing 
date.
    (iii) Additional concepts used in applying the controlled group 
rules.
    (A) The term testing date means the date used for determining the 
status of controlled group members as either component members or 
excluded members. That testing date is then also used to determine which 
taxable years of those component members are to be subjected to the 
controlled group rules. Generally, a member's testing date is the 
December 31st date included within that member's taxable year, whether 
such member is on a calendar or fiscal taxable year. However, if a 
component member of a controlled group has a

[[Page 33]]

short taxable year that does not include a December 31st date, then the 
last day of that short taxable year becomes that member's testing date.
    (B) The term testing period means the time period used for 
determining the status of controlled group members as either component 
members or excluded members. The testing period begins on the first day 
of a member's taxable year and ends on the day before its testing date. 
(Generally, the testing date is December 31st, but for a component 
member having a short taxable year not ending on December 31st, the 
testing date for the short taxable year of that member (and only that 
member) becomes the last day of that member's short taxable year.) Thus, 
for a member on a fiscal taxable year, the portion of its taxable year 
beginning on December 31st and ending on the last day of its taxable 
year is not taken into account for determining its status as a component 
member or an excluded member.
    (2) Excluded members--(i) Temporal test. A corporation, which is a 
member of a controlled group of corporations on the group's testing 
date, a date included within that member's taxable year, but who was a 
member of such group for less than one-half of the number of days of its 
testing period, shall be treated as an excluded member of such group for 
that group's testing date.
    (ii) Qualification test. A corporation which is a member of a 
controlled group of corporations on a testing date shall be treated as 
an excluded member of such group on such date if, for its taxable year 
including such date, such corporation is--
    (A) Exempt from taxation under section 501(a) (except a corporation 
which is subject to tax on its unrelated business taxable income under 
section 511) or 521 for such taxable year;
    (B) A foreign corporation not subject to taxation under section 
882(a) for the taxable year;
    (C) An S corporation (as defined in section 1361) for purposes of 
any tax benefit item described in section 1561(a) to which it is not 
subject;
    (D) A franchised corporation (as defined in section 1563(f)(4) and 
Sec. 1.1563-4); or
    (E) An insurance company subject to taxation under section 801, 
unless such insurance company (without regard to this paragraph 
(b)(2)(ii)(E)) is a component member of a life insurance controlled 
group described in paragraph (a)(5)(i) of this section or unless Sec. 
1.1502-47(f)(6) applies (which treats a life insurance company, for 
which a section 1504(c)(2) election is effective, as a member (whether 
eligible or ineligible) of a life-nonlife affiliated group).
    (3) Additional members. A corporation shall be treated as an 
additional member of a controlled group of corporations, that is, an 
additional component member, on the group's testing date if it--
    (i) Is not a member of such group on such date;
    (ii) Is not described, with respect to such taxable year, in 
paragraph (b)(2)(ii)(A), (b)(2)(ii)(B), (b)(2)(ii)(C), (b)(2)(ii)(D), or 
(b)(2)(ii)(E) of this section; and
    (iii) Was a member of such group for one-half (or more) of the 
number of days in its testing period.
    (4) Examples. The provisions of this paragraph (b) may be 
illustrated by the following examples:

    Example 1. B, an individual, owns all of the stock of corporations W 
and X on each day of 1964. W and X each use the calendar year as their 
taxable year. On January 1, 1964, B also owns all the stock of 
corporation Y (a fiscal year corporation with a taxable year beginning 
on July 1, 1964, and ending on June 30, 1965), which stock he sells on 
October 15, 1964. On December 1, 1964, B purchases all the stock of 
corporation Z (a fiscal year corporation with a taxable year beginning 
on September 1, 1964, and ending on August 31, 1965). On December 31, 
1964, W, X, and Z are members of the same controlled group. However, the 
component members of the group on such December 31st are W, X, and Y. 
Under paragraph (b)(2)(i) of this section, Z is treated as an excluded 
member of the group on December 31, 1964, since Z was a member of the 
group for less than one-half of the number of days (29 out of 121 days) 
during the period beginning on September 1, 1964 (the first day of its 
taxable year) and ending on December 30, 1964. Under paragraph (b)(3) of 
this section, Y is treated as an additional member of the group on 
December 31, 1964, since Y was a member of the group for at least one-
half of the number of days (107 out of 183 days) during the period 
beginning on July 1, 1964 (the first day of its taxable year) and ending 
on December 30, 1964.

[[Page 34]]

    Example 2. On January 1, 1964, corporation P owns all the stock of 
corporation S, which in turn owns all the stock of corporation S-1. On 
November 1, 1964, P purchases all of the stock of corporation X from the 
public and sells all of the stock of S to the public. Corporation X owns 
all the stock of corporation Y during 1964. P, S, S-1, X, and Y file 
their returns on the basis of the calendar year. On December 31, 1964, 
P, X, and Y are members of a parent-subsidiary controlled group of 
corporations; also, corporations S and S-1 are members of a different 
parent-subsidiary controlled group on such date. However, since X and Y 
have been members of the parent-subsidiary controlled group of which P 
is the common parent for less than one-half the number of days during 
the period January 1 through December 30, 1964, they are not component 
members of such group on such date. On the other hand, X and Y have been 
members of a parent-subsidiary controlled group of which X is the common 
parent for at least one-half the number of days during the period 
January 1 through December 30, 1964, and therefore they are component 
members of such group on December 31, 1964. Also since S and S-1 were 
members of the parent-subsidiary controlled group of which P is the 
common parent for at least one-half the number of days in the taxable 
years of each such corporation during the period January 1 through 
December 30, 1964, P, S, and S-1 are component members of such group on 
December 31, 1964.
    Example 3. Throughout 1964, corporation M owns all the stock of 
corporation F which, in turn, owns all the stock of corporations 
L1, L2, X, and Y. M is a domestic mutual insurance 
company subject to taxation under section 821, F is a foreign 
corporation not engaged in a trade or business within the United States, 
L1 and L2 are domestic life insurance companies 
subject to taxation under section 802, and X and Y are domestic 
corporations subject to tax under section 11 of the Code. Each 
corporation uses the calendar year as its taxable year. On December 31, 
1964, M, F, L1, L2, X, and Y are members of a 
parent-subsidiary controlled group of corporations. However, under 
paragraph (b)(2)(ii) of this section, M, F, L1, and 
L2 are treated as excluded members of the group on December 
31, 1964. Thus, on December 31, 1964, the component members of the 
parent-subsidiary controlled group of which M is the common parent 
include only X and Y.
    Furthermore, since paragraph (b)(2)(ii)(E) of this section does not 
result in L1 and L2 being treated as excluded 
members of a life insurance controlled group, L1 and 
L2 are component members of a life insurance controlled group 
on December 31, 1964.
    Example 4. Individual A owns all of the stock of corporations X, Y 
and Z. Each of these corporations is an S corporation. X, Y, and Z are 
each members of a brother-sister controlled group, even though each such 
corporation is treated as an excluded member of such group. See Sec. 
1.1563-1(b)(2)(ii)(C).

    (5) Application of constructive ownership rules. For purposes of 
paragraphs (b)(2)(i) and (b)(3)(iii) of this section, it is necessary to 
determine whether a corporation was a member of a controlled group of 
corporations for one-half (or more) of the number of days in its taxable 
year which precede the December 31st falling within such taxable year. 
Therefore, the constructive ownership rules contained in Sec. 1.1563-
3(b) (to the extent applicable in making such determination) must be 
applied on a day-by-day basis. For example, if P Corporation owns all 
the stock of X Corporation on each day of 1964, and on December 30, 
1964, acquires an option to purchase all the stock of Y Corporation (a 
calendar-year taxpayer which has been in existence on each day of 1964), 
the application of Sec. 1.1563-3(b)(1) on a day-by-day basis results in 
Y being a member of the brother-sister controlled group on only one day 
of Y's 1964 year which precedes December 31, 1964. Accordingly, since Y 
is not a member of such group for one-half or more of the number of days 
in its 1964 year preceding December 31, 1964, Y is treated as an 
excluded member of such group on December 31, 1964.
    (c) Overlapping groups--(1) In general. If on a December 31st a 
corporation is a component member of a controlled group of corporations 
by reason of ownership of stock possessing at least 80 percent of the 
total value of shares of all classes of stock of the corporation, and if 
on such December 31st such corporation is also a component member of 
another controlled group of corporations by reason of ownership of other 
stock (that is, stock not used to satisfy the at-least-80 percent total 
value test) possessing at least 80 percent of the total combined voting 
power of all classes of stock of the corporation entitled to vote, then 
such corporation shall be treated as a component member only of the 
controlled group of which it is a component member by reason of the 
ownership of at least 80 percent of the total value of its shares.
    (2) Brother-sister controlled groups--(i) One corporation. If on a 
December 31st,

[[Page 35]]

a corporation would, without the application of this paragraph (c)(2), 
be a component member of more than one brother-sister controlled group 
on such date, the corporation will be treated as a component member of 
only one such group on such date. Such corporation may elect the group 
in which it is to be included by including on or with its income tax 
return for the taxable year that includes such date a statement 
entitled, ``STATEMENT TO ELECT CONTROLLED GROUP PURSUANT TO Sec. 
1.1563-1(c)(2).'' This statement must include--
    (A) A description of each of the controlled groups in which the 
corporation could be included. The description must include the name and 
employer identification number of each component member of each such 
group and the stock ownership of the component members of each such 
group; and
    (B) The following representation: [INSERT NAME AND EMPLOYER 
IDENTIFICATION NUMBER OF CORPORATION] ELECTS TO BE TREATED AS A 
COMPONENT MEMBER OF THE [INSERT DESIGNATION OF GROUP].
    (ii) Multiple corporations. If more than one corporation would, 
without the application of this paragraph (c)(2), be a component member 
of more than one controlled group, those corporations electing to be 
component members of the same group must file a single statement. The 
statement must contain the information described in paragraph (c)(2)(i) 
of this section, plus the names and employer identification numbers of 
all other corporations designating the same group. The original 
statement must be included on or with the original Federal income tax 
return (including any amended return filed on or before the due date 
(including extensions) of such return) of the corporation that, among 
those corporations which would (without the application of this 
paragraph (c)(2)) belong to more than one group, has the taxable year 
including such December 31st which ends on the earliest date. That 
corporation must provide a copy of the statement to each other 
corporation included in the statement and represent in its statement 
that it has done so. Either the original or a copy of the statement must 
be retained by each corporation as part of its records. See Sec. 
1.6001-1(e) of this chapter.
    (iii) Election. (A) An election filed under this paragraph (c)(2) is 
irrevocable and effective until a change in the stock ownership of the 
corporation results in termination of membership in the controlled group 
in which such corporation has been included.
    (B) In the event no election is filed in accordance with the 
provisions of this paragraph (c)(2), then the Internal Revenue Service 
will determine the group in which such corporation is to be included. 
Such determination will be binding for all subsequent years unless the 
corporation files a valid election with respect to any such subsequent 
year or until a change in the stock ownership of the corporation results 
in termination of membership in the controlled group in which such 
corporation has been included.
    (iv) Examples. The provisions of this paragraph (c)(2) may be 
illustrated by the following examples (in which it is assumed that all 
the individuals are unrelated):

    Example 1. (i) On each day of 1970 all the outstanding stock of 
corporations X, Y, and Z is held in the following manner:

------------------------------------------------------------------------
                                                      Corporations
                 Individuals                  --------------------------
                                                X (%)    Y (%)    Z (%)
------------------------------------------------------------------------
A............................................       55       40        5
B............................................       40       20       40
C............................................        5       40       55
------------------------------------------------------------------------

    (ii) Since the more-than-50 percent identical ownership requirement 
of section 1563(a)(2) is met with respect to corporations X and Y and 
with respect to corporations Y and Z, but not with respect to 
corporations X, Y, and Z, corporation Y would, without the application 
of this paragraph (c)(2), be a component member on December 31, 1970, of 
overlapping groups consisting of X and Y and of Y and Z. If Y does not 
file an election in accordance with paragraph (c)(2)(i) of this section, 
the Internal Revenue Service will determine the group in which Y is to 
be included.
    Example 2. (i) On each day of 1970, all the outstanding stock of 
corporations V, W, X, Y, and Z is held in the following manner:

----------------------------------------------------------------------------------------------------------------
                                                                                     Corporations
                            Individuals                             --------------------------------------------
                                                                        V        W        X        Y        Z
----------------------------------------------------------------------------------------------------------------
D..................................................................       52       52       52       52       52
E..................................................................       40        2        2        2        2
F..................................................................        2       40        2        2        2

[[Page 36]]

 
G..................................................................        2        2       40        2        2
H..................................................................        2        2        2       40        2
I..................................................................        2        2        2        2       40
----------------------------------------------------------------------------------------------------------------

    (ii) On December 31, 1970, the more-than-50 percent identical 
ownership requirement of section 1563(a)(2) may be met with regard to 
any combination of the corporations but all five corporations cannot be 
included as component members of a single controlled group because the 
inclusion of all the corporations in a single group would be dependent 
upon taking into account the stock ownership of more than five persons. 
Therefore, if the corporations do not file a statement in accordance 
with paragraph (c)(2)(ii) of this section, the Internal Revenue Service 
will determine the group in which each corporation is to be included. 
The corporations or the Internal Revenue Service, as the case may be, 
may designate that three corporations be included in one group and two 
corporations in another, or that any four corporations be included in 
one group and that the remaining corporation not be included in any 
group.

    (d) Transitional rules--(1) In general. Treasury decision 8179 
amended paragraph (a)(3)(ii) of this section to revise the definition of 
a brother-sister controlled group of corporations. In general, those 
amendments are effective for taxable years ending on or after December 
31, 1970.
    (2) Limited nonretroactivity--(i) Old group. Under the authority of 
section 7805(b), the Internal Revenue Service will treat an old group as 
a brother-sister controlled group corporations for purposes of applying 
sections 401, 404(a), 408(k), 409A, 410, 411, 412, 414, 415, and 4971 of 
the Internal Revenue Code (Code) and sections 202, 203, 204, and 302 of 
the Employment Retirement Income Security Act of 1974 (ERISA) in a plan 
year or taxable year beginning before March 2, 1988, to the extent 
necessary to prevent an adverse effect on any old member (or any other 
corporation), or on any plan or other entity described in such sections 
(including plans, etc., of corporations not part of such old group), 
that would result solely from the retroactive effect of the amendment to 
this section by TD 8179. An adverse effect includes the disqualification 
of a plan or the disallowance of a deduction or credit for a 
contribution to a plan. The Internal Revenue Service, however, will not 
treat an old member as a member of an old group to the extent that such 
treatment will have an adverse effect on that old member.
    (ii) Old member of old group. Section 7805(b) will not be applied 
pursuant to paragraph (d)(2)(i) of this section to treat an old member 
of an old group as a member of a brother-sister controlled group to 
prevent an adverse effect for a taxable year if, for that taxable year, 
that old member treats or has treated itself as not being a member of 
that old group for purposes of sections 401, 404(a), 408(k), 409A, 410, 
411, 412, 414, 415, and 4971 of the Code and sections 202, 203, 204, and 
302 and title IV of ERISA for such taxable year (such as by filing, with 
respect to such taxable year, a return, amended return, or claim for 
credit or refund in which the amount of any deduction, credit, 
limitation, or tax due is determined by treating itself as not being a 
member of the old group for purposes of those sections). However, the 
fact that one or more (but not all) of the old members do not qualify 
for section 7805(b) treatment because of the preceding sentence will not 
preclude that old member (or members) from being treated as a member of 
the old group under paragraph (d)(2)(i) of this section in order to 
prevent the disallowance of a deduction or credit of another old member 
(or other corporation) or to prevent the disqualification of, or other 
adverse effect on, another old member's plan (or other entity) described 
in the sections of the Code and ERISA enumerated in such paragraph.
    (3) Election of general nonretroactivity. In the case of a taxable 
year ending on or after December 31, 1970, and before March 2, 1988, an 
old group will be treated as a brother-sister controlled group of 
corporations for all purposes of the Code for such taxable year if--
    (i) Each old member files a statement consenting to such treatment 
for such taxable year with the District Director having audit 
jurisdiction over its return within six months after March 2, 1988; and
    (ii) No old member--
    (A) Files or has filed, with respect to such taxable year, a return, 
amended return, or claim for credit or refund in which the amount of any 
deduction,

[[Page 37]]

credit, limitation, or tax due is determined by treating any old member 
as not a member of the old group; or
    (B) Treats the employees of all members of the old group as not 
being employed by a single employer for purposes of sections 401, 
404(a), 408(k), 409A, 410, 411, 412, 414, 415, and 4971 of the Code and 
sections 202, 203, 204, and 302 of ERISA for such taxable year.
    (4) Definitions. For purposes of this paragraph (d)--
    (i) An old group is a brother-sister controlled group of 
corporations, determined by applying paragraph (a)(3)(ii) of this 
section as in effect before the amendments made by TD 8179, that is not 
a brother-sister controlled group of corporations, determined by 
applying paragraph (a)(3)(ii) of this section as amended by such 
Treasury decision; and
    (ii) An old member is any corporation that is a member of an old 
group.
    (5) Election to choose between membership in more than one 
controlled group--(i) In general. A corporation may make an election 
under paragraph (c)(2) of this section by filing an amended return on or 
before September 2, 1988 if--
    (A) An old member has filed an election under paragraph (c)(2) of 
this section to be treated as a component member of an old group for a 
December 31st before March 2, 1988; and
    (B) That corporation would (without regard to such paragraph (c)(2)) 
be a component member of more than one brother-sister controlled group 
(not including an old group) on December 31st.
    (ii) Exception. This paragraph (d)(5) does not apply to a 
corporation that is treated as a member of an old group under paragraph 
(d)(3) of this section.
    (6) Refunds. See section 6511(a) for period of limitation on filing 
claims for credit or refund.
    (e) Effective/applicability date. This section applies to taxable 
years beginning on or after May 26, 2009. However, taxpayers may apply 
this section to taxable years beginning before May 26, 2009. For taxable 
years beginning before May 26, 2009, see Sec. 1.1563-1T as contained in 
26 CFR part 1 in effect on April 1, 2009. Paragraph (a)(1)(ii) of this 
section applies to taxable years beginning on or after April 11, 2011.

[T.D. 9451, 74 FR 25148, May 27, 2009, as amended by T.D. 9522, 76 FR 
19907, Apr. 11, 2011]



Sec. 1.1563-2  Excluded stock.

    (a) Certain stock excluded. For purposes of sections 1561 through 
1563 and the regulations thereunder, the term ``stock'' does not 
include:
    (1) Nonvoting stock which is limited and preferred as to dividends, 
and
    (2) Treasury stock.
    (b) Stock treated as excluded stock--(1) Parent-subsidiary 
controlled group. If a corporation (hereinafter in this paragraph 
referred to as ``parent corporation'') owns 50 percent or more of the 
total combined voting power of all classes of stock entitled to vote or 
50 percent or more of the total value of shares of all classes of stock 
in another corporation (hereinafter in this paragraph referred to as 
``subsidiary corporation''), the provisions of subparagraph (2) of this 
paragraph shall apply. For purposes of this subparagraph, stock owned by 
a corporation means stock owned directly plus stock owned with the 
application of the constructive ownership rules of paragraph (b) (1) and 
(4) of Sec. 1.1563-3, relating to options and attribution from 
corporations. In determining whether the stock owned by a corporation 
possesses the requisite percentage of the total combined voting power of 
all classes of stock entitled to vote of another corporation, see 
paragraph (a)(6) of Sec. 1.1563-1.
    (2) Stock treated as not outstanding. If the provisions of this 
subparagraph apply, then for purposes of determining whether the parent 
corporation or the subsidiary corporation is a member of a parent-
subsidiary controlled group of corporations within the meaning of 
paragraph (a)(2) of Sec. 1.1563-1, the following stock of the 
subsidiary corporation shall, except as otherwise provided in paragraph 
(c) of this section, be treated as if it were not outstanding:
    (i) Plan of deferred compensation. Stock in the subsidiary 
corporation held by a trust which is part of a plan of deferred 
compensation for the benefit of the employees of the parent corporation 
or the subsidiary corporation.

[[Page 38]]

The term ``plan of deferred compensation'' shall have the same meaning 
such term has in section 406(a)(3) and the regulations thereunder.
    (ii) Principal stockholders and officers. Stock in the subsidiary 
corporation owned (directly and with the application of the rules 
contained in paragraph (b) of Sec. 1.1563-3) by an individual who is a 
principal stockholder or officer of the parent corporation. A principal 
stockholder of the parent corporation is an individual who owns 
(directly and with the application of the rules contained in paragraph 
(b) of Sec. 1.1563-3) 5 percent or more of the total combined voting 
power of all classes of stock entitled to vote or 5 percent or more of 
the total value of shares of all classes of stock of the parent 
corporation. An officer of the parent corporation includes the 
president, vice-presidents, general manager, treasurer, secretary, and 
comptroller of such corporation, and any other person who performs 
duties corresponding to those normally performed by persons occupying 
such positions.
    (iii) Employees. Stock in the subsidiary corporation owned (directly 
and with the application of the rules contained in paragraph (b) of 
Sec. 1.1563-3) by an employee of the subsidiary corporation if such 
stock is subject to conditions which substantially restrict or limit the 
employee's right (or if the employee constructively owns such stock, the 
direct owner's right) to dispose of such stock and which run in favor of 
the parent or subsidiary corporation. In general, any condition which 
extends, directly or indirectly, to the parent corporation or the 
subsidiary corporation preferential rights with respect to the 
acquisition of the employee's (or direct owner's) stock will be 
considered to be a condition described in the preceding sentence. It is 
not necessary, in order for a condition to be considered to be in favor 
of the parent corporation or the subsidiary corporation, that the parent 
or subsidiary be extended a discriminatory concession with respect to 
the price of the stock. For example, a condition whereby the parent 
corporation is given a right of first refusal with respect to any stock 
of the subsidiary corporation offered by an employee for sale is a 
condition which substantially restricts or limits the employee's right 
to dispose of such stock and runs in favor of the parent corporation. 
Moreover, any legally enforceable condition which prohibits the employee 
from disposing of his stock without the consent of the parent (or a 
subsidiary of the parent) will be considered to be a substantial 
limitation running in favor of the parent corporation.
    (iv) Controlled exempt organization. Stock in the subsidiary 
corporation owned (directly and with the application of the rules 
contained in paragraph (b) of Sec. 1.1563-3) by an organization (other 
than the parent corporation):
    (a) To which section 501 (relating to certain educational and 
charitable organizations which are exempt from tax) applies, and
    (b) Which is controlled directly or indirectly by the parent 
corporation or subsidiary corporation, by an individual, estate, or 
trust that is a principal stockholder of the parent corporation, by an 
officer of the parent corporation, or by any combination thereof.


The terms ``principal stockholder of the parent corporation'' and 
``officer of the parent corporation'' shall have the same meanings in 
this subdivision as in subdivision (ii) of this subparagraph. The term 
``control'' as used in this subdivision means control in fact and the 
determination of whether the control requirement of (b) of this 
subdivision is met will depend upon all the facts and circumstances of 
each case, without regard to whether such control is legally enforceable 
and irrespective of the method by which such control is exercised or 
exercisable.
    (3) Brother-sister controlled group. If five or fewer persons 
(hereinafter referred to as common owners) who are individuals, estates, 
or trusts own (directly and with the application of the rules contained 
in paragraph (b) of Sec. 1.1563-3) stock possessing 50 percent or more 
of the total combined voting power of all classes of stock entitled to 
vote or 50 percent or more of the total value of shares of all classes 
of stock in a corporation, the provisions of subparagraph (4) of this 
paragraph shall apply. In determining whether the

[[Page 39]]

stock owned by such person or persons possesses the requisite percentage 
of the total combined voting power of all classes of stock entitled to 
vote of a corporation, see paragraph (a)(6) of Sec. 1.1563-1.
    (4) Stock treated as not outstanding. If the provisions of this 
subparagraph apply, then for purposes of determining whether a 
corporation is a member of a brother-sister controlled group of 
corporations within the meaning of paragraph (a)(3) of Sec. 1.1563-1, 
the following stock of such corporation shall, except as otherwise 
provided in paragraph (c) of this section, be treated as if it were not 
outstanding:
    (i) Exempt employees' trust. Stock in such corporation held by an 
employees' trust described in section 401(a) which is exempt from tax 
under section 501(a), if such trust is for the benefit of the employees 
of such corporation.
    (ii) Employees. Stock in such corporation owned (directly and with 
the application of the rules contained in paragraph (b) of Sec. 1.1563-
3) by an employee of such corporation if such stock is subject to 
conditions which run in favor of a common owner of such corporation (or 
in favor of such corporation) and which substantially restrict or limit 
the employee's right (or if the employee constructively owns such stock, 
the record owner's right) to dispose of such stock. The principles of 
subparagraph (2)(iii) of this paragraph shall apply in determining 
whether a condition satisfies the requirements of the preceding 
sentence. Thus, in general, a condition which extends, directly or 
indirectly, to a common owner or such corporation preferential rights 
with respect to the acquisition of the employee's (or record owner's) 
stock will be considered to be a condition which satisfies such 
requirements. For purposes of this subdivision, if a condition which 
restricts or limits an employee's right (or record owner's right) to 
dispose of his stock also applies to the stock in such corporation held 
by such common owner pursuant to a bona fide reciprocal stock purchase 
arrangement, such condition shall not be treated as one which restricts 
or limits the employee's (or record owner's) right to dispose of such 
stock. An example of a reciprocal stock purchase arrangement is an 
agreement whereby a common owner and the employee are given a right of 
first refusal with respect to stock of the employer corporation owned by 
the other party. If, however, the agreement also provides that the 
common owner has the right to purchase the stock of the employer 
corporation owned by the employee in the event that the corporation 
should discharge the employee for reasonable cause, the purchase 
arrangement would not be reciprocal within the meaning of this 
subdivision.
    (iii) Controlled exempt organization. Stock in such corporation 
owned (directly and with the application of the rules contained in 
paragraph (b) of Sec. 1.1563-3) by an organization:
    (a) To which section 501(c)(3) (relating to certain educational and 
charitable organizations which are exempt from tax) applies, and
    (b) Which is controlled directly or indirectly by such corporation, 
by an individual, estate, or trust that is a principal stockholder of 
such corporation, by an officer of such corporation, or by any 
combination thereof.


The terms ``principal stockholder'' and ``officer'' shall have the same 
meanings in this subdivision as in subparagraph (2)(ii) of this 
paragraph. The term ``control'' as used in this subdivision means 
control in fact and the determination of whether the control requirement 
of (b) of this subdivision is met will depend upon all the facts and 
circumstances of each case, without regard to whether such control is 
legally enforceable and irrespective of the method by which such control 
is exercised or exercisable.
    (5) Other controlled groups. The provisions of subparagraphs (1), 
(2), (3), and (4) of this paragraph shall apply in determining whether a 
corporation is a member of a combined group (within the meaning of 
paragraph (a)(4) of Sec. 1.1563-1) or an insurance group (within the 
meaning of paragraph (a)(5) of Sec. 1.1563-1). For example, under 
paragraph (a)(4) of Sec. 1.1563-1, in order for a corporation to be a 
member of a combined group such corporation must be a member of a 
parent-subsidiary group or a brother-sister group. Accordingly, the 
excluded stock rules provided by

[[Page 40]]

this paragraph are applicable in determining whether the corporation is 
a member of such group.
    (6) Meaning of employee. For purposes of this section Sec. Sec. 
1.1563-3 and 1.1563-4, the term ``employee'' has the same meaning such 
term is given in section 3306(i) of the Code (relating to definitions 
for purposes of the Federal Unemployment Tax Act). Accordingly, the term 
employee as used in such sections includes an officer of a corporation.
    (7) Examples. The provisions of this paragraph may be illustrated by 
the following examples:

    Example 1. Corporation P owns 70 of the 100 shares of the only class 
of stock of corporation S. The remaining shares of S are owned as 
follows: 4 shares by Jones (the general manager of P), and 26 shares by 
Smith (who also owns 5 percent of the total combined voting power of the 
stock of P). P satisfies the 50 percent stock ownership requirement of 
subparagraph (1) of this paragraph with respect to S. Since Jones is an 
officer of P and Smith is a principal stockholder of P, under 
subparagraph (2)(ii) of this paragraph the S stock owned by Jones and 
Smith is treated as not outstanding for purposes of determining whether 
P and S are members of a parent-subsidiary controlled group of 
corporations within the meaning of paragraph (a)(2) of Sec. 1.1563-1. 
Thus, P is considered to own stock possessing 100 percent (70 / 70) of 
the total voting power and value of all the S stock. Accordingly, P and 
S are members of a parent-subsidiary controlled group of corporations.
    Example 2. Assume the same facts as in example (1) and further 
assume that Jones owns 15 shares of the 100 shares of the only class of 
stock of corporation S-1, and corporation S owns 75 shares of such 
stock. P satisfies the 50 percent stock ownership requirement of 
subparagraph (1) of this paragraph with respect to S-1 since P is 
considered as owning 52.5 percent (70 percent x 75 percent) of the S-1 
stock with the application of paragraph (b)(4) of Sec. 1.1563-3. Since 
Jones is an officer of P, under subparagraph (2)(ii) of this paragraph, 
the S-1 stock owned by Jones is treated as not outstanding for purposes 
of determining whether S-1 is a member of the parent-subsidiary 
controlled group of corporations. Thus, S is considered to own stock 
possessing 88.2 percent (75 / 85) of the voting power and value of the 
S-1 stock. Accordingly, P, S, and S-1 are members of a parent-subsidiary 
controlled group of corporations.
    Example 3. Corporation X owns 60 percent of the only class of stock 
of corporation Y. Davis, the president of Y, owns the remaining 40 
percent of the stock of Y. Davis has agreed that if he offers his stock 
in Y for sale he will first offer the stock to X at a price equal to the 
fair market value of the stock on the first date the stock is offered 
for sale. Since Davis is an employee of Y within the meaning of section 
3306(i) of the Code, and his stock in Y is subject to a condition which 
substantially restricts or limits his right to dispose of such stock and 
runs in favor of X, under subparagraph (2)(iii) of this paragraph such 
stock is treated as if it were not outstanding for purposes of 
determining whether X and Y are members of a parent-subsidiary 
controlled group of corporations. Thus, X is considered to own stock 
possessing 100 percent of the voting power and value of the stock of Y. 
Accordingly, X and Y are members of a parent-subsidiary controlled group 
of corporations. The result would be the same if Davis's wife, instead 
of Davis, owned directly the 40 percent stock interest in Y and such 
stock was subject to a right of first refusal running in favor of X.

    (c) Exception--(1) General. If stock of a corporation is owned by a 
person directly or with the application of the rules contained in 
paragraph (b) of Sec. 1.1563-3 and such ownership results in the 
corporation being a component member of a controlled group of 
corporations on a December 31, then the stock shall not be treated as 
excluded stock under the provisions of paragraph (b) of this section if 
the result of applying such provisions is that such corporation is not a 
component member of a controlled group of corporations on such December 
31.
    (2) Illustration. The provisions of this paragraph may be 
illustrated by the following example:

    Example. On each day of 1965, corporation P owns directly 50 of the 
100 shares of the only class of stock of corporation S. Jones, an 
officer of P, owns directly 30 shares of S stock and P has an option to 
acquire such 30 shares from Jones. The remaining shares of S are owned 
by unrelated persons. If, pursuant to the provisions of paragraph 
(b)(2)(ii) of this section, the 30 shares of S stock owned directly by 
Jones is treated as not outstanding, the result is that P would be 
treated as owning stock possessing only 71 percent (50 / 70) of the 
total voting power and value of S stock, and S would not be a component 
member of a controlled group of corporations on December 31, 1965. 
However, since P is considered as owning the 30 shares of S stock with 
the application of paragraph (b)(1) of this section, and such ownership 
plus the S stock directly owned by P (50 shares) results in S being a 
component member of a controlled group of corporations on

[[Page 41]]

December 31, 1965, the provisions of this paragraph apply. Therefore, 
the provisions of paragraph (b)(2)(ii) of this section do not apply with 
respect to the 30 shares of S stock, and on December 31, 1965, S is a 
component member of a controlled group of corporations consisting of P 
and S.

[T.D. 6845, 30 FR 9753, Aug. 5, 1965, as amended by T.D. 7181, 37 FR 
8070, Apr. 4, 1972]



Sec. 1.1563-3  Rules for determining stock ownership.

    (a) In general. In determining stock ownership for purposes of 
Sec. Sec. 1.1562-5, 1.1563-1, 1.1563-2, and this section, the 
constructive ownership rules of paragraph (b) of this section apply to 
the extent such rules are referred to in such sections. The application 
of such rules shall be subject to the operating rules and special rules 
contained in paragraphs (c) and (d) of this section.
    (b) Constructive ownership--(1) Options. If a person has an option 
to acquire any outstanding stock of a corporation, such stock shall be 
considered as owned by such person. For purposes of this subparagraph, 
an option to acquire such an option, and each one of a series of such 
options, shall be considered as an option to acquire such stock. For 
example, assume Smith owns an option to purchase 100 shares of the 
outstanding stock of M Corporation. Under this subparagraph, Smith is 
considered to own such 100 shares. The result would be the same if Smith 
owned an option to acquire the option (or one of a series of options) to 
purchase 100 shares of M stock.
    (2) Attribution from partnerships. (i) Stock owned, directly or 
indirectly, by or for a partnership shall be considered as owned by any 
partner having an interest of 5 percent or more in either the capital or 
profits of the partnership in proportion to his interest in capital or 
profits, whichever such proportion is the greater.
    (ii) The provisions of this subparagraph may be illustrated by the 
following example:

    Example. Green, Jones, and White, unrelated individuals, are 
partners in the GJW partnership. The partners' interests in the capital 
and profits of the partnership are as follows:

------------------------------------------------------------------------
                                                    Capital     Profits
                     Partner                     -----------------------
                                                    Percent     Percent
------------------------------------------------------------------------
Green...........................................          36          25
Jones...........................................          60          71
White...........................................           4           4
------------------------------------------------------------------------


The GJW partnership owns the entire outstanding stock (100 shares) of X 
Corporation. Under this subparagraph, Green is considered to own the X 
stock owned by the partnership in proportion to his interest in capital 
(36 percent) or profits (25 percent), whichever such proportion is the 
greater. Therefore, Green is considered to own 36 shares of the X stock. 
However, since Jones has a greater interest in the profits of the 
partnership, he is considered to own the X stock in proportion to his 
interest in such profits. Therefore, Jones is considered to own 71 
shares of the X stock. Since White does not have an interest of 5 
percent or more in either the capital or profits of the partnership, he 
is not considered to own any shares of the X stock.

    (3) Attribution from estates or trusts. (i) Stock owned, directly or 
indirectly, by or for an estate or trust shall be considered as owned by 
any beneficiary who has an actuarial interest of 5 percent or more in 
such stock, to the extent of such actuarial interest. For purposes of 
this subparagraph, the actuarial interest of each beneficiary shall be 
determined by assuming the maximum exercise of discretion by the 
fiduciary in favor of such beneficiary and the maximum use of such stock 
to satisfy his rights as a beneficiary. A beneficiary of an estate or 
trust who cannot under any circumstances receive any interest in stock 
held by the estate or trust, including the proceeds from the disposition 
thereof, or the income therefrom, does not have an actuarial interest in 
such stock. Thus, where stock owned by a decedent's estate has been 
specifically bequeathed to certain beneficiaries and the remainder of 
the estate is bequeathed to other beneficiaries, the stock is 
attributable only to the beneficiaries to whom it is specifically 
bequeathed. Similarly, a remainderman of a trust who cannot under any 
circumstances receive any interest in the stock of a corporation which 
is a part of the corpus of the trust (including any accumulated income 
therefrom or the proceeds from a disposition thereof) does not have an 
actuarial interest in such stock. However, an income beneficiary

[[Page 42]]

of a trust does have an actuarial interest in stock if he has any right 
to the income from such stock even though under the terms of the trust 
instrument such stock can never be distributed to him. The factors and 
methods prescribed in Sec. 20.2031-7 of this chapter (Estate Tax 
Regulations) for use in ascertaining the value of an interest in 
property for estate tax purposes shall be used for purposes of this 
subdivision in determining a beneficiary's actuarial interest in stock 
owned directly or indirectly by or for a trust.
    (ii) For the purposes of this subparagraph, property of a decedent 
shall be considered as owned by his estate if such property is subject 
to administration by the executor or administrator for the purposes of 
paying claims against the estate and expenses of administration 
notwithstanding that, under local law, legal title to such property 
vests in the decedent's heirs, legatees or devisees immediately upon 
death. With respect to an estate, the term ``beneficiary'' includes any 
person entitled to receive property of the decedent pursuant to a will 
or pursuant to laws of descent and distribution. A person shall no 
longer be considered a beneficiary of an estate when all the property to 
which he is entitled has been received by him, when he no longer has a 
claim against the estate arising out of having been a beneficiary, and 
when there is only a remote possibility that it will be necessary for 
the estate to seek the return of property or to seek payment from him by 
contribution or otherwise to satisfy claims against the estate or 
expenses of administration. When pursuant to the preceding sentence, a 
person ceases to be a beneficiary, stock owned by the estate shall not 
thereafter be considered owned by him.
    (iii) Stock owned, directly or indirectly, by or for any portion of 
a trust of which a person is considered the owner under Subpart E, Part 
I, Subchapter J of the Code (relating to grantors and others treated as 
substantial owners) is considered as owned by such person.
    (iv) This subparagraph does not apply to stock owned by any 
employees' trust described in section 401(a) which is exempt from tax 
under section 501(a).
    (4) Attribution from corporations. (i) Stock owned, directly or 
indirectly, by or for a corporation shall be considered as owned by any 
person who owns (within the meaning of section 1563(d)) 5 percent or 
more in value or its stock in that proportion which the value of the 
stock which such person so owns bears to the value of all the stock in 
such corporation.
    (ii) The provisions of this subparagraph may be illustrated by the 
following example:

    Example. Brown, an individual, owns 60 shares of the 100 shares of 
the only class of outstanding stock of corporation P. Smith, an 
individual, owns 4 shares of the P stock, and corporation X owns 36 
shares of the P stock. Corporation P owns, directly and indirectly, 50 
shares of the stock of corporation S. Under this subparagraph, Brown is 
considered to own 30 shares of the S stock (\60/100\ x 50), and X is 
considered to own 18 shares of the S stock (\36/100\ x 50). Since Smith 
does not own 5 percent or more in value of the P stock, he is not 
considered as owning any of the S stock owned by P. If, in this example, 
Smith's wife had owned directly 1 share of the P stock, Smith (and his 
wife) would each own 5 shares of the P stock, and therefore Smith (and 
his wife) would be considered as owning 2.5 shares of the S stock (\5/
100\ x 50).

    (5) Spouse. (i) Except as provided in subdivision (ii) of this 
subparagraph, an individual shall be considered to own the stock owned, 
directly or indirectly, by or for his spouse, other than a spouse who is 
legally separated from the individual under a decree of divorce, whether 
interlocutory or final, or a decree of separate maintenance.
    (ii) An individual shall not be considered to own stock in a 
corporation owned, directly or indirectly, by or for his spouse on any 
day of a taxable year of such corporation, provided that each of the 
following conditions are satisfied with respect to such taxable year:
    (a) Such individual does not, at any time during such taxable year, 
own directly any stock in such corporation.
    (b) Such individual is not a member of the board of directors or an 
employee of such corporation and does not participate in the management 
of such corporation at any time during such taxable year.

[[Page 43]]

    (c) Not more than 50 percent of such corporation's gross income for 
such taxable year was derived from royalties, rents, dividends, 
interest, and annuities.
    (d) Such stock in such corporation is not, at any time during such 
taxable year, subject to conditions which substantially restrict or 
limit the spouse's right to dispose of such stock and which run in favor 
of the individual or his children who have not attained the age of 21 
years. The principles of paragraph (b)(2)(iii) of Sec. 1.1563-2 shall 
apply in determining whether a condition is a condition described in the 
preceding sentence.
    (iii) For purposes of subdivision (ii)(c) of this subparagraph, the 
gross income of a corporation for a taxable year shall be determined 
under section 61 and the regulations thereunder. The terms 
``royalties'', ``rents'', ``dividends'', ``interest'', and ``annuities'' 
shall have the same meanings such terms are given for purposes of 
section 1244(c). See paragraph (e)(1)(ii), (iii), (iv), (v), and (vi) of 
Sec. 1.1244(c)-1.
    (6) Children, grandchildren, parents, and grandparents. (i) An 
individual shall be considered to own the stock owned, directly or 
indirectly, by or for his children who have not attained the age of 21 
years, and, if the individual has not attained the age of 21 years, the 
stock owned, directly or indirectly, by or for his parents.
    (ii) If an individual owns (directly, and with the application of 
the rules of this paragraph but without regard to this subdivision) 
stock possessing more than 50 percent of the total combined voting power 
of all classes of stock entitled to vote or more than 50 percent of the 
total value of shares of all classes of stock in a corporation, then 
such individual shall be considered to own the stock in such corporation 
owned, directly or indirectly, by or for his parents, grandparents, 
grandchildren, and children who have attained the age of 21 years. In 
determining whether the stock owned by an individual possesses the 
requisite percentage of the total combined voting power of all classes 
of stock entitled to vote of a corporation, see paragraph (a)(6) of 
Sec. 1.1563-1.
    (iii) For purposes of section 1563, and Sec. Sec. 1.1563-1 through 
1.1563-4, a legally adopted child of an individual shall be treated as a 
child of such individual by blood.
    (iv) The provisions of this subparagraph may be illustrated by the 
following example:

    Example. (a) Facts. Individual F owns directly 40 shares of the 100 
shares of the only class of stock of Z Corporation. His son, M (20 years 
of age), owns directly 30 shares of such stock, and his son, A (30 years 
of age), owns directly 20 shares of such stock. The remaining 10 shares 
of the Z stock are owned by an unrelated person.
    (b) F's ownership. Individual F owns 40 shares of the Z stock 
directly and is considered to own the 30 shares of Z stock owned 
directly by M. Since, for purposes of the more-than-50-percent stock 
ownership test contained in subdivision (ii) of this subparagraph, F is 
treated as owning 70 shares or 70 percent of the total voting power and 
value of the Z stock, he is also considered as owning the 20 shares 
owned by his adult son, A. Accordingly, F is considered as owning a 
total of 90 shares of the Z stock.
    (c) M's ownership. Minor son, M, owns 30 shares of the Z stock 
directly, and is considered to own the 40 shares of Z stock owned 
directly by his father, F. However, M is not considered to own the 20 
shares of Z stock owned directly by his brother, A, and constructively 
by F, because stock constructively owned by F by reason of family 
attribution is not considered as owned by him for purposes of making 
another member of his family the constructive owner of such stock. See 
paragraph (c)(2) of this section. Accordingly, M owns and is considered 
as owning a total of 70 shares of the Z stock.
    (d) A's ownership. Adult son, A, owns 20 shares of the Z stock 
directly. Since, for purposes of the more-than-50-percent stock 
ownership test contained in subdivision (ii) of this subparagraph, A is 
treated as owning only the Z stock which he owns directly, he does not 
satisfy the condition precedent for the attribution of Z stock from his 
father. Accordingly, A is treated as owning only the 20 shares of Z 
stock which he owns directly.

    (c) Operating rules and special rules--(1) In general. Except as 
provided in subparagraph (2) of this paragraph, stock constructively 
owned by a person by reason of the application of subparagraph (1), (2), 
(3), (4), (5), or (6) of paragraph (b) of this section shall, for 
purposes of applying such subparagraphs, be treated as actually owned by 
such person.
    (2) Members of family. Stock constructively owned by an individual 
by reason of the application of subparagraph

[[Page 44]]

(5) or (6) of paragraph (b) of this section shall not be treated as 
owned by him for purposes of again applying such subparagraphs in order 
to make another the constructive owner of such stock.
    (3) Precedence of option attribution. For purposes of this section, 
if stock may be considered as owned by a person under subparagraph (1) 
of paragraph (b) of this section (relating to option attribution) and 
under any other subparagraph of such paragraph, such stock shall be 
considered as owned by such person under subparagraph (1) of such 
paragraph.
    (4) Examples. The provisions of this paragraph may be illustrated by 
the following examples:

    Example 1. A, 30 years of age, has a 90 percent interest in the 
capital and profits of a partnership. The partnership owns all the 
outstanding stock of corporation X and X owns 60 shares of the 100 
outstanding shares of corporation Y. Under subparagraph (1) of this 
paragraph, the 60 shares of Y constructively owned by the partnership by 
reason of subparagraph (4) of paragraph (b) of this section is treated 
as actually owned by the partnership for purposes of applying 
subparagraph (2) of paragraph (b) of this section. Therefore, A is 
considered as owning 54 shares of the Y stock (90 percent of 60 shares).
    Example 2. Assume the same facts as in example (1). Assume further 
that B, who is 20 years of age and the brother of A, directly owns 40 
shares of Y stock. Although the stock of Y owned by B is considered as 
owned by C (the father of A and B) under paragraph (b)(6)(i) of this 
section, under subparagraph (2) of this paragraph such stock may not be 
treated as owned by C for purposes of applying paragraph (b)(6)(ii) of 
this section in order to make A the constructive owner of such stock.
    Example 3. Assume the same facts assumed for purposes of example 
(2), and further assume that C has an option to acquire the 40 shares of 
Y stock owned by his son, B. The rule contained in subparagraph (2) of 
this paragraph does not prevent the reattribution of such 40 shares to A 
because, under subparagraph (3) of this paragraph, C is considered as 
owning the 40 shares by reason of option attribution and not by reason 
of family attribution. Therefore, since A satisfies the more-than-50-
percent stock ownership test contained in paragraph (b)(6)(ii) of this 
section with respect to Y, the 40 shares of Y stock constructively owned 
by C are reattributed to A, and A is considered as owning a total of 94 
shares of Y stock.

    (d) Special rule of section 1563 (f)(3)(B)--(1) In general. If the 
same stock of a corporation is owned (within the meaning of section 
1563(d)) by two or more persons, then such stock shall be treated as 
owned by the person whose ownership of such stock results in the 
corporation being a component member of a controlled group on a December 
31 which has at least one other component member on such date.
    (2) Component member of more than one group. (i) If, by reason of 
subparagraph (1) of this paragraph, a corporation would (but for this 
subparagraph) become a component member of more than one controlled 
group on a December 31, such corporation shall be treated as a component 
member of only one such controlled group on such date. The determination 
as to which group such corporation is treated as a component member of 
shall be made in accordance with the rules contained in paragraphs 
(d)(2)(ii), (iii) and (iv) of this section.
    (ii) In any case in which a corporation is a component member of a 
controlled group of corporations on a December 31 as a result of 
treating each share of its stock as owned only by the person who owns 
such share directly, then each such share shall be treated as owned by 
the person who owns such share directly.
    (iii) If the application of subdivision (ii) of this subparagraph 
does not result in a corporation being treated as a component member of 
only one controlled group on a December 31, then the stock of such 
corporation described in subparagraph (1) of this paragraph shall be 
treated as owned by the one person described in such subparagraph who 
owns, directly and with the application of the rules contained in 
paragraph (b) (1), (2), (3), and (4) of this section, the stock 
possessing the greatest percentage of the total value of shares of all 
classes of stock of the corporation.
    (iv) Statement. If the application of paragraph (d)(2)(ii) or (iii) 
of this section does not result in a corporation being treated as a 
component member of only one controlled group of corporations on a 
December 31, then such corporation will be treated as a component member 
of only one such group on

[[Page 45]]

such date. Such corporation may elect the group in which it is to be 
included by including on or with its income tax return a statement 
entitled, ``STATEMENT TO ELECT CONTROLLED GROUP PURSUANT TO Sec. 
1.1563-3(d)(2)(iv).'' The statement must include--
    (A) A description of each of the controlled groups in which the 
corporation could be included. The description must include the name and 
employer identification number of each component member of each such 
group and the stock ownership of the component members of each such 
group; and
    (B) The following representation: [INSERT NAME AND EMPLOYER 
IDENTIFICATION NUMBER OF CORPORATION] ELECTS TO BE TREATED AS A 
COMPONENT MEMBER OF THE [INSERT DESIGNATION OF GROUP].
    (v) Election--(A) Election filed. An election filed under paragraph 
(d)(2)(iv) of this section is irrevocable and effective until paragraph 
(d)(2)(ii) or (iii) of this section applies or until a change in the 
stock ownership of the corporation results in termination of membership 
in the controlled group in which such corporation has been included.
    (B) Election not filed. In the event no election is filed in 
accordance with the provisions of paragraph (d)(2)(iv) of this section, 
then the Internal Revenue Service will determine the group in which such 
corporation is to be included. Such determination will be binding for 
all subsequent years unless the corporation files a valid election with 
respect to any such subsequent year or until a change in the stock 
ownership of the corporation results in termination of membership in the 
controlled group in which such corporation has been included.
    (3) Examples. The provisions of this paragraph may be illustrated by 
the following examples, in which each corporation referred to uses the 
calendar year as its taxable year and the stated facts are assumed to 
exist on each day of 1970 (unless otherwise provided in the example):

    Example 1. Jones owns all the stock of corporation X and has an 
option to purchase from Smith all the outstanding stock of corporation 
Y. Smith owns all the outstanding stock of corporation Z. Since the Y 
stock is considered as owned by two or more persons, under subparagraph 
(2)(ii) of this paragraph the Y stock is treated as owned only by Smith 
since he has direct ownership of such stock. Therefore, on December 31, 
1970, Y and Z are component members of the same brother-sister 
controlled group. If, however, Smith had owned his stock in corporation 
Z for less than one-half of the number of days of Z's 1970 taxable year, 
then under subparagraph (1) of this paragraph the Y stock would be 
treated as owned only by Jones since his ownership results in Y being a 
component member of a controlled group on December 31, 1970.
    Example 2. Individual H owns directly all the outstanding stock of 
corporation M. W (the wife of H) owns directly all the outstanding stock 
of corporation N. Neither spouse is considered as owning the stock 
directly owned by the other because each of the conditions prescribed in 
paragraph (b)(5)(ii) of this section is satisfied with respect to each 
corporation's 1970 taxable year. H owns directly 60 percent of the only 
class of stock of corporation P and W owns the remaining 40 percent of 
the P stock. Under subparagraph (2)(iii) of this paragraph, the stock of 
P is treated as owned only by H since H owns (directly and with the 
application of the rules contained in paragraph (b) (1), (2), (3), and 
(4) of this section) the stock possessing the greatest percentage of the 
total value of shares of all classes of stock of P. Accordingly, on 
December 31, 1970, P is treated as a component member of a brother-
sister group consisting of M and P.
    Example 3. Unrelated individuals A and B each own 49 percent of all 
the outstanding stock of corporation R, which in turn owns 70 percent of 
the only class of outstanding stock of corporation S. The remaining 30 
percent of the stock of corporation S is owned by unrelated individual 
C. C also owns the remaining 2 percent of the stock of corporation R. 
Under the attribution rule of paragraph (b)(4) of this section A and B 
are each considered to own 34.3 percent of the stock of corporation S. 
Accordingly, since five or fewer persons own at least 80 percent of the 
stock of corporations R and S and also own more than 50 percent 
identically (A's and B's identical ownership each is 34.3 percent, C's 
identical ownership is 2 percent), on December 31, 1970, corporations R 
and S are treated as component members of the same brother-sister 
controlled group for purposes of paragraph (a)(3)(ii) of Sec. 1.1563-1.

    (e) Effective/applicability date. Paragraph (d)(2)(iv) and (v) of 
this section apply to any taxable year beginning on or after May 30, 
2006. However, taxpayers may apply paragraph (d)(2)(iv) and (v) of this 
section to any original Federal income tax return (including

[[Page 46]]

any amended return filed on or before the due date (including 
extensions) of such original return) timely filed on or after May 30, 
2006. For taxable years beginning before May 30, 2006, see Sec. 1.1563-
3 as contained in 26 CFR part 1 in effect on April 1, 2006.

[T.D. 6845, 30 FR 9755, Aug. 5, 1965, as amended by T.D. 7181, 37 FR 
8070, Apr. 25, 1972; T.D. 7779, 46 FR 29474, June 2, 1981; T.D. 8179, 53 
FR 6613, Mar. 2, 1988; T.D. 9264, 71 FR 30606, 30608, May 30, 2006; T.D. 
9304, 71 FR 76913, Dec. 22, 2006; T.D. 9329, 72 FR 32806, 32807, June 
14, 2007; T.D. 9451, 74 FR 25148, May 27, 2009]



Sec. 1.1563-4  Franchised corporations.

    (a) In general. For purposes of paragraph (b)(2)(ii)(d) of Sec. 
1.1563-1, a member of a controlled group of corporations shall be 
considered to be a franchised corporation for a taxable year if each of 
the following conditions is satisfied for one-half (or more) of the 
number of days preceding the December 31 included within such taxable 
year (or, if such taxable year does not include a December 31, for one-
half or more of the number of days in such taxable year preceding the 
last day of such year):
    (1) Such member is franchised to sell the products of another 
member, or the common owner, of such controlled group.
    (2) More than 50 percent (determined on the basis of cost) of all 
the goods held by such member primarily for sale to its customers are 
acquired from members or the common owner of the controlled group, or 
both.
    (3) The stock of such member is to be sold to an employee (or 
employees) of such member pursuant to a bona fide plan designed to 
eliminate the stock ownership of the parent corporation (as defined in 
paragraph (b)(1) of Sec. 1.1563-2) or of the common owner (as defined 
in paragraph (b)(3) of Sec. 1.1563-2) in such member.
    (4) Such employee owns (or such employees in the aggregate own) 
directly more than 20 percent of the total value of shares of all 
classes of stock of such member. For purposes of this subparagraph, the 
determination of whether an employee (or employees) owns the requisite 
percentage of the total value of the stock of the member shall be made 
without regard to paragraph (b) of Sec. 1.1563-2, relating to certain 
stock treated as excluded stock. Furthermore, if the corporation has 
more than one class of stock outstanding, the relative voting rights as 
between each such class of stock shall be disregarded in making such 
determination.
    (b) Plan for elimination of stock ownership. (1) A plan referred to 
in paragraph (a)(3) of this section must:
    (i) Provide a reasonable selling price for the stock of the member, 
and
    (ii) Require that a portion of the employee's compensation or 
dividends, or both, from such member be applied to the purchase of such 
stock (or to the purchase of notes, bonds, debentures, or similar 
evidences of indebtedness of such member held by the parent corporation 
or the common owner).


It is not necessary, in order to satisfy the requirements of subdivision 
(ii) of this subparagraph, that the plan require that a percentage of 
every dollar of the compensation and dividends be applied to the 
purchase of the stock (or the indebtedness). The requirements of such 
subdivision are satisfied if an otherwise qualified plan provides that 
under certain specified conditions (such as a requirement that the 
member earn a specified profit) no portion of the compensation and/or 
dividends need be applied to the purchase of the stock (or 
indebtedness), provided such conditions are reasonable.
    (2) A plan for the elimination of the stock ownership of the parent 
corporation or of the common owner will satisfy the requirements of 
paragraph (a)(3) of this section and subparagraph (1) of this paragraph 
even though it does not require that the stock of the member be sold to 
an employee (or employees) if it provides for the redemption of the 
stock of the member held by the parent or common owner and under the 
plan the amount of such stock to be redeemed during any period is 
calculated by reference to the profits of such member during such 
period.

[T.D. 6845, 30 FR 9757, Aug. 5, 1965]

[[Page 47]]

  Individual Shared Responsibility Payment for Not Maintaining Minimum 
                           Essential Coverage



PROCEDURE AND ADMINISTRATION--Table of Contents



                         Information and Returns



Sec. 1.5000A-0  Table of contents.

    This section lists the captions contained in Sec. Sec. 1.5000A-1 
through 1.5000A-5.

Sec. 1.5000A-1 Maintenance of minimum essential coverage and liability 
                 for the shared responsibility payment.

    (a) In general.
    (b) Coverage under minimum essential coverage.
    (1) In general.
    (2) Special rule for United States citizens or residents residing 
outside the United States or residents of territories.
    (c) Liability for shared responsibility payment.
    (1) In general.
    (2) Liability for dependents.
    (i) In general.
    (ii) Special rules for dependents adopted or placed in foster care 
during the taxable year.
    (A) Taxpayers adopting an individual.
    (B) Taxpayers placing an individual for adoption.
    (C) Examples.
    (3) Liability of individuals filing a joint return.
    (d) Definitions.
    (1) Affordable Care Act.
    (2) Employee.
    (3) Exchange.
    (4) Family.
    (5) Family coverage.
    (6) Group health insurance coverage.
    (7) Group health plan.
    (8) Health insurance coverage.
    (9) Health insurance issuer.
    (10) Household income.
    (i) In general.
    (ii) Modified adjusted gross income.
    (11) Individual market.
    (12) Large and small group market.
    (13) Month.
    (14) Qualified health plan.
    (15) Rating area.
    (16) Self-only coverage.
    (17) Shared responsibility family.
    (18) State.

               Sec. 1.5000A-2 Minimum essential coverage.

    (a) In general.
    (b) Government-sponsored program.
    (1) In general.
    (i) Medicare.
    (ii) Medicaid.
    (iii) Children's Health Insurance Program.
    (iv) TRICARE.
    (v) Veterans programs.
    (vi) Peace Corp program.
    (vii) Nonappropriated Fund Health Benefits Program.
    (2) Certain health care coverage not minimum essential coverage 
under a government-sponsored program.
    (c) Eligible employer-sponsored plan.
    (1) In general.
    (2) Government-sponsored program generally not an eligible employer-
sponsored plan.
    (d) Plan in the individual market.
    (1) In general.
    (2) Qualified health plan offered by an Exchange.
    (e) Grandfathered health plan.
    (f) Other coverage that qualifies as minimum essential coverage.
    (g) Excepted benefits not minimum essential coverage.

                   Sec. 1.5000A-3 Exempt individuals.

    (a) Members of recognized religious sects.
    (1) In general.
    (2) Exemption certification.
    (b) Member of health care sharing ministries.
    (1) In general.
    (2) Health care sharing ministry.
    (c) Exempt noncitizens.
    (1) In general.
    (2) Exempt noncitizens.
    (d) Incarcerated individuals.
    (1) In general.
    (2) Incarcerated.
    (e) Individuals with no affordable coverage.
    (1) In general.
    (2) Required contribution percentage.
    (i) In general.
    (ii) Indexing.
    (iii) Plan year.
    (3) Individuals eligible for coverage under eligible employer-
sponsored plans.
    (i) Eligibility.
    (A) In general.
    (B) Multiple eligibility.
    (C) Special rule for post-employment coverage.
    (ii) Required contribution for individuals eligible for coverage 
under an eligible employer-sponsored plan.
    (A) Employees.
    (B) Individuals related to employees.
    (C) Required contribution for part-year period.
    (D) Employer contributions to health reimbursement arrangements.
    (E) Wellness program incentives.
    (iii) Examples.
    (4) Individuals ineligible for coverage under eligible employer-
sponsored plans.
    (i) Eligibility for coverage other than an eligible employer-
sponsored plan.
    (ii) Required contribution for individuals ineligible for coverage 
under eligible employer-sponsored plans.

[[Page 48]]

    (A) In general.
    (B) Applicable plan.
    (1) In general.
    (2) Lowest cost bronze plan does not cover all individuals included 
in the taxpayer's nonexempt family.
    (i) In general.
    (ii) Optional simplified method for applicable plan identification.
    (C) Wellness program incentives.
    (D) Credit allowable under section 36B.
    (E) Required contribution for part-year period.
    (iii) Examples.
    (f) Household income below filing threshold.
    (1) In general.
    (2) Applicable filing threshold.
    (i) In general.
    (ii) Certain dependents.
    (3) Manner of claiming the exemption.
    (g) Members of Indian tribes.
    (h) Individuals with hardship exemption certification.
    (1) In general.
    (2) Hardship exemption certification.
    (3) Hardship exemption without hardship exemption certification.
    (i) [Reserved]
    (j) Individuals with certain short coverage gaps.
    (1) In general.
    (2) Short coverage gap.
    (i) In general.
    (ii) Coordination with other exemptions.
    (iii) More than one short coverage gap during calendar year.
    (3) Continuous period.
    (i) In general.
    (ii) Continuous period straddling more than one taxable year.
    (4) Examples.

      Sec. 1.5000A-4 Computation of shared responsibility payment.

    (a) In general.
    (b) Monthly penalty amount.
    (1) In general.
    (2) Flat dollar amount.
    (i) In general.
    (ii) Applicable dollar amount.
    (iii) Special applicable dollar amount for individuals under age 18.
    (iv) Indexing of applicable dollar amount.
    (3) Excess income amount.
    (i) In general.
    (ii) Income percentage.
    (c) Monthly national average bronze plan premium.
    (d) Examples.

              Sec. 1.5000A-5 Administration and procedure.

    (a) In general.
    (b) Special rules.
    (1) Waiver of criminal penalties.
    (2) Limitations on liens and levies.
    (3) Authority to offset against overpayment.
    (c) Effective/applicability date.

[T.D. 9632, 78 FR 53655, Aug. 30, 2013, as amended at 78 FR 78255, Dec. 
26, 2013; T.D. 9705, 79 FR 70468, Nov. 26, 2014]



Sec. 1.5000A-1  Maintenance of minimum essential coverage and 
liability for the shared responsibility payment.

    (a) In general. For each month during the taxable year, a nonexempt 
individual must have minimum essential coverage or pay the shared 
responsibility payment. For a month, a nonexempt individual is an 
individual in existence for the entire month who is not an exempt 
individual described in Sec. 1.5000A-3.
    (b) Coverage under minimum essential coverage--(1) In general. An 
individual has minimum essential coverage for a month in which the 
individual is enrolled in and entitled to receive benefits under a 
program or plan identified as minimum essential coverage in Sec. 
1.5000A-2 for at least one day in the month.
    (2) Special rule for United States citizens or residents residing 
outside the United States or residents of territories. An individual is 
treated as having minimum essential coverage for a month--
    (i) If the month occurs during any period described in section 
911(d)(1)(A) or section 911(d)(1)(B) that is applicable to the 
individual; or
    (ii) If, for the month, the individual is a bona fide resident of a 
possession of the United States (as determined under section 937(a)).
    (c) Liability for shared responsibility payment--(1) In general. A 
taxpayer is liable for the shared responsibility payment for a month for 
which--
    (i) The taxpayer is a nonexempt individual without minimum essential 
coverage; or
    (ii) A nonexempt individual for whom the taxpayer is liable under 
paragraph (c)(2) or (c)(3) of this section does not have minimum 
essential coverage.
    (2) Liability for dependents--(i) In general. For a month when a 
nonexempt individual does not have minimum essential coverage, if the 
nonexempt individual is a dependent (as defined in section 152) of 
another individual for

[[Page 49]]

the other individual's taxable year including that month, the other 
individual is liable for the shared responsibility payment attributable 
to the dependent's lack of coverage. An individual is a dependent of a 
taxpayer for a taxable year if the individual satisfies the definition 
of dependent under section 152, regardless of whether the taxpayer 
claims the individual as a dependent on a Federal income tax return for 
the taxable year. If an individual may be claimed as a dependent by more 
than one taxpayer in the same calendar year, the taxpayer who properly 
claims the individual as a dependent for the taxable year is liable for 
the shared responsibility payment attributable to the individual. If 
more than one taxpayer may claim an individual as a dependent in the 
same calendar year but no one claims the individual as a dependent, the 
taxpayer with priority under the rules of section 152 to claim the 
individual as a dependent is liable for the shared responsibility 
payment for the individual.
    (ii) Special rules for dependents adopted or placed in foster care 
during the taxable year--(A) Taxpayers adopting an individual. If a 
taxpayer adopts a nonexempt dependent (or accepts a nonexempt dependent 
who is an eligible foster child as defined in section 152(f)(1)(C)) 
during the taxable year and is otherwise liable for the nonexempt 
dependent under paragraph (c)(2)(i) of this section, the taxpayer is 
liable under paragraph (c)(2)(i) of this section for the nonexempt 
dependent only for the full months in the taxable year that follow the 
month in which the adoption or acceptance occurs.
    (B) Taxpayers placing an individual for adoption. If a taxpayer who 
is otherwise liable for a nonexempt dependent under paragraph (c)(2)(i) 
of this section places (or, by operation of law, must place) the 
nonexempt dependent for adoption or foster care during the taxable year, 
the taxpayer is liable under paragraph (c)(2)(i) of this section for the 
nonexempt dependent only for the full months in the taxable year that 
precede the month in which the adoption or foster care placement occurs.
    (C) Examples. The following examples illustrate the provisions of 
this paragraph (c)(2)(ii). In each example the taxpayer's taxable year 
is a calendar year.

    Example 1. Taxpayers adopting a child. (i) E and F, married 
individuals filing a joint return, initiate proceedings for the legal 
adoption of a 2-year old child, G, in January 2016. On May 15, 2016, G 
becomes the adopted child (within the meaning of section 152(f)(1)(B)) 
of E and F, and resides with them for the remainder of 2016. Prior to 
the adoption, G resides with H, an unmarried individual, with H 
providing all of G's support. For 2016 G meets all requirements under 
section 152 to be E and F's dependent, and not H's dependent.
    (ii) Under paragraph (c)(2) of this section, E and F are not liable 
for a shared responsibility payment attributable to G for January 
through May of 2016, but are liable for a shared responsibility payment 
attributable to G, if any, for June through December of 2016. H is not 
liable for a shared responsibility payment attributable to G for any 
month in 2016, because G is not H's dependent for 2016 under section 
152.
    Example 2. Taxpayers placing a child for adoption. (i) The facts are 
the same as Example 1, except the legal adoption occurs on August 15, 
2016, and, for 2016, G meets all requirements under section 152 to be 
H's dependent, and not E and F's dependent.
    (ii) Under paragraph (c)(2) of this section, H is liable for a 
shared responsibility payment attributable to G, if any, for January 
through July of 2016, but is not liable for a shared responsibility 
payment attributable to G for August through December of 2016. E and F 
are not liable for a shared responsibility payment attributable to G for 
any month in 2016, because G is not E and F's dependent for 2016 under 
section 152.

    (3) Liability of individuals filing a joint return. Married 
individuals (within the meaning of section 7703) who file a joint return 
for a taxable year are jointly liable for any shared responsibility 
payment for a month included in the taxable year.
    (d) Definitions. The definitions in this paragraph (d) apply to this 
section and Sec. Sec. 1.5000A-2 through 1.5000A-5.
    (1) Affordable Care Act. Affordable Care Act refers to the Patient 
Protection and Affordable Care Act, Public Law 111-148 (124 Stat. 119 
(2010)), and the Health Care and Education Reconciliation Act of 2010, 
Public Law 111-152 (124 Stat. 1029 (2010)), as amended.
    (2) Employee. Employee includes former employees.
    (3) Exchange. Exchange has the same meaning as in 45 CFR 155.20.

[[Page 50]]

    (4) Family. A taxpayer's family means the individuals for whom the 
taxpayer properly claims a deduction for a personal exemption under 
section 151 for the taxable year.
    (5) Family coverage. Family coverage means health insurance that 
covers more than one individual.
    (6) Group health insurance coverage. Group health insurance coverage 
has the same meaning as in section 2791(b)(4) of the Public Health 
Service Act (42 U.S.C. 300gg-91(b)(4)).
    (7) Group health plan. Group health plan has the same meaning as in 
section 2791(a)(1) of the Public Health Service Act (42 U.S.C. 300gg-
91(a)(1)).
    (8) Health insurance coverage. Health insurance coverage has the 
same meaning as in section 2791(b)(1) of the Public Health Service Act 
(42 U.S.C. 300gg-91(b)(1)).
    (9) Health insurance issuer. Health insurance issuer has the same 
meaning as in section 2791(b)(2) of the Public Health Service Act (42 
U.S.C. 300gg-91(b)(2)).
    (10) Household income--(i) In general. Household income means the 
sum of--
    (A) A taxpayer's modified adjusted gross income; and
    (B) The aggregate modified adjusted gross income of all other 
individuals who--
    (1) Are included in the taxpayer's family under paragraph (d)(4) of 
this section; and
    (2) Are required to file a Federal income tax return for the taxable 
year.
    (ii) Modified adjusted gross income. Modified adjusted gross income 
means adjusted gross income (within the meaning of section 62) increased 
by--
    (A) Amounts excluded from gross income under section 911; and
    (B) Tax-exempt interest the taxpayer receives or accrues during the 
taxable year.
    (11) Individual market. Individual market has the same meaning as in 
section 1304(a)(2) of the Affordable Care Act (42 U.S.C. 18024(a)(2)).
    (12) Large and small group market. Large group market and small 
group market have the same meanings as in section 1304(a)(3) of the 
Affordable Care Act (42 U.S.C. 18024(a)(3)).
    (13) Month. Month means calendar month.
    (14) Qualified health plan. Qualified health plan has the same 
meaning as in section 1301(a) of the Affordable Care Act (42 U.S.C. 
18021(a)).
    (15) Rating area. Rating area has the same meaning as in Sec. 
1.36B-1(n).
    (16) Self-only coverage. Self-only coverage means health insurance 
that covers one individual.
    (17) Shared responsibility family. Shared responsibility family 
means, for a month, all nonexempt individuals for whom the taxpayer (and 
the taxpayer's spouse, if the taxpayer is married and files a joint 
return with the spouse) is liable for the shared responsibility payment 
under paragraph (c) of this section.
    (18) State. State means each of the 50 states and the District of 
Columbia.

[T.D. 9632, 78 FR 53655, Aug. 30, 2013, as amended at 78 FR 78255, Dec. 
26, 2013]



Sec. 1.5000A-2  Minimum essential coverage.

    (a) In general. Minimum essential coverage means coverage under a 
government-sponsored program (described in paragraph (b) of this 
section), an eligible employer-sponsored plan (described in paragraph 
(c) of this section), a plan in the individual market (described in 
paragraph (d) of this section), a grandfathered health plan (described 
in paragraph (e) of this section), or other health benefits coverage 
(described in paragraph (f) of this section). Minimum essential coverage 
does not include coverage described in paragraph (g) of this section. 
All terms defined in this section apply for purposes of this section and 
Sec. 1.5000A-1 and Sec. Sec. 1.5000A-3 through 1.5000A-5.
    (b) Government-sponsored program--(1) In general. Except as provided 
in paragraph (2), government-sponsored program means any of the 
following:
    (i) Medicare. The Medicare program under part A of Title XVIII of 
the Social Security Act (42 U.S.C. 1395c and following sections);
    (ii) Medicaid. The Medicaid program under Title XIX of the Social 
Security Act (42 U.S.C. 1396 and following sections);
    (iii) Children's Health Insurance Program. The Children's Health 
Insurance Program (CHIP) under Title XXI of the

[[Page 51]]

Social Security Act (42 U.S.C. 1397aa and following sections);
    (iv) TRICARE. Medical coverage under chapter 55 of Title 10, U.S.C., 
including coverage under the TRICARE program;
    (v) Veterans programs. The following health care programs under 
chapter 17 or 18 of Title 38, U.S.C.:
    (A) The medical benefits package authorized for eligible veterans 
under 38 U.S.C. 1710 and 38 U.S.C. 1705;
    (B) The Civilian Health and Medical Program of the Department of 
Veterans Affairs (CHAMPVA) authorized under 38 U.S.C. 1781; and
    (C) The comprehensive health care program authorized under 38 U.S.C. 
1803 and 38 U.S.C. 1821 for certain children of Vietnam Veterans and 
Veterans of covered service in Korea who are suffering from spina 
bifida.
    (vi) Peace Corp program. A health plan under section 2504(e) of 
Title 22, U.S.C. (relating to Peace Corps volunteers); and
    (vii) Nonappropriated Fund Health Benefits Program. The 
Nonappropriated Fund Health Benefits Program of the Department of 
Defense, established under section 349 of the National Defense 
Authorization Act for Fiscal Year 1995 (Pub. L. 103-337; 10 U.S.C. 1587 
note).
    (2) Certain health care coverage not minimum essential coverage 
under a government-sponsored program. Government-sponsored program does 
not mean any of the following:
    (i) Optional coverage of family planning services under section 
1902(a)(10)(A)(ii)(XXI) of the Social Security Act (42 U.S.C. 
1396a(a)(10)(A)(ii)(XXI));
    (ii) Optional coverage of tuberculosis-related services under 
section 1902(a)(10)(A)(ii)(XII) of the Social Security Act (42 U.S.C. 
1396a(a)(10)(A)(ii)(XII));
    (iii) Coverage of pregnancy-related services under section 
1902(a)(10)(A)(i)(IV) and (a)(10)(A)(ii)(IX) of the Social Security Act 
(42 U.S.C. 1396a(a)(10)(A)(i)(IV), (a)(10)(A)(ii)(IX));
    (iv) Coverage limited to treatment of emergency medical conditions 
in accordance with 8 U.S.C. 1611(b)(1)(A), as authorized by section 
1903(v) of the Social Security Act (42 U.S.C. 1396b(v));
    (v) Coverage for medically needy individuals under section 
1902(a)(10)(C) of the Social Security Act (42 U.S.C. 1396a(a)(10)(C)) 
and 42 CFR 435.300 and following sections;
    (vi) Coverage authorized under section 1115(a) of the Social 
Security Act (42 U.S.C. 1315(a));
    (vii) Coverage under section 1079(a), 1086(c)(1), or 1086(d)(1) of 
title 10, U.S.C., that is solely limited to space available care in a 
facility of the uniformed services for individuals excluded from TRICARE 
coverage for care from private sector providers; and
    (viii) Coverage under sections 1074a and 1074b of title 10, U.S.C., 
for an injury, illness, or disease incurred or aggravated in the line of 
duty for individuals who are not on active duty.
    (c) Eligible employer-sponsored plan--(1) In general. Eligible 
employer-sponsored plan means, with respect to any employee:
    (i) Group health insurance coverage offered by, or on behalf of, an 
employer to the employee that is--
    (A) A governmental plan (within the meaning of section 2791(d)(8) of 
the Public Health Service Act (42 U.S.C. 300gg-91(d)(8)));
    (B) Any other plan or coverage offered in the small or large group 
market within a State; or
    (C) A grandfathered health plan (within the meaning of paragraph (e) 
of this section) offered in a group market; or
    (ii) A self-insured group health plan under which coverage is 
offered by, or on behalf of, an employer to the employee.
    (2) Government-sponsored program generally not an eligible employer-
sponsored plan. Except for the program identified in paragraph 
(b)(1)(vii) of this section, a government-sponsored program described in 
paragraph (b) of this section is not an eligible employer-sponsored 
plan.
    (d) Plan in the individual market--(1) In general. Plan in the 
individual market means health insurance coverage offered to individuals 
in the individual market within a state, other than short-term limited 
duration insurance within the meaning of section 2791(b)(5)

[[Page 52]]

of the Public Health Service Act (42 U.S.C. 300gg-91(b)(5)).
    (2) Qualified health plan offered by an Exchange. A qualified health 
plan offered by an Exchange is a plan in the individual market. If a 
territory of the United States elects to establish an Exchange under 
section 1323(a)(1) and (b) of the Affordable Care Act (42 U.S.C. 
18043(a)(1), (b)), a qualified health plan offered by that Exchange is a 
plan in the individual market.
    (e) Grandfathered health plan. Grandfathered health plan means any 
group health plan or group health insurance coverage to which section 
1251 of the Affordable Care Act (42 U.S.C. 18011) applies.
    (f) Other coverage that qualifies as minimum essential coverage. 
Minimum essential coverage includes any plan or arrangement recognized 
by the Secretary of Health and Human Services, in coordination with the 
Secretary of the Treasury, as minimum essential coverage.
    (g) Excepted benefits not minimum essential coverage. Minimum 
essential coverage does not include any coverage that consists solely of 
excepted benefits described in section 2791(c)(1), (c)(2), (c)(3), or 
(c)(4) of the Public Health Service Act (42 U.S.C. 300gg-91(c)).

[T.D. 9632, 78 FR 53655, Aug. 30, 2013, as amended at 78 FR 78255, Dec. 
26, 2013; T.D. 9705, 79 FR 70469, Nov. 26, 2014]



Sec. 1.5000A-3  Exempt individuals.

    (a) Members of recognized religious sects--(1) In general. An 
individual is an exempt individual for a month that includes a day on 
which the individual has in effect a religious conscience exemption 
certification described in paragraph (a)(2) of this section.
    (2) Exemption certification. A religious conscience exemption 
certification is issued by an Exchange in accordance with the 
requirements of section 1311(d)(4)(H) of the Affordable Care Act (42 
U.S.C. 18031(d)(4)(H)), 45 CFR 155.605(c), and 45 CFR 155.615(b) and 
certifies that an individual is--
    (i) A member of a recognized religious sect or division of the sect 
that is described in section 1402(g)(1); and
    (ii) An adherent of established tenets or teachings of the sect or 
division as described in that section.
    (b) Member of health care sharing ministries--(1) In general. An 
individual is an exempt individual for a month that includes a day on 
which the individual is a member of a health care sharing ministry.
    (2) Health care sharing ministry. For purposes of this section, 
health care sharing ministry means an organization--
    (i) That is described in section 501(c)(3) and is exempt from tax 
under section 501(a);
    (ii) Members of which share a common set of ethical or religious 
beliefs and share medical expenses among themselves in accordance with 
those beliefs and without regard to the state in which a member resides 
or is employed;
    (iii) Members of which retain membership even after they develop a 
medical condition;
    (iv) That (or a predecessor of which) has been in existence at all 
times since December 31, 1999;
    (v) Members of which have shared medical expenses continuously and 
without interruption since at least December 31, 1999; and
    (vi) That conducts an annual audit performed by an independent 
certified public accounting firm in accordance with generally accepted 
accounting principles and makes the annual audit report available to the 
public upon request.
    (c) Exempt noncitizens--(1) In general. An individual is an exempt 
individual for a month that the individual is an exempt noncitizen.
    (2) Exempt noncitizens. For purposes of this section, an individual 
is an exempt noncitizen for a month if the individual--
    (i) Is not a U.S. citizen or U.S. national for any day during the 
month; and
    (ii) Is either--
    (A) A nonresident alien (within the meaning of section 
7701(b)(1)(B)) for the taxable year that includes the month; or
    (B) An individual who is not lawfully present (within the meaning of 
45 CFR 155.20) on any day in the month.

[[Page 53]]

    (d) Incarcerated individuals--(1) In general. An individual is an 
exempt individual for a month that includes a day on which the 
individual is incarcerated.
    (2) Incarcerated. For purposes of this section, the term 
incarcerated means confined, after the disposition of charges, in a 
jail, prison, or similar penal institution or correctional facility.
    (e) Individuals with no affordable coverage--(1) In general. An 
individual is an exempt individual for a month in which the individual 
lacks affordable coverage. For purposes of this paragraph (e), an 
individual lacks affordable coverage in a month if the individual's 
required contribution (determined on an annual basis) for minimum 
essential coverage for the month exceeds the required contribution 
percentage (as defined in paragraph (e)(2) of this section) of the 
individual's household income. For purposes of this paragraph (e), an 
individual's household income is increased by any amount of the required 
contribution made through a salary reduction arrangement that is 
excluded from gross income.
    (2) Required contribution percentage--(i) In general. Except as 
provided in paragraph (e)(2)(ii) of this section, the required 
contribution percentage is 8 percent.
    (ii) Indexing. For plan years beginning in any calendar year after 
2014, the required contribution percentage is the percentage determined 
by the Department of Health and Human Services that reflects the excess 
of the rate of premium growth between the preceding calendar year and 
2013 over the rate of income growth for the period.
    (iii) Plan year. For purposes of this paragraph (e), plan year means 
the eligible employer-sponsored plan's regular 12-month coverage period, 
or for a new employee or an individual who enrolls during a special 
enrollment period, the remainder of a 12-month coverage period.
    (3) Individuals eligible for coverage under eligible employer-
sponsored plans--(i) Eligibility--(A) In general. Except as provided in 
paragraph (e)(3)(i)(B) of this section, an employee or related 
individual (as defined in paragraph (e)(3)(ii)(B) of this section) is 
treated as eligible for coverage under an eligible employer-sponsored 
plan for a month during a plan year if the employee or related 
individual could have enrolled in the plan for any day in that month 
during an open or special enrollment period, regardless of whether the 
employee or related individual is eligible for any other type of minimum 
essential coverage.
    (B) Multiple eligibility. For purposes of this paragraph (e)(3), an 
employee eligible for coverage under an eligible employer-sponsored plan 
offered by the employee's employer is not treated as eligible as a 
related individual for coverage under an eligible employer-sponsored 
plan (for example, an eligible employer-sponsored plan offered by the 
employer of the employee's spouse) for any month included in the plan 
year of the eligible employer-sponsored plan offered by the employee's 
employer.
    (C) Special rule for post-employment coverage. A former employee or 
an individual related to a former employee, who may enroll in 
continuation coverage required under Federal law or a state law that 
provides comparable continuation coverage, or in retiree coverage under 
an eligible employer-sponsored plan, is eligible for coverage under an 
eligible employer-sponsored plan only if the individual enrolls in the 
coverage.
    (ii) Required contribution for individuals eligible for coverage 
under an eligible employer-sponsored plan--(A) Employees. In the case of 
an employee who is eligible to purchase coverage under an eligible 
employer-sponsored plan sponsored by the employee's employer, the 
required contribution is the portion of the annual premium that the 
employee would pay (whether through salary reduction or otherwise) for 
the lowest cost self-only coverage.
    (B) Individuals related to employees. In the case of an individual 
who is eligible for coverage under an eligible employer-sponsored plan 
because of a relationship to an employee and for whom a personal 
exemption deduction under section 151 is claimed on the employee's 
Federal income tax return (related individual), the required 
contribution is the portion of the annual premium that the employee 
would pay

[[Page 54]]

(whether through salary reduction or otherwise) for the lowest cost 
family coverage that would cover the employee and all related 
individuals who are included in the employee's family and are not 
otherwise exempt under Sec. 1.5000A-3.
    (C) Required contribution for part-year period. For each individual 
described in paragraph (e)(3)(ii)(A) or (e)(3)(ii)(B) of this section, 
affordability under this paragraph (e)(3) is determined separately for 
each employment period that is less than a full calendar year or for the 
portions of an employer's plan year that fall in different taxable years 
of the individual. Coverage under an eligible employer-sponsored plan is 
affordable for a part-year period if the annualized required 
contribution for self-only coverage (in the case of the employee) or 
family coverage (in the case of a related individual) under the plan for 
the part-year period does not exceed the required contribution 
percentage of the individual's household income for the taxable year. 
The annualized required contribution is the required contribution 
determined under paragraph (e)(3)(ii)(A) or (e)(3)(ii)(B) of this 
section for the part-year period times a fraction, the numerator of 
which is 12 and the denominator of which is the number of months in the 
part-year period during the individual's taxable year. Only full 
calendar months are included in the computation under this paragraph 
(e)(3)(ii)(C).
    (D) Employer contributions to health reimbursement arrangements. 
Amounts newly made available for the current plan year under a health 
reimbursement arrangement that an employee may use to pay premiums, or 
may use to pay cost-sharing or benefits not covered by the primary plan 
in addition to premiums, are counted toward the employee's required 
contribution if the health reimbursement arrangement would be 
integrated, as that term is used in Notice 2013-54 (2013-40 IRB 287) or 
in any successor published guidance (see Sec. 601.601(d) of this 
chapter), with an eligible employer-sponsored plan for an employee 
enrolled in the plan. The eligible employer-sponsored plan and the 
health reimbursement arrangement must be offered by the same employer. 
Employer contributions to a health reimbursement arrangement count 
toward an employee's required contribution only to the extent the amount 
of the annual contribution is required under the terms of the plan or 
otherwise determinable within a reasonable time before the employee must 
decide whether to enroll in the eligible employer-sponsored plan.
    (E) Employer contributions to cafeteria plans. Amounts made 
available for the current plan year under a cafeteria plan, within the 
meaning of section 125, are taken into account in determining an 
employee's or a related individual's required contribution if:
    (1) The employee may not opt to receive the amount as a taxable 
benefit;
    (2) The employee may use the amount to pay for minimum essential 
coverage; and
    (3) The employee may use the amount exclusively to pay for medical 
care, within the meaning of section 213.
    (F) Wellness program incentives. Nondiscriminatory wellness program 
incentives, within the meaning of Sec. 54.9802-1(f) of this chapter, 
offered by an eligible employer-sponsored plan that affect premiums are 
treated as earned in determining an employee's required contribution for 
purposes of affordability of an eligible employer-sponsored plan to the 
extent the incentives relate exclusively to tobacco use. Wellness 
program incentives that do not relate to tobacco use or that include a 
component unrelated to tobacco use are treated as not earned for this 
purpose. For purposes of this section, the term wellness program 
incentive has the same meaning as the term reward in Sec. 54.9802-
1(f)(1)(i) of this chapter.
    (G) Opt-out arrangements. [Reserved]
    (iii) Examples. The following examples illustrate the application of 
this paragraph (e)(3). Unless stated otherwise, in each example, each 
individual's taxable year is a calendar year, the individual is 
ineligible for any other exemptions described in this section for a 
month, the rate of premium growth has not exceeded the rate of income 
growth since 2013, and the individual's employer offers a single plan 
that uses a calendar plan year and is

[[Page 55]]

an eligible employer-sponsored plan as described in Sec. 1.5000A-2(c).

    Example 1. Unmarried employee with no dependents. Taxpayer A is an 
unmarried individual with no dependents. In November 2015, A is eligible 
to enroll in self-only coverage under a plan offered by A's employer for 
calendar year 2016. If A enrolls in the coverage, A is required to pay 
$5,000 of the total annual premium. In 2016, A's household income is 
$60,000. Under paragraph (e)(3)(ii)(A) of this section, A's required 
contribution is $5,000, the portion of the annual premium A pays for 
self-only coverage. Under paragraph (e)(1) of this section, A lacks 
affordable coverage for 2016 because A's required contribution ($5,000) 
is greater than 8% of A's household income ($4,800).
    Example 2. Married employee with dependents. Taxpayers B and C are 
married and file a joint return for 2016. B and C have two children, D 
and E. In November 2015, B is eligible to enroll in self-only coverage 
under a plan offered by B's employer for calendar year 2016 at a cost of 
$5,000 to B. C, D, and E are eligible to enroll in family coverage under 
the same plan for 2016 at a cost of $20,000 to B. B, C, D, and E's 
household income for 2016 is $90,000. Under paragraph (e)(3)(ii)(A) of 
this section, B's required contribution is B's share of the cost for 
self-only coverage, $5,000. Under paragraph (e)(1) of this section, B 
has affordable coverage for 2016 because B's required contribution 
($5,000) does not exceed 8% of B's household income ($7,200). Under 
paragraph (e)(3)(ii)(B) of this section, the required contribution for 
C, D, and E is B's share of the cost for family coverage, $20,000. Under 
paragraph (e)(1) of this section, C, D, and E lack affordable coverage 
for 2016 because their required contribution ($20,000) exceeds 8% of 
their household income ($7,200).
    Example 3. Plan year is a fiscal year. (i) Taxpayer F is an 
unmarried individual with no dependents. In June 2015, F is eligible to 
enroll in self-only coverage under a plan offered by F's employer for 
the period July 2015 through June 2016 at a cost to F of $4,750. In June 
2016, F is eligible to enroll in self-only coverage under a plan offered 
by F's employer for the period July 2016 through June 2017 at a cost to 
F of $5,000. In 2016, F's household income is $60,000.
    (ii) Under paragraph (e)(3)(ii)(C) of this section, F's annualized 
required contribution for the period January 2016 through June 2016 is 
$4,750 ($2,375 paid for premiums in 2016 x 12/6). Under paragraph (e)(1) 
of this section, F has affordable coverage for January 2016 through June 
2016 because F's annualized required contribution ($4,750) does not 
exceed 8% of F's household income ($4,800).
    (iii) Under paragraph (e)(3)(ii)(C) of this section, F's annualized 
required contribution for the period July 2016 to December 2016 is 
$5,000 ($2,500 paid for premiums in 2016 x 12/6). Under paragraph (e)(1) 
of this section, F lacks affordable coverage for July 2016 through 
December 2016 because F's annualized required contribution ($5,000) 
exceeds 8% of F's household income ($4,800).
    Example 4. Eligibility for coverage under an eligible employer-
sponsored plan and under government sponsored coverage. Taxpayer G is 
unmarried and has one child, H. In November 2015, H is eligible to 
enroll in family coverage under a plan offered by G's employer for 2016. 
H is also eligible to enroll in the CHIP program for 2016. Under 
paragraph (e)(3)(i) of this section, H is treated as eligible for 
coverage under an eligible employer-sponsored plan for each month in 
2016, notwithstanding that H is eligible to enroll in government 
sponsored coverage for the same period.

    (4) Individuals ineligible for coverage under eligible employer-
sponsored plans--(i) Eligibility for coverage other than an eligible 
employer-sponsored plan. An individual is treated as ineligible for 
coverage under an eligible employer-sponsored plan for a month that is 
not described in paragraph (e)(3)(i) of this section.
    (ii) Required contribution for individuals ineligible for coverage 
under eligible employer-sponsored plans--(A) In general. In the case of 
an individual who is ineligible for coverage under an eligible employer-
sponsored plan, the required contribution is the premium for the 
applicable plan, reduced by the maximum amount of any credit allowable 
under section 36B for the taxable year, determined as if the individual 
was covered for the entire taxable year by a qualified health plan 
offered through the Exchange serving the rating area where the 
individual resides.
    (B) Applicable plan--(1) In general. Except as provided in paragraph 
(e)(4)(ii)(B)(2) of this section, applicable plan means the single 
lowest cost bronze plan available in the individual market through the 
Exchange serving the rating area in which the individual resides 
(without regard to whether the individual purchased a qualified health 
plan through the Exchange) that would cover all individuals in the 
individual's nonexempt family. For purposes of this paragraph (e)(4), an 
individual's nonexempt family means the family (as defined in Sec. 
1.5000A-1(d)(4)) that includes the individual, excluding any family 
members who are otherwise exempt

[[Page 56]]

under section 1.5000A-3 or are treated as eligible for coverage under an 
eligible employer-sponsored plan under paragraph (e)(3)(i) of this 
section. The premium for the applicable plan takes into account rating 
factors (for example, an individual's age or tobacco use) that an 
Exchange would use to determine the cost of coverage.
    (2) Lowest cost bronze plan does not cover all individuals included 
in the taxpayer's nonexempt family--(i) In general. If the Exchange 
serving the rating area where the individual resides does not offer a 
single bronze plan covering all individuals included in the individual's 
nonexempt family, the premium for the applicable plan is the sum of the 
premiums for the lowest cost bronze plans that are offered through the 
Exchanges serving the rating areas where one or more of the individuals 
reside that would cover in the aggregate all the individuals in the 
individual's nonexempt family. For instance, coverage offered through 
the Exchange in a rating area might not cover a family member living in 
different rating area or a single policy might not cover all the members 
in a taxpayer's household.
    (ii) Optional simplified method for applicable plan identification. 
[Reserved]
    (C) Wellness programs incentives. [Reserved]
    (D) Credit allowable under section 36B. For purposes of paragraph 
(e)(4)(ii)(A) of this section, maximum amount of any credit allowable 
under section 36B means the maximum amount of the credit that would be 
allowable to the individual, or to the taxpayer who can properly claim 
the individual as a dependent, under section 36B if all members of the 
individual's nonexempt family enrolled in a qualified health plan 
through the Exchange serving the rating area where the individual 
resides.
    (E) Required contribution for part-year period. For each individual, 
affordability under paragraph (e)(4) of this section is determined 
separately for each period described in paragraph (e)(4)(ii)(E) of this 
section that is less than a 12-month period. Coverage under a plan is 
affordable for a part-year period if the annualized required 
contribution for coverage under the plan for the part-year period does 
not exceed the required contribution percentage of the individual's 
household income for the taxable year. The annualized required 
contribution is the required contribution determined under paragraph 
(e)(4)(ii)(A) of this section for the part-year period times a fraction, 
the numerator of which is 12 and the denominator of which is the number 
of months in the part-year period during the individual's taxable year. 
Only full calendar months are included in the computation under this 
paragraph (e)(4)(ii)(D).
    (iii) Examples. The following examples illustrate the provisions of 
this paragraph (e)(4). Unless stated otherwise, in each example the 
taxpayer's taxable year is a calendar year, the rate of premium growth 
has not exceeded the rate of income growth since 2013, and the taxpayer 
is ineligible for any of the exemptions described in paragraphs (a) 
through (d) and (f) through (j) of this section for a month.

    Example 1. Unmarried individual with no dependents. (i) Taxpayer G 
is an unmarried individual with no dependents. G is ineligible to enroll 
in any minimum essential coverage other than coverage in the individual 
market for all months in 2016. The annual premium for the lowest cost 
bronze self-only plan in G's rating area (G's applicable plan) is 
$5,000. The adjusted annual premium for the second lowest cost silver 
self-only plan in G's rating area (G's applicable benchmark plan within 
the meaning of Sec. 1.36B-3(f)) is $5,500. In 2016 G's household income 
is $40,000, which is 358% of the Federal poverty line for G's family 
size for the taxable year.
    (ii) Under paragraph (e)(4)(ii)(C) of this section, the credit 
allowable under section 36B is determined pursuant to section 36B. With 
household income at 358% of the Federal poverty line, G's applicable 
percentage is 9.5. Because each month in 2016 is a coverage month 
(within the meaning of Sec. 1.36B-3(c)), G's maximum credit allowable 
under section 36B is the excess of G's premium for the applicable 
benchmark plan over the product of G's household income and G's 
applicable percentage ($1,700). Therefore, under paragraph (e)(4)(ii)(A) 
of this section, G's required contribution is $3,300. Under paragraph 
(e)(1) of this section, G lacks affordable coverage for 2016 because G's 
required contribution ($3,300) exceeds 8% of G's household income 
($3,200).
    Example 2. Family. (i) In 2016 Taxpayers M and N are married and 
file a joint return. M and N have two children, P and Q. M, N, P, and Q 
are ineligible to enroll in minimum essential coverage other than 
coverage in the

[[Page 57]]

individual market for a month in 2016. The annual premium for M, N, P, 
and Q's applicable plan is $20,000. The adjusted annual premium for M, 
N, P, and Q's applicable benchmark plan (within the meaning of Sec. 
1.36B-3(f)) is $25,000. M and N's household income is $80,000, which is 
347% of the Federal poverty line for a family size of 4 for the taxable 
year.
    (ii) Under paragraph (e)(4)(ii)(C) of this section, the credit 
allowable under section 36B is determined pursuant to section 36B. With 
household income at 347% of the Federal poverty line, the applicable 
percentage is 9.5. Because each month in 2016 is a coverage month 
(within the meaning of Sec. 1.36B-3(c)), the maximum credit allowable 
under section 36B is the excess of the premium for the applicable 
benchmark plan over the product of the household income and the 
applicable percentage ($17,400). Therefore, under paragraph 
(e)(4)(ii)(A) of this section, the required contribution for M, N, P, 
and Q is $2,600. Under paragraph (e)(1) of this section, M, N, P, and Q 
have affordable coverage for 2016 because their required contribution 
($2,600) does not exceed 8% of their household income ($6,400).
    Example 3. Family with some members eligible for government-
sponsored coverage. (i) In 2016 Taxpayers U and V are married and file a 
joint return. U and V have two children, W and X. U and V are ineligible 
to enroll in minimum essential coverage other than coverage in the 
individual market for all months in 2016; however, W and X are eligible 
for coverage under CHIP for 2016. The annual premium for U, V, W, and 
X's applicable plan is $20,000. The adjusted annual premium for the 
second lowest cost silver plan that would cover U and V (the applicable 
benchmark plan within the meaning of Sec. 1.36B-3(f)) is $12,500. U and 
V's household income is $50,000, which is 217% of the Federal poverty 
line for a family size of 4 for the taxable year. W and X do not enroll 
in CHIP coverage.
    (ii) Under paragraph (e)(4)(ii)(C) of this section, the credit 
allowable under section 36B is determined pursuant to section 36B. With 
household income at 217% of the Federal poverty line, the applicable 
percentage is 6.89. Each month in 2016 is a coverage month (within the 
meaning of Sec. 1.36B-3(c)) for U and V, but no months in 2016 are 
coverage months for W and X because they are eligible for CHIP coverage. 
The maximum credit allowable under section 36B is the excess of the 
premium for the applicable benchmark plan over the product of the 
household income and the applicable percentage ($9,055). Therefore, 
under paragraph (e)(4)(ii)(A) of this section, the required contribution 
is $10,945. Under paragraph (e)(1) of this section, U, V, W, and X lack 
affordable coverage for 2016 because their required contribution 
($10,945) exceeds 8% of their household income ($4,000).
    Example 4. Family with some members enrolled in government-sponsored 
minimum essential coverage. The facts are the same as Example 3, except 
W and X enroll in CHIP coverage on January 1, 2016. Under paragraph 
(e)(4)(ii)(B), U, V, W, and X are members of U and V's nonexempt family 
for 2016. Therefore, the annual premium for the applicable plan is the 
same as in Example 3 ($20,000). The maximum credit allowable under 
section 36B is also the same as in Example 3 ($9,055). Under paragraph 
(e)(4)(ii)(A) of this section, the required contribution is $10,945. 
Under paragraph (e)(1) of this section, U and V lack affordable coverage 
for 2016 because their required contribution ($10,945) exceeds 8% of 
their household income ($4,000).
    (f) Household income below filing threshold--(1) In general. An 
individual is an exempt individual for any taxable year for which the 
individual's household income is less than the applicable filing 
threshold.
    (2) Applicable filing threshold--(i) In general. For purposes of 
this section, applicable filing threshold means the amount of gross 
income that would trigger an individual's requirement to file a Federal 
income tax return under section 6012(a)(1).
    (ii) Certain dependents. The applicable filing threshold for an 
individual who is properly claimed as a dependent by another taxpayer is 
equal to the other taxpayer's applicable filing threshold.
    (3) Manner of claiming the exemption. A taxpayer is not required to 
file a Federal income tax return solely to claim the exemption described 
in this paragraph (f). If a taxpayer has a household income below the 
applicable filing threshold and nevertheless files a Federal income tax 
return, the taxpayer may claim the exemption described in this paragraph 
(f) on the return.
    (g) Members of Indian tribes. An individual is an exempt individual 
for a month that includes a day on which the individual is a member of 
an Indian tribe. For purposes of this section, Indian tribe means a 
group or community described in section 45A(c)(6).
    (h) Individuals with hardship exemption certification--(1) In 
general. Except as provided in paragraph (h)(3) of this section, an 
individual is an exempt individual for a month that includes a day on 
which the individual has in effect a hardship exemption certification

[[Page 58]]

described in paragraph (h)(2) of this section.
    (2) Hardship exemption certification. A hardship exemption 
certification is issued by an Exchange under section 1311(d)(4)(H) of 
the Affordable Care Act (42 U.S.C. 18031(d)(4)(H)), 45 CFR 
155.605(g)(1), (g)(2), (g)(4) and (g)(6), 45 CFR 155.610(i), and 45 CFR 
155.615(f), and certifies that an individual has suffered a hardship (as 
that term is defined in 45 CFR 155.605(g)) affecting the capability to 
obtain minimum essential coverage.
    (3) Hardship exemption without hardship exemption certification. An 
individual may claim an exemption without obtaining a hardship exemption 
certification described in paragraph (h)(2) of this section for any 
month that includes a day on which the individual meets the requirements 
of any hardship for which:
    (i) The Secretary of HHS issues guidance of general applicability 
describing the hardship and indicating that an exemption for such 
hardship can be claimed on a Federal income tax return pursuant to 
guidance published by the Secretary; and
    (ii) The Secretary issues published guidance of general 
applicability, see Sec. 601.601(d)(2) of this chapter, allowing an 
individual to claim the hardship exemption on a return without obtaining 
a hardship exemption from an Exchange.
    (i) [Reserved]
    (j) Individuals with certain short coverage gaps--(1) In general. An 
individual is an exempt individual for a month the last day of which is 
included in a short coverage gap.
    (2) Short coverage gap--(i) In general. Short coverage gap means a 
continuous period of less than three months in which the individual is 
not covered under minimum essential coverage. If the individual does not 
have minimum essential coverage for a continuous period of three or more 
months, none of the months included in the continuous period are treated 
as included in a short coverage gap.
    (ii) Coordination with other exemptions. For purposes of this 
paragraph (j), an individual is treated as having minimum essential 
coverage for a month in which an individual is exempt under any of 
paragraphs (a) through (h) of this section.
    (iii) More than one short coverage gap during calendar year. If a 
calendar year includes more than one short coverage gap, the exemption 
provided by this paragraph (j) only applies to the earliest short 
coverage gap.
    (3) Continuous period--(i) In general. Except as provided in 
paragraph (j)(3)(ii) of this section, the number of months included in a 
continuous period is determined without regard to the calendar years in 
which months included in that period occur. For purposes of paragraph 
(j) of this section, a continuous period begins no earlier than January 
1, 2014.
    (ii) Continuous period straddling more than one taxable year. If an 
individual does not have minimum essential coverage for a continuous 
period that begins in one taxable year and ends in the next, for 
purposes of applying this paragraph (j) to the first taxable year, the 
months in the second taxable year included in the continuous period are 
disregarded. For purposes of applying this paragraph (j) to the second 
taxable year, the months in the first taxable year included in the 
continuous period are taken into account.
    (4) Examples. The following examples illustrate the provisions of 
this paragraph (j). Unless stated otherwise, in each example the 
taxpayer's taxable year is a calendar year and the taxpayer is 
ineligible for any of the exemptions described in paragraphs (a) through 
(h) of this section for a month.

    Example 1. Short coverage gap. Taxpayer D has minimum essential 
coverage in 2016 from January 1 through March 2. After March 2, D does 
not have minimum essential coverage until D enrolls in an eligible 
employer-sponsored plan effective June 15. Under Sec. 1.5000A-1(b), for 
purposes of section 5000A, D has minimum essential coverage for January, 
February, March, and June through December. D's continuous period 
without coverage is 2 months, April and May. April and May constitute a 
short coverage gap under paragraph (j)(2)(i) of this section.
    Example 2. Continuous period of 3 months or more. The facts are the 
same as in Example 1, except D's coverage is not effective until July 1. 
D's continuous period without coverage is 3 months, April, May, and 
June. Under paragraph (j)(2)(i) of this section, April, May, and June 
are not included in a short coverage gap.

[[Page 59]]

    Example 3. Short coverage gap following exempt period. Taxpayer E is 
incarcerated from January 1 through June 2. E enrolls in an eligible 
employer-sponsored plan effective September 15. Under paragraph (d) of 
this section, E is exempt for the period January through June. Under 
paragraph (j)(2)(ii) of this section, E is treated as having minimum 
essential coverage for this period, and E's continuous period without 
minimum essential coverage is 2 months, July and August. July and August 
constitute a short coverage gap under paragraph (j)(2)(i) of this 
section.
    Example 4. Continuous period covering more than one taxable year. 
Taxpayer F, an unmarried individual with no dependents, has minimum 
essential coverage for the period January 1 through October 15, 2016. F 
is without coverage until February 15, 2017. F files his Federal income 
tax return for 2016 on March 10, 2017. Under paragraph (j)(3)(ii) of 
this section, November and December of 2016 are treated as a short 
coverage gap. However, November and December of 2016 are included in the 
continuous period that includes January 2017. The continuous period for 
2017 is not less than 3 months and, therefore, January is not a part of 
a short coverage gap.
    Example 5. Enrollment following loss of coverage. The facts are the 
same as in Example 4 except F loses coverage on June 15, 2017. F enrolls 
in minimum essential coverage effective September 15, 2017. The 
continuous period without minimum essential coverage in July and August 
of 2017 is two months and, therefore, is a short coverage gap. Because 
January 2017 was not part of a short coverage gap, the earliest short 
coverage gap occurring in 2017 is the gap that includes July and August.
    Example 6. Multiple coverage gaps. (i) The facts are the same as in 
Example 5 except F has minimum essential coverage for November 2016. 
Under paragraph (j)(3)(ii) of this section, December 2016 is treated as 
a short coverage gap.
    (ii) December 2016 is included in the continuous period that 
includes January 2017. This continuous period is two months and, 
therefore, January 2017 is the earliest month in 2017 that is included 
in a short coverage gap. Under paragraph (j)(2)(iii) of this section, 
the exemption under this paragraph (j) applies only to January 2017. 
Thus, the continuous period without minimum essential coverage in July 
and August of 2017 is not a short coverage gap.

[T.D. 9632, 78 FR 53655, Aug. 30, 2013, as amended at 78 FR 78255, Dec. 
26, 2013; T.D. 9705, 79 FR 70469, Nov. 26, 2014; T.D. 9804, 81 FR 91768, 
Dec. 19, 2016]



Sec. 1.5000A-4  Computation of shared responsibility payment.

    (a) In general. For each taxable year, the shared responsibility 
payment imposed on a taxpayer in accordance with Sec. 1.5000A-1(c) is 
the lesser of--
    (1) The sum of the monthly penalty amounts; or
    (2) The sum of the monthly national average bronze plan premiums for 
the shared responsibility family.
    (b) Monthly penalty amount--(1) In general. Monthly penalty amount 
means, for a month that a nonexempt individual is not covered under 
minimum essential coverage, 1/12 multiplied by the greater of--
    (i) The flat dollar amount; or
    (ii) The excess income amount.
    (2) Flat dollar amount--(i) In general. Flat dollar amount means the 
lesser of--
    (A) The sum of the applicable dollar amounts for all individuals 
included in the taxpayer's shared responsibility family; or
    (B) 300 percent of the applicable dollar amount (determined without 
regard to paragraph (b)(2)(iii) of this section) for the calendar year 
with or within which the taxable year ends.
    (ii) Applicable dollar amount. Except as provided in paragraphs 
(b)(2)(iii) and (b)(2)(iv) of this section, the applicable dollar amount 
is--
    (A) $95 in 2014;
    (B) $325 in 2015; or
    (C) $695 in 2016.
    (iii) Special applicable dollar amount for individuals under age 18. 
If an individual has not attained the age of 18 before the first day of 
a month, the applicable dollar amount for the individual is equal to 
one-half of the applicable dollar amount (as expressed in paragraph 
(b)(2)(ii) of this section) for the calendar year in which the month 
occurs. For purposes of this paragraph (b)(2)(iii), an individual 
attains the age of 18 on the anniversary of the date when the individual 
was born. For example, an individual born on March 1, 1999, attains the 
age of 18 on March 1, 2017.
    (iv) Indexing of applicable dollar amount. In any calendar year 
after 2016, the applicable dollar amount is $695 as increased by the 
product of $695 and the cost-of-living adjustment determined under 
section 1(f)(3) for the calendar year. For purposes of this paragraph 
(b)(2)(iv), the cost-of-living adjustment is determined by substituting 
``calendar year 2015'' for ``calendar year

[[Page 60]]

1992'' in section 1(f)(3)(B). If any increase under this paragraph 
(b)(2)(iv) is not a multiple of $50, the increase is rounded down to the 
next lowest multiple of $50.
    (3) Excess income amount--(i) In general. Excess income amount means 
the product of--
    (A) The excess of the taxpayer's household income over the 
taxpayer's applicable filing threshold (as defined in Sec. 1.5000A-
3(f)(2)); and
    (B) The income percentage.
    (ii) Income percentage. For purposes of this section, income 
percentage means--
    (A) 1.0 percent for taxable years beginning in 2013;
    (B) 1.0 percent for taxable years beginning in 2014;
    (C) 2.0 percent for taxable years beginning in 2015; or
    (D) 2.5 percent for taxable years beginning after 2015.
    (c) Monthly national average bronze plan premium. Monthly national 
average bronze plan premium means, for a month for which a shared 
responsibility payment is imposed, \1/12\ of the annual national average 
premium for qualified health plans that have a bronze level of coverage, 
would provide coverage for the taxpayer's shared responsibility family 
members who do not have minimum essential coverage for the month, and 
are offered through Exchanges for plan years beginning in the calendar 
year with or within which the taxable year ends.
    (d) Examples. The following examples illustrate the provisions of 
this section. In each example the taxpayer's taxable year is a calendar 
year and all members of the taxpayer's shared responsibility family are 
ineligible for any of the exemptions described in Sec. 1.5000A-3 for a 
month.

    Example 1. Unmarried taxpayer without minimum essential coverage. 
(i) In 2016, Taxpayer G is an unmarried individual with no dependents. G 
does not have minimum essential coverage for any month in 2016. G's 
household income is $120,000. G's applicable filing threshold is 
$12,000. The annual national average bronze plan premium for G is 
$5,000.
    (ii) For each month in 2016, under paragraph (b)(2)(ii) of this 
section, G's applicable dollar amount is $695. Under paragraph (b)(2)(i) 
of this section, G's flat dollar amount is $695 (the lesser of $695 and 
$2,085 ($695 x 3)). Under paragraph (b)(3) of this section, G's excess 
income amount is $2,700 (($120,000 - $12,000) x 0.025). Therefore, under 
paragraph (b)(1) of this section, the monthly penalty amount is $225 
(the greater of $58 ($695/12) or $225 ($2,700/12)).
    (iii) The sum of the monthly penalty amounts is $2,700 ($225 x 12). 
The sum of the monthly national average bronze plan premiums is $5,000 
($5,000/12 x 12). Therefore, under paragraph (a) of this section, the 
shared responsibility payment imposed on G for 2016 is $2,700 (the 
lesser of $2,700 or $5,000).
    Example 2. Part-year coverage. The facts are the same as in Example 
1, except G has minimum essential coverage for January through June. The 
sum of the monthly penalty amounts is $1,350 ($225 x 6). The sum of the 
monthly national average bronze plan premiums is $2,500 ($5,000/12 x 6). 
Therefore, under paragraph (a) of this section, the shared 
responsibility payment imposed on G for 2016 is $1,350 (the lesser of 
$1,350 or $2,500).
    Example 3. Family without minimum essential coverage. (i) In 2016, 
Taxpayers H and J are married and file a joint return. H and J have 
three children: K, age 21, L, age 15, and M, age 10. No member of the 
family has minimum essential coverage for any month in 2016. H and J's 
household income is $250,000. H and J's applicable filing threshold is 
$24,000. The annual national average bronze plan premium for a family of 
5 (3 adults, 2 children) is $15,000.
    (ii) For each month in 2016, under paragraphs (b)(2)(ii) and 
(b)(2)(iii) of this section, the applicable dollar amount is $2,780 
(($695 x 3 adults) + (($695/2) x 2 children)). Under paragraph (b)(2)(i) 
of this section, the flat dollar amount is $2,085 (the lesser of $2,780 
and $2,085 ($695 x 3)). Under paragraph (b)(3) of this section, the 
excess income amount is $5,650 (($250,000-$24,000) x 0.025). Therefore, 
under paragraph (b)(1) of this section, the monthly penalty amount is 
$470.83 (the greater of $173.75 ($2,085/12) or $470.83 ($5,650/12)).
    (iii) The sum of the monthly penalty amounts is $5,650 ($470.83 x 
12). The sum of the monthly national average bronze plan premiums is 
$15,000 ($15,000/12 x 12). Therefore, under paragraph (a) of this 
section, the shared responsibility payment imposed on H and J for 2016 
is $5,650 (the lesser of $5,650 or $15,000).
    Example 4. Change in shared responsibility family during the year. 
(i) The facts are the same as in Example 3, except J has minimum 
essential coverage for January through June. The annual national average 
bronze plan premium for a family of 4 (2 adults, 2 children) is $10,000.
    (ii) For the period January through June 2016, under paragraphs 
(b)(2)(ii) and (b)(2)(iii) of this section the applicable dollar amount

[[Page 61]]

is $2,085 (($695 x 2 adults) + (($695/2) x 2 children)). Under paragraph 
(b)(2)(i) of this section, the flat dollar amount is $2,085 (the lesser 
of $2,085 or $2,085 ($695 x 3)).
    (iii) For the period July through December 2016, the applicable 
dollar amount is $2,780 (($695 x 3 adults) + (($695/2) x 2 children)). 
Under paragraph (b)(2) of this section, the flat dollar amount is $2,085 
(the lesser of $2,780 or $2,085 ($695 x 3)). Under paragraph (b)(3) of 
this section, the excess income amount is $5,650 (($250,000-$24,000) x 
0.025). Therefore, under paragraph (b)(1) of this section, for January 
through June the monthly penalty amount is $470.83 (the greater of 
$173.75 ($2,085/12) or $470.83 ($5,650/12)). The monthly penalty amount 
for July through December is $470.83 (the greater of $173.75 ($2,085/12) 
or $470.83 ($5,650/12)).
    (iv) The sum of the monthly penalty amounts is $5,650 ($470.83 x 
12). The sum of the monthly national average bronze plan premiums is 
$12,500 ((($10,000/12) x 6) + (($15,000/12) x 6))). Therefore, under 
paragraph (a) of this section, the shared responsibility payment imposed 
on H and J for 2016 is $5,650 (the lesser of $5,650 or $12,500).
    Example 5. Eighteenth birthday during the year. (i) In 2016 
Taxpayers S and T are married and file a joint return. S and T have one 
child, U, who turns 18 years old on June 28. S, T, and U do not enroll 
in, and as a result are not eligible to receive benefits under, 
affordable employer-sponsored coverage offered by T's employer for 2016. 
S and T's household income is $60,000. S and T's applicable filing 
threshold is $24,000. The annual national average bronze plan premium 
for a family of 3 (2 adults, 1 child) is $11,000.
    (ii) For the period January through June 2016, under paragraphs 
(b)(2)(ii) and (b)(2)(iii) of this section, the applicable dollar amount 
is $1,737.50 (($695 x 2 adults) + ($695/2) x 1 child)). Under paragraph 
(b)(2) of this section, the flat dollar amount is $1,737.50 (the lesser 
of $1,737.50 or $2,085 ($695 x 3)).
    (iii) For the period July through December 2016, the applicable 
dollar amount is $2,085 ($695 x 3). Under paragraph (b)(2)(i) of this 
section, the flat dollar amount is $2,085 (the lesser of $2,085 or 
$2,085 ($695 x 3)). Under paragraph (b)(3) of this section, the excess 
income amount is $900 (($60,000-$24,000) x 0.025). Therefore, under 
paragraph (b)(1) of this section, for January through June the monthly 
penalty amount is $144.79 (the greater of $144.79 ($1,737.50/12) or $75 
($900/12)). The monthly penalty amount for July through December is 
$173.75 (the greater of $173.75 ($2,085/12) or $75 ($900/12)).
    (iv) The sum of the monthly penalty amounts is $1,911.24 (($144.79 x 
6) + ($173.75 x 6)). The sum of the monthly national average bronze plan 
premiums is $11,000 ($11,000/12 x 12). Therefore, under paragraph (a) of 
this section, the shared responsibility payment imposed on S and T for 
2016 is $1,911.24 (the lesser of $1,911.24 or $11,000).

[T.D. 9632, 78 FR 53655, Aug. 30, 2013, as amended at 78 FR 78255, Dec. 
26, 2013; T.D. 9705, 79 FR 70469, Nov. 26, 2014]



Sec. 1.5000A-5  Administration and procedure.

    (a) In general. A taxpayer's liability for the shared responsibility 
payment for a month must be reported on the taxpayer's Federal income 
tax return for the taxable year that includes the month. The period of 
limitations for assessing the shared responsibility payment is the same 
as that prescribed by section 6501 for the taxable year to which the 
Federal income tax return on which the shared responsibility payment is 
to be reported relates. The shared responsibility payment is payable 
upon notice and demand by the Secretary, and except as provided in 
paragraph (b) of this section, is assessed and collected in the same 
manner as an assessable penalty under subchapter B of chapter 68 of the 
Internal Revenue Code. The shared responsibility payment is not subject 
to deficiency procedures of subchapter B of chapter 63 of the Internal 
Revenue Code. Interest on this payment accrues in accordance with the 
rules in section 6601.
    (b) Special rules. Notwithstanding any other provision of law--
    (1) Waiver of criminal penalties. In the case of a failure by a 
taxpayer to timely pay the shared responsibility payment, the taxpayer 
is not subject to criminal prosecution or penalty for the failure.
    (2) Limitations on liens and levies. If a taxpayer fails to pay the 
shared responsibility payment imposed by this section and Sec. Sec. 
1.5000A-1 through 1.5000A-4, the Secretary will not file notice of lien 
on any property of the taxpayer, or levy on any property of the taxpayer 
for the failure.
    (3) Authority to offset against overpayment. Nothing in this section 
prohibits the Secretary from offsetting any liability for the shared 
responsibility payment against any overpayment due the taxpayer, in 
accordance with section 6402(a) and its corresponding regulations.

[[Page 62]]

    (c) Effective/applicability date. This section and Sec. Sec. 
1.5000A-1 through 1.5000A-4 apply for months beginning after December 
31, 2013.

[T.D. 9632, 78 FR 53655, Aug. 30, 2013]

                   Tax on Certain Foreign Procurement



Sec. 1.5000C-0  Outline of regulation provisions for section 5000C.

    This section lists the captions contained in Sec. Sec. 1.5000C-1 
through 1.5000C-7.

     Sec. 1.5000C-1 Tax on specified Federal procurement payments.

    (a) Overview.
    (b) Imposition of tax.
    (c) Definitions.
    (d) Exemptions.
    (1) Simplified acquisitions.
    (2) Emergency acquisitions.
    (3) Certain personal service contracts.
    (4) Certain foreign humanitarian assistance contracts.
    (5) Certain international agreements.
    (6) Goods manufactured or produced or services provided in the 
United States.
    (7) Goods manufactured or produced or services provided in a country 
that is a party to an international procurement agreement.
    (e) Country in which goods are manufactured or produced or services 
provided.
    (1) Goods manufactured or produced.
    (2) Provision of services.
    (3) Allocation of total contract price to determine the nonexempt 
amount.
    (4) Reduction or elimination of withholding by an acquiring agency.

 Sec. 1.5000C-2 Withholding on specified Federal procurement payments.

    (a) In general.
    (b) Steps in determining the obligation to withhold under section 
5000C.
    (1) Determine whether the payment is pursuant to a contract for 
goods or services.
    (2) Determine whether the payment is made pursuant to a contract 
with a U.S. person.
    (3) Determine whether the payment is for purchases under the 
simplified acquisition procedures.
    (4) Determine whether the payment is for emergency acquisitions.
    (5) Determine whether the payment is for personal services under the 
simplified acquisition threshold.
    (6) Determine whether the payment is pursuant to a foreign 
humanitarian assistance contract.
    (7) Determine whether the foreign contracting party is entitled to 
relief pursuant to an international agreement.
    (8) Determine whether the contract is for goods manufactured or 
produced or services provided in the United States or in a foreign 
country that is a party to an international procurement agreement.
    (9) Compute amounts to withhold.
    (10) Deposit and report amounts withheld.
    (c) Determining whether the contracting party is a U.S. person.
    (1) In general.
    (2) Determination based on Taxpayer Identification Number (TIN).
    (3) Determination based on the Form W-9.
    (4) Contracting party treated as a foreign contracting party.
    (d) Withholding when a foreign contracting party submits a Section 
5000C Certificate.
    (1) In general.
    (2) Exemption for a foreign contracting party entitled to the 
benefit of relief pursuant to certain international agreements.
    (3) Exemption when goods are manufactured or produced or services 
provided in the United States, or in a foreign country that is a party 
to an international procurement agreement.
    (4) Information required for Section 5000C Certificate.
    (5) Validity period of Section 5000C Certificate.
    (6) Change in circumstances.
    (7) Form W-14.
    (8) Time for submitting Section 5000C Certificate.
    (e) Offset for underwithholding or overwithholding.
    (1) In general.
    (2) Underwithholding.
    (3) Overwithholding.

  Sec. 1.5000C-3 Payment and returns of tax withheld by the acquiring 
                                 agency.

    (a) In general.
    (b) Deposit rules.
    (1) Acquiring agency with a chapter 3 deposit requirement treats 
amounts withheld as under chapter 3.
    (2) Acquiring agency with no chapter 3 filing obligation deposits 
withheld amounts monthly.
    (c) Return requirements.
    (1) In general.
    (2) Classified or confidential contracts.
    (d) Special arrangement for certain contracts.

Sec. 1.5000C-4 Requirement for the foreign contracting party to file a 
 return and pay tax, and procedures for the contracting party to seek a 
                                 refund.

    (a) In general.
    (b) Tax obligation of foreign contracting party independent of 
withholding.
    (c) Return of tax by the foreign contracting party.
    (d) Time and manner of paying tax.
    (e) Refund requests when amount withheld exceeds tax liability.

[[Page 63]]

                    Sec. 1.5000C-5 Anti-abuse rule.

                        Sec. 1.5000C-6 Examples.

              Sec. 1.5000C-7 Effective/applicability date.

[T.D. 9782, 81 FR 55137, Aug. 18, 2016]



Sec. 1.5000C-1  Tax on specified Federal procurement payments.

    (a) Overview. This section provides definitions and general rules 
relating to the imposition of, and exemption from, the tax on specified 
Federal procurement payments under section 5000C. Section 1.5000C-2 
provides rules concerning withholding under section 5000C(d)(1), 
including the steps that must be taken to determine the obligation to 
withhold and whether an exemption from withholding applies. Section 
1.5000C-3 provides the time and manner for depositing the amounts 
withheld under section 5000C and the related reporting requirements. 
Section 1.5000C-4 contains the rules that apply to a foreign contracting 
party that must pay and report the tax under section 5000C when the tax 
obligation under section 5000C is not fully satisfied by withholding, as 
well as procedures by which a contracting party may seek a refund when 
the amount withheld exceeds its tax liability under section 5000C. 
Section 1.5000C-5 contains an anti-abuse rule. Section 1.5000C-6 
contains examples illustrating the principles of Sec. Sec. 1.5000C-1 
through 1.5000C-4. Finally, Sec. 1.5000C-7 contains the effective/
applicability date for Sec. Sec. 1.5000C-1 through 1.5000C-7.
    (b) Imposition of tax. Except as otherwise provided, section 5000C 
imposes on any foreign contracting party a tax equal to 2 percent of the 
amount of a specified Federal procurement payment. In general, the tax 
imposed under section 5000C applies to specified Federal procurement 
payments received pursuant to contracts entered into on and after 
January 2, 2011. Specified Federal procurement payments received by a 
nominee or agent on behalf of a contracting party are considered to be 
received by that contracting party. The tax imposed under section 5000C 
is to be applied in a manner consistent with U.S. obligations under 
international agreements. Payments for the purchase or lease of land or 
an interest in land are not subject to the tax imposed under section 
5000C.
    (c) Definitions. Solely for purposes of section 5000C and Sec. Sec. 
1.5000C-1 through 1.5000C-7, the following definitions apply:
    (1) The term acquiring agency means the U.S. government department, 
agency, independent establishment, or corporation described in paragraph 
(c)(7) of this section that is a party to the contract. To the extent 
that a U.S. government department or agency, other than the acquiring 
agency, is making the payments pursuant to the contract, that department 
or agency is also considered to be the acquiring agency.
    (2) The term contract has the same meaning as provided in 48 CFR 
2.101, and thus does not include a grant agreement or a cooperative 
agreement within the meaning of 31 U.S.C. 6304 and 6305, respectively. A 
contract may include an agreement that is not executed under the Federal 
Acquisition Regulations (FAR), 48 CFR Chapter 1.
    (3) The term contract ratio refers to the nonexempt amount over the 
total contract price.
    (4) The term contracting party means any person that is a party to a 
contract with the U.S. government that is entered into on or after 
January 2, 2011. See Sec. 1.5000C-1(b) for situations involving a 
nominee or agent.
    (5) The term foreign contracting party means a contracting party 
that is a foreign person.
    (6) The term foreign person means any person other than a United 
States person (as defined in section 7701(a)(30)).
    (7) The term Government of the United States or U.S. government 
means the executive departments specified in 5 U.S.C. 101, the military 
departments specified in 5 U.S.C. 102, the independent establishments 
specified in 5 U.S.C. 104(1), and wholly owned government corporations 
specified in 31 U.S.C. 9101(3). Unless otherwise specified in 5 U.S.C. 
101, 102, or 104(1), or 31 U.S.C. 9101(3), the term Government of the 
United States or U.S. government does not include any quasi-governmental 
entities or instrumentalities of the U.S. government.

[[Page 64]]

    (8) The term international procurement agreement means the World 
Trade Organization Government Procurement Agreement within the meaning 
of 48 CFR 25.400(a)(1) and any free trade agreement to which the United 
States is a party that includes government procurement obligations that 
provide appropriate competitive government procurement opportunities to 
U.S. goods, services, and suppliers. A party to an international 
procurement agreement is a signatory to the agreement and does not 
include a country that is merely an observer with respect to the 
agreement.
    (9) The term nonexempt amount means the portion of the contract 
price allocated to nonexempt goods and nonexempt services.
    (10) The term nonexempt goods means goods manufactured or produced 
in a foreign country that is not a party to an international procurement 
agreement with the United States.
    (11) The term nonexempt services means services provided in a 
foreign country that is not a party to an international procurement 
agreement with the United States.
    (12) The term outlying areas has the same meaning as set forth in 48 
CFR 2.101(b), which includes Puerto Rico, the Northern Mariana Islands, 
American Samoa, Guam, the Virgin Islands, Baker Island, Howland Island, 
Jarvis Island, Johnston Atoll, Kingman Reef, Midway Islands, Navassa 
Island, Palmyra Atoll, and Wake Atoll.
    (13) The term qualified income tax treaty means a U.S. income tax 
treaty in force that contains a nondiscrimination provision that applies 
to the tax imposed under section 5000C and prohibits taxation that is 
more burdensome on a foreign national than a U.S. national (or in the 
case of certain income tax treaties, taxation that is more burdensome on 
a foreign citizen than a U.S. citizen), regardless of its residence.
    (14) The term Section 5000C Certificate means a written statement 
that includes the information described in Sec. 1.5000C-2(d) that the 
foreign contracting party submits to an acquiring agency for the 
purposes of demonstrating that the foreign contracting party is eligible 
for certain exemptions from withholding (in whole or in part) under 
section 5000C with respect to a contract. The term may also include any 
form that the Internal Revenue Service may prescribe as a substitute for 
the Section 5000C Certificate, such as Form W-14, ``Certificate of 
Foreign Contracting Party Receiving Federal Procurement Payments.''
    (15) The term specified Federal procurement payment means any 
payment made pursuant to a contract with a foreign contracting party 
that is for goods manufactured or produced or services provided in a 
foreign country that is not a party to an international procurement 
agreement with the United States. For purposes of the prior sentence, a 
foreign country does not include an outlying area.
    (16) The term Taxpayer Identification Number or TIN means the 
identifying number assigned to a person under section 6109, as defined 
in section 7701(a)(41).
    (17) The term total contract price means the total cost to the U.S. 
Government of the goods and services procured under a contract and paid 
to the contracting party.
    (d) Exemptions. The tax imposed under paragraph (b) of this section 
does not apply to the payments made in the following situations. For the 
exemptions in paragraphs (d)(5), (6) and (7) of this section, see Sec. 
1.5000C-2(d) for the procedures to eliminate withholding by an acquiring 
agency.
    (1) Simplified acquisitions. Payments for purchases under the 
simplified acquisition procedures that do not exceed the simplified 
acquisition threshold as described in 48 CFR 2.101.
    (2) Emergency acquisitions. Payments made pursuant to a contract if 
the contract is--
    (i) Awarded under the ``unusual and compelling urgency'' authority 
of 48 CFR 6.302-2, or
    (ii) Entered into under the emergency acquisition flexibilities as 
defined in 48 CFR part 18.
    (3) Certain personal service contracts. Payments for services 
provided by, and under contracts with, a single individual in which the 
payments do not (and will not) exceed on an annual calendar year basis 
the simplified acquisition threshold as described in 48 CFR

[[Page 65]]

2.101 for all years of the contract. Payments that satisfy this 
exemption remain exempt if the contract is later renegotiated so that 
future payments under the contract do not meet this exemption.
    (4) Certain foreign humanitarian assistance contracts. Payments made 
by the U.S. government pursuant to a contract with a foreign contracting 
party to obtain goods or services described in or authorized under 7 
U.S.C. 1691, et seq., 22 U.S.C. 2151, et seq., 22 U.S.C. 2601 et seq., 
22 U.S.C. 5801 et seq., 22 U.S.C. 5401 et seq., 10 U.S.C. 402, 10 U.S.C. 
404, 10 U.S.C. 407, 10 U.S.C. 2557, and 10 U.S.C. 2561, if the acquiring 
agency determines that the payment is for the purpose of providing 
foreign humanitarian assistance.
    (5) Certain international agreements. Payments made by the U.S. 
government pursuant to a contract with a foreign contracting party when 
the payments are entitled to relief from the tax imposed under section 
5000C pursuant to an international agreement with the United States, 
including relief pursuant to a nondiscrimination provision of a 
qualified income tax treaty, because the foreign contracting party is 
entitled to the benefit of that provision.
    (6) Goods manufactured or produced or services provided in the 
United States. A payment made pursuant to a contract to the extent that 
the payment is for goods manufactured or produced or services provided 
in the United States.
    (7) Goods manufactured or produced or services provided in a country 
that is a party to an international procurement agreement. A payment 
made pursuant to a contract to the extent the payment is for goods 
manufactured or produced or services provided in a country that is a 
party to an international procurement agreement, as defined in paragraph 
(c)(8) of this section.
    (e) Country in which goods are manufactured or produced or services 
provided--
    (1) Goods manufactured or produced. Solely for purposes of section 
5000C, goods are manufactured or produced in the country (or 
countries)--
    (i) Where property has been substantially transformed into the goods 
that are procured pursuant to a contract; or
    (ii) Where there has been assembly or conversion of component parts 
(involving activities that are substantial in nature and generally 
considered to constitute the manufacture or production of property) into 
the final product that constitutes the goods procured pursuant to a 
contract.
    (2) Provision of services. Solely for purposes of section 5000C, 
services are considered to be provided in the country where the 
individuals performing the services are physically located when they 
perform their duties pursuant to the contract.
    (3) Allocation of total contract price to determine the nonexempt 
amount. If, pursuant to a contract, goods are manufactured or produced, 
or services are provided, in multiple countries and only a portion of 
the goods manufactured or produced, or the services provided, pursuant 
to the contract are nonexempt goods or nonexempt services, a foreign 
contracting party may use a reasonable allocation method to determine 
the nonexempt amount. A reasonable allocation method would include 
taking into account the proportionate costs (including the cost of labor 
and raw materials) incurred to manufacture or produce the goods in each 
country, or taking into account the proportionate costs incurred to 
provide the services in each country.
    (4) Reduction or elimination of withholding by an acquiring agency. 
For procedures to reduce or eliminate withholding by an acquiring agency 
based on where goods are manufactured or produced or where services are 
provided, including as a result of an allocation under this paragraph 
(e), see Sec. 1.5000C-2(d).

[T.D. 9782, 81 FR 55138, Aug. 18, 2016]



Sec. 1.5000C-2  Withholding on specified Federal procurement payments.

    (a) In general. Except as otherwise provided in this section, every 
acquiring agency making a specified Federal procurement payment on which 
tax is imposed under section 5000C and Sec. Sec. 1.5000C-1 through 
1.5000C-7 must deduct and withhold an amount equal to 2 percent of the 
payment. For rules relating to the liability of a foreign contracting 
party with respect to specified Federal procurement payments not

[[Page 66]]

fully withheld upon at source, see Sec. 1.5000C-4. An acquiring agency 
may rely upon any information furnished by a contracting party under 
this section unless the acquiring agency has reason to know that the 
information is incorrect or unreliable. An acquiring agency has reason 
to know that the information is incorrect or unreliable if it has 
knowledge of relevant facts or statements contained in the submitted 
information such that a reasonably prudent person in the position of the 
acquiring agency would know that the information provided is incorrect 
or unreliable.
    (b) Steps in determining the obligation to withhold under section 
5000C. An acquiring agency generally determines its obligation to 
withhold under section 5000C according to the steps described in this 
paragraph (b). See, however, paragraph (e) of this section for 
situations in which withholding may be increased in the case of 
underwithholding, or may be decreased in the case of overwithholding.
    (1) Determine whether the payment is pursuant to a contract for 
goods or services. The acquiring agency determines whether it is making 
a payment pursuant to a contract for goods or services. To the extent 
that the acquiring agency is making a payment for any other purpose, it 
does not have an obligation to withhold under section 5000C on the 
payment.
    (2) Determine whether the payment is made pursuant to a contract 
with a U.S. person. The acquiring agency determines whether the payment 
is made pursuant to a contract with a person considered to be a United 
States person (U.S. person) in accordance with paragraph (c) of this 
section. If the other contracting party is a U.S. person, the acquiring 
agency does not have an obligation to withhold under section 5000C on 
the payment.
    (3) Determine whether the payment is for purchases under the 
simplified acquisition procedures. The acquiring agency determines 
whether the payment is for purchases under the simplified acquisitions 
procedures that do not exceed the simplified acquisition threshold as 
described in 48 CFR 2.101. If it is, the acquiring agency does not have 
an obligation to withhold under section 5000C on the payment.
    (4) Determine whether the payment is for emergency acquisitions. The 
acquiring agency determines whether the payment is made for certain 
emergency acquisitions within the meaning of Sec. 1.5000C-1(d)(2). If 
it is, the acquiring agency does not have an obligation to withhold 
under section 5000C on the payment.
    (5) Determine whether the payment is for personal services under the 
simplified acquisition threshold. The acquiring agency determines 
whether payments for services under contracts with a single individual 
do not exceed the simplified acquisition threshold as described in 48 
CFR 2.101 on an annual basis for all years of the contract. If that is 
the case, the acquiring agency does not have an obligation to withhold 
under section 5000C on the payment.
    (6) Determine whether the payment is pursuant to a foreign 
humanitarian assistance contract. The acquiring agency determines 
whether the payment is made pursuant to a foreign humanitarian 
assistance contract described in Sec. 1.5000C-1(d)(4). If it is, the 
acquiring agency does not have an obligation to withhold under section 
5000C on the payment.
    (7) Determine whether the foreign contracting party is entitled to 
relief pursuant to an international agreement. If the foreign 
contracting party submits a Section 5000C Certificate in accordance with 
paragraph (d) of this section representing that the foreign contracting 
party is entitled to relief from the tax imposed under section 5000C 
pursuant to an international agreement with the United States (such as 
relief pursuant to the nondiscrimination provision of a qualified income 
tax treaty), the acquiring agency does not have an obligation to 
withhold under section 5000C on the payment.
    (8) Determine whether the contract is for goods manufactured or 
produced or services provided in the United States or in a foreign 
country that is a party to an international procurement agreement. If 
the foreign contracting party submits a Section 5000C Certificate in 
accordance with paragraph (d) of this section that represents that the 
contract is for

[[Page 67]]

goods manufactured or produced or services provided in the United 
States, or in a foreign country that is a party to an international 
procurement agreement, the acquiring agency does not have an obligation 
to withhold. If the Section 5000C Certificate provides that payments 
under the contract are only partially exempt from withholding under 
section 5000C, the acquiring agency must withhold to the extent 
described in paragraph (b)(8) of this section.
    (9) Compute amounts to withhold. If, after evaluating each step 
described in this paragraph (b), the acquiring agency determines that it 
has an obligation to withhold, the acquiring agency computes the amount 
of withholding by multiplying the amount of the payment by 2 percent, 
unless the foreign contracting party has provided a Section 5000C 
Certificate or the payment is only in part for goods or services. In 
cases in which the Section 5000C Certificate demonstrates that the 
exemption in Step 8 applies, the acquiring agency generally computes the 
amount of withholding by multiplying the amount of the payment by the 
contract ratio provided on the most recent Section 5000C Certificate, 
the product of which is multiplied by 2 percent. However, in cases in 
which the exemption in Step 8 applies and the requirements of paragraph 
(d)(4)(iii)(B)(2) of this section are met, the acquiring agency computes 
the amount of withholding based on the payment for the specifically 
identified items, which may be identified by the contract line item 
number, or CLIN. In the case in which the payment is only in part for 
goods or services, the acquiring agency reduces the amount of the 
payment subject to the tax to the extent it is for something other than 
goods or services. The acquiring agency withholds the computed amount 
from the payment.
    (10) Deposit and report amounts withheld. The acquiring agency 
deposits and reports the amounts determined in the prior step in 
accordance with Sec. 1.5000C-3.
    (c) Determining whether the contracting party is a U.S. person--(1) 
In general. An acquiring agency must rely on the provisions of this 
paragraph (c) to determine the status of the contracting party as a U.S. 
person for purposes of withholding under section 5000C.
    (2) Determination based on Taxpayer Identification Number (TIN). An 
acquiring agency must treat a contracting party as a U.S. person if the 
U.S. government information system (such as the System for Award 
Management (SAM)) indicates that the contracting party is a corporation 
(for example, because the name listed in SAM contains the term 
``Corporation,'' ``Inc.,'' or ``Corp.'') and that it has a TIN that 
begins with two digits other than ``98'' (a limited liability company or 
LLC is not treated as a corporation for purposes of this paragraph 
(c)(2)). Further, an acquiring agency must treat a contracting party as 
a U.S. person if the acquiring agency has access to a U.S. government 
information system that indicates that the contracting party is an 
individual with a TIN that begins with a digit other than ``9''.
    (3) Determination based on the Form W-9. An acquiring agency must 
treat a contracting party as a U.S. person if the person has submitted 
to it a valid Form W-9, ``Request for Taxpayer Identification Number 
(TIN) and Certificate'' (or valid substitute form described in Sec. 
31.3406(h)-3(c)(2) of this chapter), signed under penalties of perjury.
    (4) Contracting party treated as a foreign contracting party. If an 
acquiring agency cannot determine that a contracting party is a U.S. 
person based on application of paragraph (c)(2) or (3) of this section, 
then the contracting party is treated as a foreign contracting party for 
purposes of this section.
    (d) Withholding when a foreign contracting party submits a Section 
5000C Certificate--(1) In general. Unless the acquiring agency has 
reason to know that the information is incorrect or unreliable, the 
acquiring agency may rely on a claim that a foreign contracting party is 
entitled to an exemption (in whole or in part) from withholding on 
payments pursuant to a contract if the foreign contracting party 
provides a Section 5000C Certificate to the acquiring agency as 
prescribed in this paragraph (d). When a Section 5000C Certificate is 
furnished, the acquiring agency

[[Page 68]]

does not withhold, or must reduce the amount of withholding, on payments 
made to a foreign person if the certificate establishes that the foreign 
person is wholly or partially exempt from withholding. An acquiring 
agency may establish a system for a foreign contracting party to 
electronically furnish a Section 5000C Certificate.
    (2) Exemption for a foreign contracting party entitled to the 
benefit of relief pursuant to certain international agreements. An 
acquiring agency does not withhold on payments pursuant to a contract 
with a foreign contracting party when the payment is entitled to relief 
from the tax imposed under section 5000C pursuant to an international 
agreement, including relief pursuant to a nondiscrimination provision of 
a qualified income tax treaty, because the foreign contracting party is 
entitled to the benefit of that agreement and the foreign contracting 
party has submitted a Section 5000C Certificate that includes all of the 
information described in paragraphs (d)(4)(i) and (ii) of this section.
    (3) Exemption when goods are manufactured or produced or services 
provided in the United States, or in a foreign country that is a party 
to an international procurement agreement. An acquiring agency does not 
withhold on payments pursuant to a contract with a foreign contracting 
party to the extent that the payments are for goods manufactured or 
produced or services provided in the United States or in a foreign 
country that is a party to an international procurement agreement with 
the United States, provided that the foreign contracting party has 
submitted a Section 5000C Certificate that includes all of the 
information described in paragraphs (d)(4)(i) and (iii) of this section. 
If the Section 5000C Certificate provides that the payment is only 
partially exempt from withholding under section 5000C, the acquiring 
agency must withhold to the extent that the payment is not exempt.
    (4) Information required for Section 5000C Certificate--(i) In 
general. The Section 5000C Certificate must be signed under penalties of 
perjury by the foreign contracting party and contain--
    (A) The name of the foreign contracting party, country of 
organization (if applicable), and permanent residence address of the 
foreign contracting party;
    (B) The mailing address of the foreign contracting party (if 
different than the permanent residence address);
    (C) The TIN assigned to the foreign contracting party (if any);
    (D) The identifying or reference number on the contract (if known);
    (E) The name and address of the acquiring agency;
    (F) A statement that the person signing the Section 5000C 
Certificate is the foreign contracting party listed in paragraph 
(d)(4)(i)(A) of this section (or is authorized to sign on behalf of the 
foreign contracting party);
    (G) A statement that the foreign contracting party is not acting as 
an agent or nominee for another foreign person with respect to the goods 
manufactured or produced or services provided under the contract;
    (H) A statement that the foreign contracting party agrees to pay an 
amount equal to any tax (including any applicable penalties and 
interest) due under section 5000C that the acquiring agency does not 
withhold under section 5000C;
    (I) A statement that the foreign contracting party acknowledges and 
understands the rules in Sec. 1.5000C-4 relating to procedural 
obligations related to section 5000C; and
    (J) A statement that the foreign contracting party has not engaged 
in a transaction (or series of transactions) with a principal purpose of 
avoiding the tax imposed under section 5000C as defined in Sec. 
1.5000C-5.
    (ii) Additional information required for claiming an exemption based 
on certain international agreements with the United States. In addition 
to the information required by paragraph (d)(4)(i) of this section, a 
foreign contracting party claiming an exemption from withholding in 
reliance on a provision of an international agreement with the United 
States, including a qualified income tax treaty, must provide--
    (A) The name of the international agreement under which the foreign 
contracting party is claiming benefits;
    (B) The specific provision of the international agreement relied 
upon

[[Page 69]]

(for example, the nondiscrimination article of a qualified income tax 
treaty); and
    (C) The basis on which it is entitled to the benefits of that 
provision (for example, because the foreign contracting party is a 
corporation organized in a foreign country that has in force a qualified 
income tax treaty with the United States that covers all nationals, 
regardless of their residence).
    (iii) Additional required information for claiming exemption based 
on country where goods are manufactured or services provided. (A) In 
general. In addition to the information required by paragraph (d)(4)(i) 
of this section, a foreign contracting party claiming an exemption from 
withholding (in whole or in part) because payments will be pursuant to a 
contract for goods manufactured or produced or services provided in the 
United States, or a foreign country that is party to an international 
procurement agreement, must describe on the Section 5000C Certificate 
the relevant goods or services and the country (or countries) in which 
they are manufactured or produced, or are provided, and must include the 
name of the international procurement agreement or agreements (if 
relevant).
    (B) Information on allocation to exempt and nonexempt amounts. (1) 
In general. In situations in which a foreign contracting party claims 
the exemption in paragraph (d)(3) of this section with respect to only a 
portion of the payments received under the contract, the Section 5000C 
Certificate must include an explanation of the method used by the 
foreign contracting party to allocate the total contract price among the 
countries, as described in Sec. 1.5000C-1(e)(3), if applicable. In 
general, the Section 5000C Certificate also must include the total 
contract price and the nonexempt amount; however, when necessary, an 
estimate of the total contract price or the nonexempt amount may be 
used. For example, total contract price may be estimated when a Section 
5000C Certificate is being completed with respect to payments to be made 
pursuant to a cost-reimbursement contract that is paid on the basis of 
actual incurred costs and the total amount of such costs is not known at 
the time the certificate is provided.
    (2) Specific identification of exempt items. If agreed to by the 
acquiring agency, the Section 5000C Certificate may identify specific 
exempt and nonexempt amounts. For example, specific contract line items 
(such as a contract line item number or CLIN) identified in the contract 
may be listed on the Section 5000C Certificate as exempt and nonexempt 
amounts (in whole or in part), as applicable. When this paragraph 
applies, and whether or not the contract identifies exempt and nonexempt 
amounts, a foreign contracting party must provide the information 
required by paragraphs (d)(4)(iii)(A) and (d)(4)(iii)(B)(1) of this 
section, on the Section 5000C Certificate to explain why the contract 
line items are eligible for an exemption; however, the foreign 
contracting party is not required to include information about the total 
contract price under this paragraph. In these circumstances, only one 
Section 5000C Certificate is required to be provided identifying the 
exempt and nonexempt contract line items that relate to the contract 
(for example, a spreadsheet may be attached to the Section 5000C 
Certificate that identifies the contract line items with an explanation 
for the treatment as exempt or nonexempt).
    (5) Validity period of Section 5000C Certificate. Except as 
otherwise provided in paragraph (d)(6) of this section, the Section 
5000C Certificate is valid for the term of the contract.
    (6) Change in circumstances. A foreign contracting party must submit 
a revised Section 5000C Certificate within 30 days of a change in 
circumstances that causes the information in a Section 5000C Certificate 
held by the acquiring agency to be incorrect with respect to the 
acquiring agency's determination of whether to withhold or the amount of 
withholding under Section 5000C. An acquiring agency must request a new 
Section 5000C Certificate from a contracting party in circumstances in 
which it knows (or has reason to know) that a previously submitted 
Section 5000C Certificate becomes incorrect or unreliable. An acquiring 
agency may request an updated Section 5000C Certificate at any time,

[[Page 70]]

including when other documentation is required under the contract, such 
as the annual representations and certifications required in 48 CFR 
4.1201. See Sec. 1.5000C-6, Example 6, for an illustration of this 
paragraph (6).
    (7) Form W-14. A foreign contracting party may choose to use Form W-
14, ``Certificate of Foreign Contracting Party Receiving Federal 
Procurement Payments'' (or other form that the IRS may prescribe), as 
its Section 5000C Certificate, provided that it includes all the 
necessary information required by this paragraph (d).
    (8) Time for submitting Section 5000C Certificate. A contracting 
party must submit the Section 5000C Certificate (such as Form W-14 or 
Form W-9) as early as practicable (for example, when the offer for the 
contract is submitted to the U.S. government). In all cases, however, 
the Section 5000C Certificate must be submitted to the acquiring agency 
no later than the date of execution of the contract.
    (e) Offset for underwithholding or overwithholding--(1) In general. 
If the foreign contracting party discovers that amounts withheld on 
prior payments either were insufficient or in excess of the amount 
required to satisfy its tax liability under section 5000C, the foreign 
contracting party may request the acquiring agency to increase or 
decrease the amount of withholding on future payments for which 
withholding is required under section 5000C. The request must be in 
writing, signed under penalties of perjury, contain the amount by which 
the foreign contracting party requests to increase or decrease future 
amounts withheld under section 5000C, and explain the reason for the 
request. The request may be submitted in conjunction with an original or 
updated Section 5000C Certificate.
    (2) Underwithholding. Upon receipt of a request described in 
paragraph (e)(1) of this section, acquiring agencies may increase the 
amount of withholding under this paragraph to correct underwithholding 
only if the payment for which the increase is applied is otherwise 
subject to withholding under section 5000C and made before the date that 
Form 1042, ``Annual Withholding Tax Return for U.S. Source Income of 
Foreign Persons,'' is required to be filed (not including extensions) 
with respect to the payment for which the underwithholding occurred. 
Amounts withheld under this paragraph must be deposited and reported in 
the time and manner as prescribed by Sec. 1.5000C-3. See Sec. 1.5000C-
4 for procedures for a foreign contracting party that must pay tax due 
when its tax liability under section 5000C was not fully satisfied by 
withholding by an acquiring agency.
    (3) Overwithholding. Upon receipt of a request described in 
paragraph (e)(1) of this section, acquiring agencies may decrease the 
amount of withholding on subsequent payments made to the foreign 
contracting party that are otherwise subject to withholding under 
section 5000C provided that the payment for which the decrease is 
applied is made on or before the date on which Form 1042, ``Annual 
Withholding Tax Return for U.S. Source Income of Foreign Persons,'' is 
required to be filed (not including extensions) with respect to the 
payment for which the overwithholding occurred. See Sec. 1.5000C-4(e) 
for procedures for foreign contracting parties to file a claim for 
refund for the overwithheld amount under section 5000C.

[T.D. 9782, 81 FR 55138, Aug. 18, 2016]



Sec. 1.5000C-3  Payment and returns of tax withheld by the acquiring
agency.

    (a) In general. This section provides administrative procedures that 
acquiring agencies must follow to satisfy their obligations to deposit 
and report amounts withheld under Sec. 1.5000C-2. An acquiring agency 
with a section 5000C withholding obligation must increase the amount it 
deducts and withholds under chapter 3 for fixed or determinable annual 
or periodical income (FDAP income) by the amount it must withhold under 
Sec. 1.5000C-2. Accordingly, this section generally applies the 
administrative provisions of chapter 3 for FDAP income relating to the 
deposit, payment, and reporting for amounts withheld under Sec. 
1.5000C-2, and contains some variation from those provisions to take 
into account the nature of the tax imposed under section 5000C.
    (b) Deposit rules--(1) Acquiring agency with a chapter 3 deposit 
requirement

[[Page 71]]

treats amounts withheld as under chapter 3. If an acquiring agency has a 
chapter 3 deposit obligation for a period, it must treat any amount 
withheld under Sec. 1.5000C-2 as an additional amount of tax withheld 
under chapter 3 for purposes of the deposit rules of Sec. 1.6302-2. 
Thus, depending on the combined amount withheld under chapter 3 and 
Sec. 1.5000C-2, an acquiring agency subject to this paragraph (b)(1) 
must make monthly deposits, quarter-monthly deposits, or annual deposits 
under the rules in Sec. 1.6302-2. To the extent provided in forms, 
instructions, or publications prescribed by the Internal Revenue Service 
(IRS), acquiring agencies must deposit all withheld amounts by 
electronic funds transfer, as that term is defined in Sec. 31.6302-
1(h)(4)(i) of this chapter.
    (2) Acquiring agency with no chapter 3 filing obligation deposits 
withheld amounts monthly. If an acquiring agency has no chapter 3 
deposit obligation to which the deposit rules of Sec. 1.6302-2 apply 
for a calendar month, it must make monthly deposits of the amounts 
withheld under the rules in this paragraph (b)(2). Thus, an acquiring 
agency with no chapter 3 deposit obligations and that has withheld any 
amount under Sec. 1.5000C-2 during any calendar month must deposit that 
amount by the 15th day of the month following the payment. To the extent 
provided in forms, instructions, or publications prescribed by the 
Internal Revenue Service (IRS), acquiring agencies must deposit all 
withheld amounts by electronic funds transfer, as that term is defined 
in Sec. 31.6302-1(h)(4)(i) of this chapter.
    (c) Return requirements--(1) In general. Except as provided in 
paragraph (c)(2) of this section, an acquiring agency that withholds an 
amount pursuant to section 5000C generally must file Form 1042-S, 
``Foreign Person's U.S. Source Income Subject to Withholding,'' and Form 
1042, ``Annual Withholding Tax Return for U.S. Source Income of Foreign 
Persons,'' each year, or other such forms as the IRS may prescribe, to 
report information related to amounts withheld under section 5000C. The 
acquiring agency must prepare a Form 1042-S for each contracting party 
reporting the amount withheld under section 5000C for the preceding 
calendar year. The Form 1042 must show the aggregate amounts withheld 
under section 5000C that were required to be reported on Forms 1042-S 
(including those amounts withheld under section 5000C for which a Form 
1042-S is not required to be filed pursuant to paragraph (c)(2) of this 
section). The Form 1042 must also include the information required by 
the form and accompanying instructions. Further, any forms required 
under this paragraph (c) are due at the same time, at the same place, 
and eligible for the same extended due dates and may be amended in the 
same manner as Form 1042 and Form 1042-S (or such other forms as the IRS 
may prescribe related to chapter 3). The acquiring agency must furnish a 
copy of the Form 1042-S (or such other form as the IRS may prescribe for 
the same purpose) to the contracting party for whom the form is prepared 
on or before March 15 of the calendar year following the year in which 
the amount subject to reporting under section 5000C was paid. It must be 
filed with a transmittal form as provided in the instructions for Form 
1042-S and to the transmittal form. Section 5000C Certificates or other 
statements or information as prescribed by Sec. 1.5000C-2 that are 
provided to the acquiring agency are not required to be attached to the 
Form 1042 filed with the IRS. However, an acquiring agency that is 
required to file Form 1042 must retain a copy of Form 1042, Form 1042-S, 
the Section 5000C Certificates, or other statements or information 
prescribed by Sec. 1.5000C-2 for at least three years from the original 
due date of Form 1042 or the date it was filed, whichever is later. An 
acquiring agency that is not required to file Form 1042 must retain any 
Section 5000C Certificates or other statements or information as 
prescribed by Sec. 1.5000C-2 for at least three years from the date the 
Form 1042 would have been due had the acquiring agency had an obligation 
to file.
    (2) Classified or confidential contracts. An acquiring agency is not 
required to report information otherwise required by this section on 
Form 1042-S for payments made pursuant to classified or confidential 
contracts (as described in

[[Page 72]]

section 6050M(e)(3)), unless the acquiring agency determines that the 
information reported on the Form 1042-S does not compromise the 
safeguarding of classified information or national security.
    (d) Special arrangement for certain contracts. In limited 
circumstances, the IRS may authorize the amount otherwise required to be 
withheld under section 5000C to be deposited in the time and manner 
mutually agreed upon by the acquiring agency and the foreign contracting 
party. In these circumstances, the IRS may in its sole discretion also 
modify any reporting or return requirements of the acquiring agency or 
the foreign contracting party.

[T.D. 9782, 81 FR 55138, Aug. 18, 2016]



Sec. 1.5000C-4  Requirement for the foreign contracting party to file
a return and pay tax, and procedures for the contracting party to
seek a refund.

    (a) In general. For purposes of subtitle F of the Internal Revenue 
Code (``Procedure and Administration''), the tax imposed under section 
5000C on foreign persons is treated as a tax imposed under subtitle A. 
Except as provided elsewhere in the regulations under section 5000C, 
forms, or accompanying instructions, the tax imposed on foreign 
contracting parties under section 5000C is administered in a manner 
similar to gross basis income taxes. This section provides procedures 
that a foreign contracting party must follow to satisfy its obligations 
to report and deposit tax due under Sec. 1.5000C-1 as well as 
procedures for contracting parties to seek a refund of amounts 
overwithheld.
    (b) Tax obligation of foreign contracting party independent of 
withholding. A foreign contracting party subject to tax under section 
5000C and Sec. Sec. 1.5000C-1 through 1.5000C-7 remains liable for the 
tax unless its tax obligation was fully satisfied by withholding by an 
acquiring agency in accordance with Sec. Sec. 1.5000C-2 and 1.5000C-3.
    (c) Return of tax by the foreign contracting party. If the tax 
liability under Sec. 1.5000C-1 relating to a payment is not fully 
satisfied by withholding in accordance with Sec. Sec. 1.5000C-2 and 
1.5000C-3 (including as a result of the use of an estimated nonexempt 
amount or estimated total contract price in computing the contract 
ratio), a foreign contracting party subject to tax under Sec. 1.5000C-1 
during a calendar year must make a return of tax on, for example, Form 
1120-F, ``U.S. Income Tax Return of a Foreign Corporation,'' or such 
other form as the Internal Revenue Service (IRS) may prescribe to report 
the amount of tax due under section 5000C (required return). A foreign 
contracting party with no other U.S. tax filing obligation other than 
with respect to its liability for the tax imposed under section 5000C 
must file its required return on or before the fifteenth day of the 
sixth month following the close of its taxable year. The required return 
must include the information required by the form and accompanying 
instructions. The required return must be filed at the place and time 
(including any extension of time to file) provided by the form and 
accompanying instructions. Penalties for failure to file contained in 
Subtitle F can apply to foreign contracting parties who fail to file the 
required return. A foreign contracting party must attach copies of all 
Forms 1042-S, ``Foreign Person's U.S. Source Income Subject to 
Withholding,'' received from acquiring agencies (if any) to the required 
return.
    (d) Time and manner of paying tax. A foreign contracting party must 
pay the tax imposed under section 5000C in the manner provided and in 
the time prescribed in the required return and accompanying 
instructions. In general, the foreign contracting party must pay the tax 
at the time that the required return is due, excluding extensions. To 
the extent provided in forms, instructions, or publications prescribed 
by the IRS, each foreign contracting party must deposit tax due under 
section 5000C by electronic funds transfer, as that term is defined in 
Sec. 31.6302-1(h)(4)(i) of this chapter. A foreign contracting party 
that fails to pay tax in the time and manner prescribed in this section 
(or under forms, instructions, or publications prescribed by the IRS 
under this section) may be subject to penalties and interest under 
Subtitle F.

[[Page 73]]

    (e) Refund requests when amount withheld exceeds tax liability. 
After taking into account any offsets pursuant to Sec. 1.5000C-2(e)(3), 
if the acquiring agency has overwithheld amounts under section 5000C and 
has made a deposit of the amounts under Sec. 1.5000C-3(b), the 
contracting party may claim a refund of the amount overwithheld pursuant 
to the procedures described in chapter 65. The contracting party's claim 
for refund must meet the requirements of section 6402 and the 
regulations thereunder, as applicable, and must be filed before the 
expiration of the period of limitations on refund in section 6511 and 
the regulations thereunder. In general, the contracting party making a 
refund claim must file the required return to claim a refund, stating 
the grounds upon which the claim is based. A Section 5000C Certificate 
and a copy of the Form 1042-S received from the acquiring agency must be 
attached to the required return. For purposes of this section, an amount 
is overwithheld if the amount withheld from the payment pursuant to 
section 5000C and Sec. Sec. 1.5000C-1 through 1.5000C-7 exceeds the 
contracting party's tax liability under Sec. 1.5000C-1, regardless of 
whether the overwithholding was in error or appeared correct when it 
occurred. A U.S. person may seek a refund under this paragraph (e) even 
if it was treated as a foreign person under the rules in Sec. 1.5000C-2 
(for example, because it neither had a taxpayer identification number on 
file in the System for Award Management nor submitted Form W-9, 
``Request for Taxpayer Identification Number (TIN) and Certification,'' 
to the acquiring agency).

[T.D. 9782, 81 FR 55138, Aug. 18, 2016]



Sec. 1.5000C-5  Anti-abuse rule.

    If a foreign person engages in a transaction (or series of 
transactions) with a principal purpose of avoiding the tax imposed under 
section 5000C, the transaction (or series of transactions) may be 
disregarded or the arrangement may be recharacterized (including 
disregarding an intermediate entity), in accordance with its substance. 
If this section applies, the foreign person remains liable for any tax 
(including any tax obligation unsatisfied as a result of 
underwithholding) and the Internal Revenue Service retains all other 
rights and remedies under any applicable law available to collect any 
tax imposed on the foreign contracting party by section 5000C.

[T.D. 9782, 81 FR 55138, Aug. 18, 2016]



Sec. 1.5000C-6  Examples.

    The rules of Sec. Sec. 1.5000C-1 through 1.5000C-4 are illustrated 
by the following examples. For purposes of the examples: All contracts 
are executed with acquiring agencies on or after January 2, 2011, and 
are for the provision of either goods or services; none of the 
exemptions described in Sec. 1.5000C-1(d) apply, unless otherwise 
explicitly stated; the acquiring agencies have no other withholding 
obligations under chapter 3 of the Code and have no other contracts 
subject to section 5000C; the foreign contracting parties do not have 
any U.S. source income or a U.S. tax return filing obligation other than 
a tax return filing obligation that arises based on the facts described 
in the particular example; and none of the contracts are classified or 
confidential contracts as described in section 6050M(e)(3).

    Example 1. U.S. person not subject to tax; no withholding. (i) 
Facts. Company A Inc., a domestic corporation and the contracting party, 
enters into a contract with Agency L, the acquiring agency. Before 
making its first payment under the contract (for example, on the date of 
execution of the contract), pursuant to the first step in Sec. 1.5000C-
2(b), Agency L determines that the contract will be for services. Under 
the second step, Agency L reviews Company A Inc.'s record in the System 
for Award Management (SAM) and determines that Company A is a 
corporation and is considered to be a U.S. person because Agency L's 
records demonstrate that Company A Inc. is a business entity treated as 
a corporation for tax purposes that has a TIN that does not begin with 
``98.''
    (ii) Analysis. Company A Inc. is a U.S. person and thus is not 
subject to the tax under section 5000C. Moreover, because Company A Inc. 
is a corporation for tax purposes that has a TIN that does not begin 
with ``98,'' Agency L is able to determine that it has no obligation to 
withhold any amounts under section 5000C on the payment made to Company 
A Inc. For purposes of section 5000C, Company A Inc. could also 
establish that it is a U.S. person by providing a Form W-9, ``Request 
for Taxpayer Identification Number (TIN) and Certification,'' to Agency 
L.

[[Page 74]]

Company A Inc. does not need to file a Section 5000C Certificate to 
demonstrate its eligibility for an exemption from withholding.
    Example 2. Foreign national entitled to the benefit of a 
nondiscrimination provision of a treaty; no withholding. (i) Facts. 
Company B, a foreign contracting party and a national of Country T, 
provides goods to Agency M, the acquiring agency. Company B determines 
that it is exempt from tax under section 5000C because it is entitled to 
the benefit of the nondiscrimination article of a qualified income tax 
treaty between the United States and Country T. Company B submits a 
Section 5000C Certificate to Agency M when the contract is executed. 
Company B uses Form W-14, ``Certificate of Foreign Contracting Party 
Receiving Federal Procurement Payments,'' and properly fills the 
relevant sections stating the name of the treaty, the specific article 
relied upon, and the basis on which it is entitled to the benefits of 
that article. Following the steps in Sec. 1.5000C-2, Agency M 
determines that the nondiscrimination provision of the Country T-United 
States income tax treaty applies to exempt Company B from the tax 
imposed under section 5000C. Agency M makes one lump sum payment of $50 
million to Company B pursuant to the contract.
    (ii) Analysis. Company B has no liability for tax under section 
5000C because it is entitled to the benefit of a nondiscrimination 
article of a qualified income tax treaty. Because Company B submitted a 
Section 5000C Certificate meeting the requirements in Sec. 1.5000C-2 
and Agency M does not have reason to know that the submitted information 
is incorrect or unreliable, Agency M is not required to withhold under 
section 5000C. Agency M must retain the Section 5000C Certificate for at 
least three years pursuant to Sec. 1.5000C-3(c)(1) from the due date 
for the Form 1042 (if it were required).
    Example 3. Foreign treaty beneficiary does not submit Section 5000C 
Certificate; withholding required. (i) Facts. The facts are the same as 
in Example 2, except that Company B does not submit a Section 5000C 
Certificate to Agency M before Agency M makes the $50 million payment.
    (ii) Analysis. Company B is not subject to tax under section 5000C, 
but Agency M must nevertheless withhold on the payment made to Company B 
because Agency M did not receive a Section 5000C Certificate from 
Company B in the time and manner required pursuant to Sec. 1.5000C-
2(d). Agency M must withhold $1 million (2 percent of $50 million) on 
the payment, and deposit that amount under the rules in Sec. 1.5000C-3 
no later than the 15th day of the month following the month in which the 
payment was made. Agency M must also complete Forms 1042, ``Annual 
Withholding Tax Return for U.S. Source Income of Foreign Persons,'' and 
1042-S, ``Foreign Person's U.S. Source Income Subject to Withholding,'' 
on or before the date specified on those forms and the accompanying 
instructions. Agency M must furnish copies of Form 1042-S to Company B. 
Agency M must retain a copy of the Form 1042 and the Form 1042-S for 3 
years from the due date for the Form 1042 pursuant to Sec. 1.5000C-
3(c)(1). As Company B is not liable for the tax, it may later file a 
claim for refund pursuant to the procedures described in chapter 65.
    Example 4. Foreign contracting party partially exempt from tax under 
section 5000C when goods are manufactured in different countries. (i) 
Facts. Company C, a foreign contracting party, provides goods to Agency 
N in 2015. The terms of the contract require that payment be made to 
Company C by Agency N in two $5 million installments in 2015. Company C 
has a TIN that begins with ``98'' and is not entitled to relief pursuant 
to an international agreement with the United States, such as relief 
pursuant to a nondiscrimination provision of a qualified income tax 
treaty. Some of the goods are manufactured in Country R, which is a 
party to an international procurement agreement with the United States, 
with the remainder being manufactured in Country S, a country that is 
not a party to an international procurement agreement with the United 
States. Company C uses a reasonable allocation method based on the 
information available to it at the time in accordance with Sec. 
1.5000C-1(e)(3) to estimate that $3 million is the nonexempt amount that 
is allocated to the goods produced in Country S. Company C submits a 
valid and complete Section 5000C Certificate to Agency N in the time and 
manner required by Sec. Sec. 1.5000C-1 through 1.5000C-7 that provides 
that the nonexempt amount is $3 million. In 2015, Agency N pays Company 
C in two installments pursuant to the terms of the contract.
    (ii) Analysis. Using a reasonable allocation method to determine the 
estimated nonexempt amount, Company C determines that pursuant to 
section 5000C and Sec. Sec. 1.5000C-1 through 1.5000C-7, tax of $30,000 
(2 percent of the $5 million payment, or $100,000 multiplied by a 
fraction, the numerator of which is the estimated nonexempt amount, $3 
million, and the denominator of which is the estimated total contract 
price, or $10 million) is imposed on each payment made to Company C. 
Because Company C has timely submitted a Section 5000C Certificate 
explaining the basis for this allocation, Agency N withholds $30,000 on 
each payment made to Company C. Agency N must deposit each $30,000 
withholding tax under the rules in Sec. 1.5000C-3 no later than the 
15th day of the month following the month in which each payment is made. 
Agency N must also complete Forms 1042 and 1042-S and furnish copies of 
Form 1042-S to Company C. Agency N must retain a copy of the Form 1042 
and the Form 1042-S for at least three years from the due date

[[Page 75]]

for the Form 1042 pursuant to Sec. 1.5000C-3(c)(1). Provided that 
Agency N properly withholds on the nonexempt portion as required under 
section 5000C and Sec. Sec. 1.5000C-1 through 1.5000C-7 and that 
Company C's estimate of the nonexempt amount is the actual nonexempt 
amount, Company C does not have an additional tax liability or a U.S. 
tax return filing obligation as a result of receiving the payments.
    Example 5. Foreign contracting party liable for additional tax under 
Section 5000C not fully withheld upon due to errors on the Section 5000C 
Certificate. (i) Facts. The facts are the same as in Example 4, except 
that the Section 5000C Certificate submitted to Agency N by Company C 
erroneously provides that the estimated nonexempt amount is $1.5 million 
instead of $3 million. As a result, Agency N only withholds $15,000 (2 
percent of the $5 million payment multiplied by a fraction (the 
numerator of which is the estimated nonexempt amount stated on the 
Section 5000C Certificate, $1.5 million, and the denominator of which is 
the estimated total contract price, or $10 million)) on each payment 
made to Company C. Agency N neither discovered nor had reason to know 
that the information on the Section 5000C Certificate was incorrect or 
unreliable. After both payments have been made and after the filing due 
date for Form 1042 for 2015, Company C determines that the estimated 
nonexempt amount should have been stated as $3 million on the Section 
5000C Certificate.
    (ii) Analysis. The tax imposed under section 5000C on Company C as a 
result of the receipt of specified Federal procurement payments is 
$60,000 and this amount has not been fully satisfied by withholding by 
Agency N. Accordingly, Company C must remit additional tax of $30,000 
($60,000 tax liability less $30,000 amounts already withheld by Agency 
N) and file its required return, a Form 1120-F, ``U.S. Income Tax Return 
of a Foreign Corporation,'' for 2015 to report this tax liability, as 
required by Sec. 1.5000C-4. Company C must explain its corrected 
allocation method in its Form 1120-F. Company C must also attach a copy 
of the Form 1042-S it received from Agency N to Form 1120-F.
    Example 6. Foreign contracting party submits revised Section 5000C 
Certificate due to change in circumstances. (i) Facts. The facts are the 
same as in Example 4, except that, after the first payment, Company C 
changes its business so that all of the goods manufactured with respect 
to the second payment are manufactured in Country R. Prior to the second 
payment, Company C submits a revised Section 5000C Certificate 
indicating this change in circumstance pursuant to Sec. 1.5000C-
2(d)(6).
    (ii) Analysis. Agency N withholds $30,000 on the first payment made 
to Company C and does not withhold on the second payment. Company C does 
not have an additional tax liability or a U.S. tax return filing 
obligation as a result of receiving the payments.

[T.D. 9782, 81 FR 55138, Aug. 18, 2016]



Sec. 1.5000C-7  Effective/applicability date.

    Section 5000C applies to specified Federal procurement payments 
received pursuant to contracts entered into on and after January 2, 
2011. Sections 1.5000C-1 through 1.5000C-7 apply on and after November 
16, 2016. Contracting parties and acquiring agencies may rely upon the 
rules in the regulations before such date. If a foreign contracting 
party fully satisfies its tax and filing obligations under section 5000C 
with respect to any payments received in tax years ending before 
November 16, 2016 on or before the later of November 16, 2016 or the due 
date for the foreign person's income tax return for the year in which 
the payment was received in a manner consistent with the final 
regulations, penalties will not be asserted on the foreign contracting 
parties with respect to those payments or returns.

[T.D. 9782, 81 FR 55138, Aug. 18, 2016]

                           Returns and Records

    Source: Sections 1.6001-1 through 1.6091-4 contained in T.D. 6500, 
25 FR 12108, Nov. 26, 1960, unless otherwise noted.

                Records, Statements, and Special Returns



Sec. 1.6001-1  Records.

    (a) In general. Except as provided in paragraph (b) of this section, 
any person subject to tax under subtitle A of the Code (including a 
qualified State individual income tax which is treated pursuant to 
section 6361(a) as if it were imposed by chapter 1 of subtitle A), or 
any person required to file a return of information with respect to 
income, shall keep such permanent books of account or records, including 
inventories, as are sufficient to establish the amount of gross income, 
deductions, credits, or other matters required to be shown by such 
person in any return of such tax or information.
    (b) Farmers and wage-earners. Individuals deriving gross income from 
the business of farming, and individuals

[[Page 76]]

whose gross income includes salaries, wages, or similar compensation for 
personal services rendered, are required with respect to such income to 
keep such records as will enable the district director to determine the 
correct amount of income subject to the tax. It is not necessary, 
however, that with respect to such income individuals keep the books of 
account or records required by paragraph (a) of this section. For rules 
with respect to the records to be kept in substantiation of traveling 
and other business expenses of employees, see Sec. 1.162-17.
    (c) Exempt organizations. In addition to such permanent books and 
records as are required by paragraph (a) of this section with respect to 
the tax imposed by section 511 on unrelated business income of certain 
exempt organizations, every organization exempt from tax under section 
501(a) shall keep such permanent books of account or records, including 
inventories, as are sufficient to show specifically the items of gross 
income, receipts and disbursements. Such organizations shall also keep 
such books and records as are required to substantiate the information 
required by section 6033. See section 6033 and Sec. Sec. 1.6033-1 
through 1.6033-3.
    (d) Notice by district director requiring returns statements, or the 
keeping of records. The district director may require any person, by 
notice served upon him, to make such returns, render such statements, or 
keep such specific records as will enable the district director to 
determine whether or not such person is liable for tax under subtitle A 
of the Code, including qualified State individual income taxes, which 
are treated pursuant to section 6361(a) as if they were imposed by 
chapter 1 of subtitle A.
    (e) Retention of records. The books or records required by this 
section shall be kept at all times available for inspection by 
authorized internal revenue officers or employees, and shall be retained 
so long as the contents thereof may become material in the 
administration of any internal revenue law.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 7122, 36 FR 
11025, June 8, 1971; T.D. 7577, 43 FR 59357, Dec. 20, 1978; T.D. 8308, 
55 FR 35593, Aug. 31, 1990]



Sec. 1.6001-2  Returns.

    For rules relating to returns required to be made by every 
individual, estate, or trust which is liable for one or more qualified 
State individual income taxes, as defined in section 6362, for a taxable 
year, see paragraph (b) of Sec. 301.6361-1 of this chapter (Regulations 
on procedure and Administration).

[T.D. 7577, 43 FR 59357, Dec. 20, 1978]

                        tax returns or statements



Sec. 1.6011-1  General requirement of return, statement, or list.

    (a) General rule. Every person subject to any tax, or required to 
collect any tax, under Subtitle A of the Code, shall make such returns 
or statements as are required by the regulations in this chapter. The 
return or statement shall include therein the information required by 
the applicable regulations or forms.
    (b) Use of prescribed forms. Copies of the prescribed return forms 
will so far as possible be furnished taxpayers by district directors. A 
taxpayer will not be excused from making a return, however, by the fact 
that no return form has been furnished to him. Taxpayers not supplied 
with the proper forms should make application therefor to the district 
director in ample time to have their returns prepared, verified, and 
filed on or before the due date with the internal revenue office where 
such returns are required to be filed. Each taxpayer should carefully 
prepare his return and set forth fully and clearly the information 
required to be included therein. Returns which have not been so prepared 
will not be accepted as meeting the requirements of the Code. In the 
absence of a prescribed form, a statement made by a taxpayer disclosing 
his gross income and the deductions therefrom may be accepted as a 
tentative return, and, if filed within the prescribed time, the 
statement so made will relieve the taxpayer from liability for the 
addition to tax imposed for the delinquent filing of the return, 
provided that without unnecessary delay such a tentative return is 
supplemented by a return made on the proper form.

[[Page 77]]

    (c) Tax withheld on nonresident aliens and foreign corporations. For 
requirements respecting the return of the tax required to be withheld 
under chapter 3 of the Code on nonresident aliens and foreign 
corporations and tax-free covenant bonds, see Sec. 1.1461-2.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6922, 32 FR 
8713, June 17, 1967]



Sec. 1.6011-2  Returns, etc., of DISC's and former DISC's.

    (a) Records and information. Every DISC and former DISC (as defined 
in section 992(a)) must comply with section 6001 and the regulations 
thereunder, relating to required records, statements, and special 
returns. Thus, for example, a DISC is required to maintain the books of 
account or records described in Sec. 1.6001-1(a). In addition, every 
DISC must furnish to each of its shareholders on or before the last day 
of the second month following the close of the taxable year of the DISC 
a copy of Schedule K (Form 1120-DISC) disclosing the amounts of actual 
distributions and deemed distributions from the DISC to such shareholder 
for the taxable year of the DISC. In the case of a deficiency 
distribution to meet qualification requirements, see Sec. 1.992-3(a)(4) 
for requirements that distribution be designated in the form of a 
communication sent to a shareholder and service center at the time of 
distribution.
    (b) Returns--(1) Requirement of return. Every DISC (as defined in 
section 992(a)(1)) shall make a return of income. A former DISC (as 
defined in section 992(a)(3)) shall also make a return of income in 
addition to any other return required. The return required of a DISC or 
former DISC under this section shall be made on Form 1120-DISC. The 
provisions of Sec. 1.6011-1 shall apply with respect to a DISC and 
former DISC. A former DISC should indicate clearly on Form 1120-DISC 
that it is making a return of income as a former DISC (for example, by 
labeling at the top of the Form 1120-DISC ``Former DISC''). In the case 
of a former DISC, those items on the form which pertain to the 
computation of taxable income shall not be completed, but Schedules J, 
K, L, and M must be completed. Except as otherwise specifically provided 
in the Code or regulations, the return of a DISC or former DISC is 
considered to be an income tax return.
    (2) Existence of DISC. A corporation which is a DISC and which is in 
existence during any portion of a taxable year is required to make a 
return for that fractional part of its taxable year during which it was 
in existence.

[T.D. 7533, 43 FR 6603, Feb. 15, 1978]



Sec. 1.6011-3  Requirement of statement from payees of certain
gambling winnings.

    (a) General rule. Except as provided in paragraph (c) of this 
section, any person receiving a payment with respect to a wager in a 
sweepstakes, wagering pool, lottery, or other wagering transaction 
(including a parimutuel pool with respect to horse races, dog races, or 
jai alai) shall make a statement to the payer of such winnings upon the 
payer's demand. Such statements shall accompany the payer's return made 
with respect to the payment as required pursuant to section 3402(q) or 
6041, as the case may be.
    (b) Contents of statement. The statement referred to in paragraph 
(a) shall contain information (in addition to that required under 
section 6041(c)) as to the amount, if any, of winnings from identical 
wagers to which the recipient is entitled. If any person other than the 
recipient is entitled to all or a portion of the payment, the statement 
shall also include information as to the amount, if any, of winnings 
from identical wagers to which each such person is entitled. The 
statement shall be provided on Form W-2G or, if persons other than the 
recipient are entitled to all or a portion of such payment, on Form 
5754.
    (c) Exception. The requirement of paragraph (a) of this section does 
not apply with respect to any payment of winnings--
    (1) From a slot machine play, or a bingo or keno game,
    (2) Which is subject to withholding under section 3402(q) without 
regard to the existence of winnings from identical wagers, or
    (3) For which no return of information under section 6041 is 
required of the payer.

[[Page 78]]

    (d) Meaning of terms, For purposes of this section, the terms 
``sweepstakes'', ``wagering pool'', ``lottery'', ``other wagering 
transaction'' and ``identical wagers'' shall have the same meanings as 
ascribed to them under Sec. 31.3402(q)-1.

[T.D. 7919, 48 FR 46297, Oct. 12, 1983]



Sec. 1.6011-4  Requirement of statement disclosing participation 
in certain transactions by taxpayers.

    (a) In general. Every taxpayer that has participated, as described 
in paragraph (c)(3) of this section, in a reportable transaction within 
the meaning of paragraph (b) of this section and who is required to file 
a tax return must file within the time prescribed in paragraph (e) of 
this section a disclosure statement in the form prescribed by paragraph 
(d) of this section. The fact that a transaction is a reportable 
transaction shall not affect the legal determination of whether the 
taxpayer's treatment of the transaction is proper.
    (b) Reportable transactions--(1) In general. A reportable 
transaction is a transaction described in any of the paragraphs (b)(2) 
through (7) of this section. The term transaction includes all of the 
factual elements relevant to the expected tax treatment of any 
investment, entity, plan, or arrangement, and includes any series of 
steps carried out as part of a plan.
    (2) Listed transactions. A listed transaction is a transaction that 
is the same as or substantially similar to one of the types of 
transactions that the Internal Revenue Service (IRS) has determined to 
be a tax avoidance transaction and identified by notice, regulation, or 
other form of published guidance as a listed transaction.
    (3) Confidential transactions--(i) In general. A confidential 
transaction is a transaction that is offered to a taxpayer under 
conditions of confidentiality and for which the taxpayer has paid an 
advisor a minimum fee.
    (ii) Conditions of confidentiality. A transaction is considered to 
be offered to a taxpayer under conditions of confidentiality if the 
advisor who is paid the minimum fee places a limitation on disclosure by 
the taxpayer of the tax treatment or tax structure of the transaction 
and the limitation on disclosure protects the confidentiality of that 
advisor's tax strategies. A transaction is treated as confidential even 
if the conditions of confidentiality are not legally binding on the 
taxpayer. A claim that a transaction is proprietary or exclusive is not 
treated as a limitation on disclosure if the advisor confirms to the 
taxpayer that there is no limitation on disclosure of the tax treatment 
or tax structure of the transaction.
    (iii) Minimum fee. For purposes of this paragraph (b)(3), the 
minimum fee is--
    (A) $250,000 for a transaction if the taxpayer is a corporation;
    (B) $50,000 for all other transactions unless the taxpayer is a 
partnership or trust, all of the owners or beneficiaries of which are 
corporations (looking through any partners or beneficiaries that are 
themselves partnerships or trusts), in which case the minimum fee is 
$250,000.
    (iv) Determination of minimum fee. For purposes of this paragraph 
(b)(3), in determining the minimum fee, all fees for a tax strategy or 
for services for advice (whether or not tax advice) or for the 
implementation of a transaction are taken into account. Fees include 
consideration in whatever form paid, whether in cash or in kind, for 
services to analyze the transaction (whether or not related to the tax 
consequences of the transaction), for services to implement the 
transaction, for services to document the transaction, and for services 
to prepare tax returns to the extent return preparation fees are 
unreasonable in light of the facts and circumstances. For purposes of 
this paragraph (b)(3), a taxpayer also is treated as paying fees to an 
advisor if the taxpayer knows or should know that the amount it pays 
will be paid indirectly to the advisor, such as through a referral fee 
or fee-sharing arrangement. A fee does not include amounts paid to a 
person, including an advisor, in that person's capacity as a party to 
the transaction. For example, a fee does not include reasonable charges 
for the use of capital or the sale or use of property. The IRS will 
scrutinize carefully all of the facts and circumstances in determining 
whether consideration received in connection with a confidential 
transaction constitutes fees.

[[Page 79]]

    (v) Related parties. For purposes of this paragraph (b)(3), persons 
who bear a relationship to each other as described in section 267(b) or 
707(b) will be treated as the same person.
    (4) Transactions with contractual protection--(i) In general. A 
transaction with contractual protection is a transaction for which the 
taxpayer or a related party (as described in section 267(b) or 707(b)) 
has the right to a full or partial refund of fees (as described in 
paragraph (b)(4)(ii) of this section) if all or part of the intended tax 
consequences from the transaction are not sustained. A transaction with 
contractual protection also is a transaction for which fees (as 
described in paragraph (b)(4)(ii) of this section) are contingent on the 
taxpayer's realization of tax benefits from the transaction. All the 
facts and circumstances relating to the transaction will be considered 
when determining whether a fee is refundable or contingent, including 
the right to reimbursements of amounts that the parties to the 
transaction have not designated as fees or any agreement to provide 
services without reasonable compensation.
    (ii) Fees. Paragraph (b)(4)(i) of this section only applies with 
respect to fees paid by or on behalf of the taxpayer or a related party 
to any person who makes or provides a statement, oral or written, to the 
taxpayer or related party (or for whose benefit a statement is made or 
provided to the taxpayer or related party) as to the potential tax 
consequences that may result from the transaction.
    (iii) Exceptions--(A) Termination of transaction. A transaction is 
not considered to have contractual protection solely because a party to 
the transaction has the right to terminate the transaction upon the 
happening of an event affecting the taxation of one or more parties to 
the transaction.
    (B) Previously reported transaction. If a person makes or provides a 
statement to a taxpayer as to the potential tax consequences that may 
result from a transaction only after the taxpayer has entered into the 
transaction and reported the consequences of the transaction on a filed 
tax return, and the person has not previously received fees from the 
taxpayer relating to the transaction, then any refundable or contingent 
fees are not taken into account in determining whether the transaction 
has contractual protection. This paragraph (b)(4) does not provide any 
substantive rules regarding when a person may charge refundable or 
contingent fees with respect to a transaction. See Circular 230, 31 CFR 
part 10, for the regulations governing practice before the IRS.
    (5) Loss transactions--(i) In general. A loss transaction is any 
transaction resulting in the taxpayer claiming a loss under section 165 
of at least--
    (A) $10 million in any single taxable year or $20 million in any 
combination of taxable years for corporations;
    (B) $10 million in any single taxable year or $20 million in any 
combination of taxable years for partnerships that have only 
corporations as partners (looking through any partners that are 
themselves partnerships), whether or not any losses flow through to one 
or more partners; or
    (C) $2 million in any single taxable year or $4 million in any 
combination of taxable years for all other partnerships, whether or not 
any losses flow through to one or more partners;
    (D) $2 million in any single taxable year or $4 million in any 
combination of taxable years for individuals, S corporations, or trusts, 
whether or not any losses flow through to one or more shareholders or 
beneficiaries; or
    (E) $50,000 in any single taxable year for individuals or trusts, 
whether or not the loss flows through from an S corporation or 
partnership, if the loss arises with respect to a section 988 
transaction (as defined in section 988(c)(1) relating to foreign 
currency transactions).
    (ii) Cumulative losses. In determining whether a transaction results 
in a taxpayer claiming a loss that meets the threshold amounts over a 
combination of taxable years as described in paragraph (b)(5)(i) of this 
section, only losses claimed in the taxable year that the transaction is 
entered into and the five succeeding taxable years are combined.
    (iii) Section 165 loss--(A) For purposes of this section, in 
determining the thresholds in paragraph (b)(5)(i) of this section, the 
amount of a section 165

[[Page 80]]

loss is adjusted for any salvage value and for any insurance or other 
compensation received. See Sec. 1.165-1(c)(4). However, a section 165 
loss does not take into account offsetting gains, or other income or 
limitations. For example, a section 165 loss does not take into account 
the limitation in section 165(d) (relating to wagering losses) or the 
limitations in sections 165(f), 1211, and 1212 (relating to capital 
losses). The full amount of a section 165 loss is taken into account for 
the year in which the loss is sustained, regardless of whether all or 
part of the loss enters into the computation of a net operating loss 
under section 172 or a net capital loss under section 1212 that is a 
carryback or carryover to another year. A section 165 loss does not 
include any portion of a loss, attributable to a capital loss carryback 
or carryover from another year, that is treated as a deemed capital loss 
under section 1212.
    (B) For purposes of this section, a section 165 loss includes an 
amount deductible pursuant to a provision that treats a transaction as a 
sale or other disposition, or otherwise results in a deduction under 
section 165. A section 165 loss includes, for example, a loss resulting 
from a sale or exchange of a partnership interest under section 741 and 
a loss resulting from a section 988 transaction.
    (6) Transactions of interest. A transaction of interest is a 
transaction that is the same as or substantially similar to one of the 
types of transactions that the IRS has identified by notice, regulation, 
or other form of published guidance as a transaction of interest.
    (7) [Reserved]
    (8) Exceptions--(i) In general. A transaction will not be considered 
a reportable transaction, or will be excluded from any individual 
category of reportable transaction under paragraphs (b)(3) through (7) 
of this section, if the Commissioner makes a determination by published 
guidance that the transaction is not subject to the reporting 
requirements of this section. The Commissioner may make a determination 
by individual letter ruling under paragraph (f) of this section that an 
individual letter ruling request on a specific transaction satisfies the 
reporting requirements of this section with regard to that transaction 
for the taxpayer who requests the individual letter ruling.
    (ii) Special rule for RICs. For purposes of this section, a 
regulated investment company (RIC) as defined in section 851 or an 
investment vehicle that is owned 95 percent or more by one or more RICs 
at all times during the course of the transaction is not required to 
disclose a transaction that is described in any of paragraphs (b)(3) 
through (5) and (b)(7) of this section unless the transaction is also a 
listed transaction or a transaction of interest.
    (c) Definitions. For purposes of this section, the following 
definitions apply:
    (1) Taxpayer. The term taxpayer means any person described in 
section 7701(a)(1), including S corporations. Except as otherwise 
specifically provided in this section, the term taxpayer also includes 
an affiliated group of corporations that joins in the filing of a 
consolidated return under section 1501.
    (2) Corporation. When used specifically in this section, the term 
corporation means an entity that is required to file a return for a 
taxable year on any 1120 series form, or successor form, excluding S 
corporations.
    (3) Participation--(i) In general--(A) Listed transactions. A 
taxpayer has participated in a listed transaction if the taxpayer's tax 
return reflects tax consequences or a tax strategy described in the 
published guidance that lists the transaction under paragraph (b)(2) of 
this section. A taxpayer also has participated in a listed transaction 
if the taxpayer knows or has reason to know that the taxpayer's tax 
benefits are derived directly or indirectly from tax consequences or a 
tax strategy described in published guidance that lists a transaction 
under paragraph (b)(2) of this section. Published guidance may identify 
other types or classes of persons that will be treated as participants 
in a listed transaction. Published guidance also may identify types or 
classes of persons that will not be treated as participants in a listed 
transaction.
    (B) Confidential transactions. A taxpayer has participated in a 
confidential transaction if the taxpayer's tax return

[[Page 81]]

reflects a tax benefit from the transaction and the taxpayer's 
disclosure of the tax treatment or tax structure of the transaction is 
limited in the manner described in paragraph (b)(3) of this section. If 
a partnership's, S corporation's or trust's disclosure is limited, and 
the partner's, shareholder's, or beneficiary's disclosure is not 
limited, then the partnership, S corporation, or trust, and not the 
partner, shareholder, or beneficiary, has participated in the 
confidential transaction.
    (C) Transactions with contractual protection. A taxpayer has 
participated in a transaction with contractual protection if the 
taxpayer's tax return reflects a tax benefit from the transaction and, 
as described in paragraph (b)(4) of this section, the taxpayer has the 
right to the full or partial refund of fees or the fees are contingent. 
If a partnership, S corporation, or trust has the right to a full or 
partial refund of fees or has a contingent fee arrangement, and the 
partner, shareholder, or beneficiary does not individually have the 
right to the refund of fees or a contingent fee arrangement, then the 
partnership, S corporation, or trust, and not the partner, shareholder, 
or beneficiary, has participated in the transaction with contractual 
protection.
    (D) Loss transactions. A taxpayer has participated in a loss 
transaction if the taxpayer's tax return reflects a section 165 loss and 
the amount of the section 165 loss equals or exceeds the threshold 
amount applicable to the taxpayer as described in paragraph (b)(5)(i) of 
this section. If a taxpayer is a partner in a partnership, shareholder 
in an S corporation, or beneficiary of a trust and a section 165 loss as 
described in paragraph (b)(5) of this section flows through the entity 
to the taxpayer (disregarding netting at the entity level), the taxpayer 
has participated in a loss transaction if the taxpayer's tax return 
reflects a section 165 loss and the amount of the section 165 loss that 
flows through to the taxpayer equals or exceeds the threshold amounts 
applicable to the taxpayer as described in paragraph (b)(5)(i) of this 
section. For this purpose, a tax return is deemed to reflect the full 
amount of a section 165 loss described in paragraph (b)(5) of this 
section allocable to the taxpayer under this paragraph (c)(3)(i)(D), 
regardless of whether all or part of the loss enters into the 
computation of a net operating loss under section 172 or net capital 
loss under section 1212 that the taxpayer may carry back or carry over 
to another year.
    (E) Transactions of interest. A taxpayer has participated in a 
transaction of interest if the taxpayer is one of the types or classes 
of persons identified as participants in the transaction in the 
published guidance describing the transaction of interest.
    (F) [Reserved]
    (G) Shareholders of foreign corporations--(1) In general. A 
reporting shareholder of a foreign corporation participates in a 
transaction described in paragraphs (b)(2) through (5) and (b)(7) of 
this section if the foreign corporation would be considered to 
participate in the transaction under the rules of this paragraph (c)(3) 
if it were a domestic corporation filing a tax return that reflects the 
items from the transaction. A reporting shareholder of a foreign 
corporation participates in a transaction described in paragraph (b)(6) 
of this section only if the published guidance identifying the 
transaction includes the reporting shareholder among the types or 
classes of persons identified as participants. A reporting shareholder 
(and any successor in interest) is considered to participate in a 
transaction under this paragraph (c)(3)(i)(G) only for its first taxable 
year with or within which ends the first taxable year of the foreign 
corporation in which the foreign corporation participates in the 
transaction, and for the reporting shareholder's five succeeding taxable 
years.
    (2) Reporting shareholder. The term reporting shareholder means a 
United States shareholder (as defined in section 951(b)) in a controlled 
foreign corporation (as defined in section 957) or a 10 percent 
shareholder (by vote or value) of a qualified electing fund (as defined 
in section 1295).
    (ii) Examples. The following examples illustrate the provisions of 
paragraph (c)(3)(i) of this section:

    Example 1. Notice 2003-55 (2003-2 CB 395), which modified and 
superseded Notice 95-53 (1995-2 CB 334) (see Sec. 601.601(d)(2) of this 
chapter), describes a lease stripping transaction

[[Page 82]]

in which one party (the transferor) assigns the right to receive future 
payments under a lease of tangible property and treats the amount 
realized from the assignment as its current income. The transferor later 
transfers the property subject to the lease in a transaction intended to 
qualify as a transferred basis transaction, for example, a transaction 
described in section 351. The transferee corporation claims the 
deductions associated with the high basis property subject to the lease. 
The transferor's and transferee corporation's tax returns reflect tax 
positions described in Notice 2003-55. Therefore, the transferor and 
transferee corporation have participated in the listed transaction. In 
the section 351 transaction, the transferor will have received stock 
with low value and high basis from the transferee corporation. If the 
transferor subsequently transfers the high basis/low value stock to a 
taxpayer in another transaction intended to qualify as a transferred 
basis transaction and the taxpayer uses the stock to generate a loss, 
and if the taxpayer knows or has reason to know that the tax loss 
claimed was derived indirectly from the lease stripping transaction, 
then the taxpayer has participated in the listed transaction. 
Accordingly, the taxpayer must disclose the transaction and the manner 
of the taxpayer's participation in the transaction under the rules of 
this section. For purposes of this example, if a bank lends money to the 
transferor, transferee corporation, or taxpayer for use in their 
transactions, the bank has not participated in the listed transaction 
because the bank's tax return does not reflect tax consequences or a tax 
strategy described in the listing notice (nor does the bank's tax return 
reflect a tax benefit derived from tax consequences or a tax strategy 
described in the listing notice) nor is the bank described as a 
participant in the listing notice.
    Example 2. XYZ is a limited liability company treated as a 
partnership for tax purposes. X, Y, and Z are members of XYZ. X is an 
individual, Y is an S corporation, and Z is a partnership. XYZ enters 
into a confidential transaction under paragraph (b)(3) of this section. 
XYZ and X are bound by the confidentiality agreement, but Y and Z are 
not bound by the agreement. As a result of the transaction, XYZ, X, Y, 
and Z all reflect a tax benefit on their tax returns. Because XYZ's and 
X's disclosure of the tax treatment and tax structure are limited in the 
manner described in paragraph (b)(3) of this section and their tax 
returns reflect a tax benefit from the transaction, both XYZ and X have 
participated in the confidential transaction. Neither Y nor Z has 
participated in the confidential transaction because they are not 
subject to the confidentiality agreement.
    Example 3. P, a corporation, has an 80% partnership interest in PS, 
and S, an individual, has a 20% partnership interest in PS. P, S, and PS 
are calendar year taxpayers. In 2006, PS enters into a transaction and 
incurs a section 165 loss (that does not meet any of the exceptions to a 
section 165 loss identified in published guidance) of $12 million and 
offsetting gain of $3 million. On PS' 2006 tax return, PS includes the 
section 165 loss and the corresponding gain. PS must disclose the 
transaction under this section because PS' section 165 loss of $12 
million is equal to or greater than $2 million. P is allocated $9.6 
million of the section 165 loss and $2.4 million of the offsetting gain. 
P does not have to disclose the transaction under this section because 
P's section 165 loss of $9.6 million is not equal to or greater than $10 
million. S is allocated $2.4 million of the section 165 loss and 
$600,000 of the offsetting gain. S must disclose the transaction under 
this section because S's section 165 loss of $2.4 million is equal to or 
greater than $2 million.

    (4) Substantially similar. The term substantially similar includes 
any transaction that is expected to obtain the same or similar types of 
tax consequences and that is either factually similar or based on the 
same or similar tax strategy. Receipt of an opinion regarding the tax 
consequences of the transaction is not relevant to the determination of 
whether the transaction is the same as or substantially similar to 
another transaction. Further, the term substantially similar must be 
broadly construed in favor of disclosure. For example, a transaction may 
be substantially similar to a listed transaction even though it involves 
different entities or uses different Internal Revenue Code provisions. 
(See for example, Notice 2003-54 (2003-2 CB 363), describing a 
transaction substantially similar to the transactions in Notice 2002-50 
(2002-2 CB 98), and Notice 2002-65 (2002-2 CB 690).) The following 
examples illustrate situations where a transaction is the same as or 
substantially similar to a listed transaction under paragraph (b)(2) of 
this section. (Such transactions may also be reportable transactions 
under paragraphs (b)(3) through (7) of this section.) See Sec. 
601.601(d)(2)(ii)(b) of this chapter. The following examples illustrate 
the provisions of this paragraph (c)(4):

    Example 1. Notice 2000-44 (2000-2 CB 255) (see Sec. 
601.601(d)(2)(ii)(b) of this chapter), sets forth a listed transaction 
involving offsetting options transferred to a partnership

[[Page 83]]

where the taxpayer claims basis in the partnership for the cost of the 
purchased options but does not adjust basis under section 752 as a 
result of the partnership's assumption of the taxpayer's obligation with 
respect to the options. Transactions using short sales, futures, 
derivatives or any other type of offsetting obligations to inflate basis 
in a partnership interest would be the same as or substantially similar 
to the transaction described in Notice 2000-44. Moreover, use of the 
inflated basis in the partnership interest to diminish gain that would 
otherwise be recognized on the transfer of a partnership asset would 
also be the same as or substantially similar to the transaction 
described in Notice 2000-44. See Sec. 601.601(d)(2)(ii)(b).
    Example 2. Notice 2001-16 (2001-1 CB 730) (see Sec. 
601.601(d)(2)(ii)(b) of this chapter), sets forth a listed transaction 
involving a seller (X) who desires to sell stock of a corporation (T), 
an intermediary corporation (M), and a buyer (Y) who desires to purchase 
the assets (and not the stock) of T. M agrees to facilitate the sale to 
prevent the recognition of the gain that T would otherwise report. 
Notice 2001-16 describes M as a member of a consolidated group that has 
a loss within the group or as a party not subject to tax. Transactions 
utilizing different intermediaries to prevent the recognition of gain 
would be the same as or substantially similar to the transaction 
described in Notice 2001-16. An example is a transaction in which M is a 
corporation that does not file a consolidated return but which buys T 
stock, liquidates T, sells assets of T to Y, and offsets the gain on the 
sale of those assets with currently generated losses. See Sec. 
601.601(d)(2)(ii)(b).

    (5) Tax. The term tax means Federal income tax.
    (6) Tax benefit. A tax benefit includes deductions, exclusions from 
gross income, nonrecognition of gain, tax credits, adjustments (or the 
absence of adjustments) to the basis of property, status as an entity 
exempt from Federal income taxation, and any other tax consequences that 
may reduce a taxpayer's Federal income tax liability by affecting the 
amount, timing, character, or source of any item of income, gain, 
expense, loss, or credit.
    (7) Tax return. The term tax return means a Federal income tax 
return and a Federal information return.
    (8) Tax treatment. The tax treatment of a transaction is the 
purported or claimed Federal income tax treatment of the transaction.
    (9) Tax structure. The tax structure of a transaction is any fact 
that may be relevant to understanding the purported or claimed Federal 
income tax treatment of the transaction.
    (d) Form and content of disclosure statement. A taxpayer required to 
file a disclosure statement under this section must file a completed 
Form 8886, ``Reportable Transaction Disclosure Statement'' (or a 
successor form), in accordance with this paragraph (d) and the 
instructions to the form. The Form 8886 (or a successor form) is the 
disclosure statement required under this section. The form must be 
attached to the appropriate tax return(s) as provided in paragraph (e) 
of this section. If a copy of a disclosure statement is required to be 
sent to the Office of Tax Shelter Analysis (OTSA) under paragraph (e) of 
this section, it must be sent in accordance with the instructions to the 
form. To be considered complete, the information provided on the form 
must describe the expected tax treatment and all potential tax benefits 
expected to result from the transaction, describe any tax result 
protection (as defined in Sec. 301.6111-3(c)(12) of this chapter) with 
respect to the transaction, and identify and describe the transaction in 
sufficient detail for the IRS to be able to understand the tax structure 
of the reportable transaction and the identity of all parties involved 
in the transaction. An incomplete Form 8886 (or a successor form) 
containing a statement that information will be provided upon request is 
not considered a complete disclosure statement. If the form is not 
completed in accordance with the provisions in this paragraph (d) and 
the instructions to the form, the taxpayer will not be considered to 
have complied with the disclosure requirements of this section. If a 
taxpayer receives one or more reportable transaction numbers for a 
reportable transaction, the taxpayer must include the reportable 
transaction number(s) on the Form 8886 (or a successor form). See Sec. 
301.6111-3(d)(2) of this chapter.
    (e) Time of providing disclosure--(1) In general. The disclosure 
statement for a reportable transaction must be attached to the 
taxpayer's tax return for each taxable year for which a taxpayer 
participates in a reportable transaction. In addition, a disclosure 
statement for a reportable transaction must be attached to each amended 
return

[[Page 84]]

that reflects a taxpayer's participation in a reportable transaction. A 
copy of the disclosure statement must be sent to OTSA at the same time 
that any disclosure statement is first filed by the taxpayer pertaining 
to a particular reportable transaction. If a reportable transaction 
results in a loss which is carried back to a prior year, the disclosure 
statement for the reportable transaction must be attached to the 
taxpayer's application for tentative refund or amended tax return for 
that prior year. In the case of a taxpayer that is a partnership, an S 
corporation, or a trust, the disclosure statement for a reportable 
transaction must be attached to the partnership, S corporation, or 
trust's tax return for each taxable year in which the partnership, S 
corporation, or trust participates in the transaction under the rules of 
paragraph (c)(3)(i) of this section. If a taxpayer who is a partner in a 
partnership, a shareholder in an S corporation, or a beneficiary of a 
trust receives a timely Schedule K-1 less than 10 calendar days before 
the due date of the taxpayer's return (including extensions) and, based 
on receipt of the timely Schedule K-1, the taxpayer determines that the 
taxpayer participated in a reportable transaction within the meaning of 
paragraph (c)(3) of this section, the disclosure statement will not be 
considered late if the taxpayer discloses the reportable transaction by 
filing a disclosure statement with OTSA within 60 calendar days after 
the due date of the taxpayer's return (including extensions). The 
Commissioner in his discretion may issue in published guidance other 
provisions for disclosure under Sec. 1.6011-4.
    (2) Special rules--(i) Listed transactions and transactions of 
interest. In general, if a transaction becomes a listed transaction or a 
transaction of interest after the filing of a taxpayer's tax return 
(including an amended return) reflecting the taxpayer's participation in 
the listed transaction or transaction of interest and before the end of 
the period of limitations for assessment of tax for any taxable year in 
which the taxpayer participated in the listed transaction or transaction 
of interest, then a disclosure statement must be filed, regardless of 
whether the taxpayer participated in the transaction in the year the 
transaction became a listed transaction or a transaction of interest, 
with OTSA within 90 calendar days after the date on which the 
transaction became a listed transaction or a transaction of interest. 
The Commissioner also may determine the time for disclosure of listed 
transactions and transactions of interest in the published guidance 
identifying the transaction.
    (ii) Loss transactions. If a transaction becomes a loss transaction 
because the losses equal or exceed the threshold amounts as described in 
paragraph (b)(5)(i) of this section, a disclosure statement must be 
filed as an attachment to the taxpayer's tax return for the first 
taxable year in which the threshold amount is reached and to any 
subsequent tax return that reflects any amount of section 165 loss from 
the transaction.
    (3) Multiple disclosures. The taxpayer must disclose the transaction 
in the time and manner provided for under the provisions of this section 
regardless of whether the taxpayer also plans to disclose the 
transaction under other published guidance, for example, Sec. 1.6662-
3(c)(2).
    (4) Example. The following example illustrates the application of 
this paragraph (e):

    Example. In January of 2008, F, a calendar year taxpayer, enters 
into a transaction that at the time is not a listed transaction and is 
not a transaction described in any of the paragraphs (b)(3) through (7) 
of this section. All the tax benefits from the transaction are reported 
on F's 2008 tax return filed timely in April 2009. On May 2, 2011, the 
IRS publishes a notice identifying the transaction as a listed 
transaction described in paragraph (b)(2) of this section. Upon issuance 
of the May 2, 2011 notice, the transaction becomes a reportable 
transaction described in paragraph (b) of this section. The period of 
limitations on assessment for F's 2008 taxable year is still open. F is 
required to file Form 8886 for the transaction with OTSA within 90 
calendar days after May 2, 2011.

    (f) Rulings and protective disclosures--(1) Rulings. If a taxpayer 
requests a ruling on the merits of a specific transaction on or before 
the date that disclosure would otherwise be required under this section, 
and receives a favorable ruling as to the transaction, the disclosure 
rules under this section

[[Page 85]]

will be deemed to have been satisfied by that taxpayer with regard to 
that transaction, so long as the request fully discloses all relevant 
facts relating to the transaction which would otherwise be required to 
be disclosed under this section. If a taxpayer requests a ruling as to 
whether a specific transaction is a reportable transaction on or before 
the date that disclosure would otherwise be required under this section, 
the Commissioner in his discretion may determine that the submission 
satisfies the disclosure rules under this section for the taxpayer 
requesting the ruling for that transaction if the request fully 
discloses all relevant facts relating to the transaction which would 
otherwise be required to be disclosed under this section. The potential 
obligation of the taxpayer to disclose the transaction under this 
section will not be suspended during the period that the ruling request 
is pending.
    (2) Protective disclosures. If a taxpayer is uncertain whether a 
transaction must be disclosed under this section, the taxpayer may 
disclose the transaction in accordance with the requirements of this 
section and comply with all the provisions of this section, and indicate 
on the disclosure statement that the disclosure statement is being filed 
on a protective basis. The IRS will not treat disclosure statements 
filed on a protective basis any differently than other disclosure 
statements filed under this section. For a protective disclosure to be 
effective, the taxpayer must comply with these disclosure regulations by 
providing to the IRS all information requested by the IRS under this 
section.
    (g) Retention of documents. (1) In accordance with the instructions 
to Form 8886 (or a successor form), the taxpayer must retain a copy of 
all documents and other records related to a transaction subject to 
disclosure under this section that are material to an understanding of 
the tax treatment or tax structure of the transaction. The documents 
must be retained until the expiration of the statute of limitations 
applicable to the final taxable year for which disclosure of the 
transaction was required under this section. (This document retention 
requirement is in addition to any document retention requirements that 
section 6001 generally imposes on the taxpayer.) The documents may 
include the following:
    (i) Marketing materials related to the transaction;
    (ii) Written analyses used in decision-making related to the 
transaction;
    (iii) Correspondence and agreements between the taxpayer and any 
advisor, lender, or other party to the reportable transaction that 
relate to the transaction;
    (iv) Documents discussing, referring to, or demonstrating the 
purported or claimed tax benefits arising from the reportable 
transaction; and documents, if any, referring to the business purposes 
for the reportable transaction.
    (2) A taxpayer is not required to retain earlier drafts of a 
document if the taxpayer retains a copy of the final document (or, if 
there is no final document, the most recent draft of the document) and 
the final document (or most recent draft) contains all the information 
in the earlier drafts of the document that is material to an 
understanding of the purported tax treatment or tax structure of the 
transaction.
    (h) Effective/applicability date--(1) In general. This section 
applies to transactions entered into on or after August 3, 2007. 
However, this section applies to transactions of interest entered into 
on or after November 2, 2006. Paragraph (f)(1) of this section applies 
to ruling requests received on or after November 1, 2006. Otherwise, the 
rules that apply with respect to transactions entered into before August 
3, 2007, are contained in Sec. 1.6011-4 in effect prior to August 3, 
2007 (see 26 CFR part 1 revised as of April 1, 2007).
    (2) [Reserved]

[T.D. 9350, 72 FR 43149, Aug. 3, 2007, as amended at 75 FR 26061, May 
11, 2010]



Sec. 1.6011-5  Required use of magnetic media for corporate income 
tax returns.

    The return of a corporation that is required to be filed on magnetic 
media under Sec. 301.6011-5 of this chapter must be filed in accordance 
with Internal Revenue Service revenue procedures,

[[Page 86]]

publications, forms, or instructions, including those posted 
electronically. (See Sec. 601.601(d)(2) of this chapter).

[T.D. 9364, 72 FR 63810, Nov. 13, 2007]



Sec. 1.6011-6  [Reserved]



Sec. 1.6011-7  Specified tax return preparers required to file 
individual income tax returns using magnetic media.

    Individual income tax returns that are required to be filed on 
magnetic media by tax return preparers under section 6011(e)(3) and 
Sec. 301.6011-7 of this chapter must be filed in accordance with 
Internal Revenue Service regulations, revenue procedures, revenue 
rulings, publications, forms or instructions, including those posted 
electronically.

[T.D. 9518, 76 FR 17528, Mar. 30, 2011]



Sec. 1.6011-8  Requirement of income tax return for taxpayers who
claim the premium tax credit under section 36B.

    (a) Requirement of return. Except as otherwise provided in this 
paragraph (a), a taxpayer who receives the benefit of advance payments 
of the premium tax credit under section 36B must file an income tax 
return for that taxable year on or before the due date for the return 
(including extensions of time for filing) and reconcile the advance 
credit payments. However, if advance credit payments are made for 
coverage of an individual for whom no taxpayer claims a personal 
exemption deduction, the taxpayer who attests to the Exchange to the 
intention to claim a personal exemption deduction for the individual as 
part of the determination that the taxpayer is eligible for advance 
credit payments must file a tax return and reconcile the advance credit 
payments.
    (b) Effective/applicability date. Except as otherwise provided, this 
section applies for taxable years beginning after December 31, 2016. 
Paragraph (a) of Sec. 1.6011-8 as contained in 26 CFR part I edition 
revised as of April 1, 2016, applies to taxable years ending after 
December 31, 2013, and beginning before January 1, 2017.

[T.D. 9804, 81 FR 91768, Dec. 19, 2016]



Sec. 1.6012-1  Individuals required to make returns of income.

    (a) Individual citizen or resident--(1) In general. Except as 
provided in subparagraph (2) of this paragraph, an income tax return 
must be filed by every individual for each taxable year beginning before 
January 1, 1973, during which he receives $600 or more of gross income, 
and for each taxable year beginning after December 31, 1972, during 
which he receives $750 or more of gross income, if such individual is:
    (i) A citizen of the United States, whether residing at home or 
abroad,
    (ii) A resident of the United States even though not a citizen 
thereof, or
    (iii) An alien bona fide resident of Puerto Rico or any section 931 
possession, as defined in Sec. 1.931-1(c)(1), during the entire taxable 
year
    (2) Special rules. (i) For taxable years beginning before January 1, 
1970, an individual who is described in subparagraph (1) of this 
paragraph and who has attained the age of 65 before the close of his 
taxable year must file an income tax return only if he receives $1,200 
or more of gross income during his taxable year.
    (ii) For taxable years beginning after December 31, 1969, and before 
January 1, 1973, an individual described in subparagraph (1) of this 
paragraph (other than an individual referred to in section 142(b)):
    (a) Who is not married (as determined by applying section 143(a) and 
the regulations thereunder) must file an income tax return only if he 
receives $1,700 or more of gross income during his taxable year, except 
that if such an individual has attained the age of 65 before the close 
of his taxable year an income tax return must be filed by such 
individual only if he receives $2,300 or more of gross income during his 
taxable year.
    (b) Who is entitled to make a joint return under section 6013 and 
the regulations thereunder must file an income tax return only if his 
gross income received during his taxable year, when combined with the 
gross income of his spouse received during his taxable year, is $2,300 
or more. However, if such individual or his spouse has attained the age 
of 65 before the close of the taxable year an income tax return must be

[[Page 87]]

filed by such individual only if their combined gross income is $2,900 
or more. If both the individual and his spouse have attained the age of 
65 before the close of the taxable year such return must be filed only 
if their combined gross income is $3,500 or more. However, this 
subdivision (ii)(b) shall not apply if the individual and his spouse did 
not have the same household as their home at the close of their taxable 
year, if such spouse files a separate return for a taxable year which 
includes any part of such individual's taxable year, or if any other 
taxpayer is entitled to an exemption for such individual or his spouse 
under section 151(e) for such other taxpayer's taxable year beginning in 
the calendar year in which such individual's taxable year begins. For 
example, a married student more than half of whose support is furnished 
by his father must file an income tax return if he receives $600 or more 
of gross income during his taxable year.
    (iii) For taxable years beginning after December 31, 1972, an 
individual described in subparagraph (1) of this paragraph (other than 
an individual referred to in section 142(b)):
    (a) Who is not married (as determined by applying section 143(a) and 
the regulations thereunder) must file an income tax return only if he 
receives $1,750 or more of gross income during his taxable year, except 
that if such an individual has attained the age of 65 before the close 
of his taxable year an income tax return must be filed by such 
individual only if he receives $2,500 or more of gross income during his 
taxable year.
    (b) Who is entitled to make a joint return under section 6013 and 
the regulations thereunder must file an income tax return only if his 
gross income received during his taxable year, when combined with the 
gross income of his spouse received during his taxable year, is $2,500 
or more. However, if such individual or his spouse has attained the age 
of 65 before the close of the taxable year an income tax return must be 
filed by such individual only if their combined gross income is $3,250 
or more. If both the individual and his spouse attain the age of 65 
before the close of the taxable year such return must be filed only if 
their combined gross income is $4,000 or more. However, this subdivision 
(iii)(b) shall not apply if the individual and his spouse did not have 
the same household as their home at the close of their taxable year, if 
such spouse files a separate return for a taxable year which includes 
any part of such individual's taxable year, or if any other taxpayer is 
entitled to an exemption for the taxpayer or his spouse under section 
151(e) for such other taxpayer's taxable year beginning in the calendar 
year in which such individual's taxable year begins. For example, a 
married student more than half of whose support is furnished by his 
father must file an income tax return if he receives $750 or more of 
gross income during the taxable year.
    (iv) For purposes of section 6012(a)(1)(A)(ii) and subdivisions 
(ii)(b) and (iii)(b) of this subparagraph, an individual and his spouse 
are considered to have the same household as their home at the close of 
a taxable year if the same household constituted the principal place of 
abode of both the individual and his spouse at the close of such taxable 
year (or on the date of death, if the individual or his spouse died 
within the taxable year). The individual and his spouse will be 
considered to have the same household as their home at the close of the 
taxable year notwithstanding a temporary absence from the household due 
to special circumstances, as, for example, in the case of a nonpermanent 
failure on the part of the individual and his spouse to have a common 
abode by reason of illness, education, business, vacation, or military 
service. For example, A, a calendar-year individual under 65 years of 
age, is married to B, also under 65 years of age, and is a member of the 
Armed Forces of the United States. During 1970 A is transferred to an 
overseas base. A and B give up their home, which they had jointly 
occupied until that time; B moves to the home of her parents for the 
duration of A's absence. They fully intend to set up a new joint 
household upon A's return. Neither A nor B must file a return for 1970 
if their combined gross income for the year is less than $2,300 and if 
no other taxpayer is entitled to a dependency exemption for A or B under 
section 151(e).

[[Page 88]]

    (v) In the case of a short taxable year referred to in section 
443(a)(1), an individual described in subparagraph (1) of this paragraph 
shall file an income tax return if his gross income received during such 
short taxable year equals or exceeds his own personal exemption allowed 
by section 151(b) (prorated as provided in section 443(c)) and, when 
applicable, his additional exemption for age 65 or more allowed by 
section 151(c)(1) (prorated as provided in section 443(c)).
    (vi) For rules relating to returns required to be made by every 
individual who is liable for one or more qualified State individual 
income taxes, as defined in section 6362, for a taxable year, see 
paragraph (b) of Sec. 301.6361-1 of this chapter (Regulations on 
Procedure and Administration).
    (vii) For taxable years beginning after December 31, 1978, an 
individual who receives payments during the calendar year in which the 
taxable year begins under section 3507 (relating to advance payment of 
earned income credit) must file an income tax return.
    (viii) For rules relating to returns required of taxpayers who 
receive advance payments of the premium tax credit under section 36B, 
see Sec. 1.6011-8(a).
    (3) Earned income from without the United States and gain from sale 
of residence. For the purpose of determining whether an income tax 
return must be filed for any taxable year beginning after December 31, 
1957, gross income shall be computed without regard to the exclusion 
provided for in section 911 (relating to earned income from sources 
without the United States). For the purpose of determining whether an 
income tax return must be filed for any taxable year ending after 
December 31, 1963, gross income shall be computed without regard to the 
exclusion provided for in section 121 (relating to sale of residence by 
individual who has attained age 65). In the case of an individual 
claiming an exclusion under section 121, he shall attach Form 2119 to 
the return required under this paragraph and in the case of an 
individual claiming an exclusion under section 911, he shall attach Form 
2555 to the return required under this paragraph.
    (4) Return of income of minor. A minor is subject to the same 
requirements and elections for making returns of income as are other 
individuals. Thus, for example, for a taxable year beginning after 
December 31, 1972, a return must be made by or for a minor who has an 
aggregate of $1,750 of gross income from funds held in trust for him and 
from his personal services, regardless of the amount of his taxable 
income. The return of a minor must be made by the minor himself or must 
be made for him by his guardian or other person charged with the care of 
the minor's person or property. See paragraph (b)(3) of Sec. 1.6012-3. 
See Sec. 1.73-1 for inclusion in the minor's gross income of amounts 
received for his personal services. For the amount of tax which is 
considered to have been properly assessed against the parent, if not 
paid by the child, see section 6201(c) and paragraph (c) of Sec. 
301.6201-1 of this chapter (Regulations on Procedure and 
Administration).
    (5) Returns made by agents. The return of income may be made by an 
agent if, by reason of disease or injury, the person liable for the 
making of the return is unable to make it. The return may also be made 
by an agent if the taxpayer is unable to make the return by reason of 
continuous absence from the United States (including Puerto Rico as if a 
part of the United States) for a period of at least 60 days prior to the 
date prescribed by law for making the return. In addition, a return may 
be made by an agent if the taxpayer requests permission, in writing, of 
the district director for the internal revenue district in which is 
located the legal residence or principal place of business of the person 
liable for the making of the return, and such district director 
determines that good cause exists for permitting the return to be so 
made. However, assistance in the preparation of the return may be 
rendered under any circumstances. Whenever a return is made by an agent 
it must be accompanied by a power of attorney (or copy thereof) 
authorizing him to represent his principal in making, executing, or 
filing the return. A form 2848, when properly completed, is sufficient. 
In addition, where one spouse is physically unable by reason of disease

[[Page 89]]

or injury to sign a joint return, the other spouse may, with the oral 
consent of the one who is incapacitated, sign the incapacitated spouse's 
name in the proper place on the return followed by the words ``By 
__________ Husband (or Wife),'' and by the signature of the signing 
spouse in his own right, provided that a dated statement signed by the 
spouse who is signing the return is attached to and made a part of the 
return stating:
    (i) The name of the return being filed,
    (ii) The taxable year,
    (iii) The reason for the inability of the spouse who is 
incapacitated to sign the return, and
    (iv) That the spouse who is incapacitated consented to the signing 
of the return.


The taxpayer and his agent, if any, are responsible for the return as 
made and incur liability for the penalties provided for erroneous, 
false, or fraudulent returns.
    (6) Form of return. Form 1040 is prescribed for general use in 
making the return required under this paragraph. Form 1040A is an 
optional short form which, in accordance with paragraph (a)(7) of this 
section, may be used by certain taxpayers. A taxpayer otherwise entitled 
to use Form 1040A as his return for any taxable year may not make his 
return on such form if he elects not to take the standard deduction 
provided in section 141, and in such case he must make his return on 
Form 1040. For taxable years beginning before January 1, 1970, a 
taxpayer entitled under section 6014 and Sec. 1.6014-1 to elect not to 
show his tax on his return must, if he desires to exercise such 
election, make his return on Form 1040A. Form 1040W is an optional short 
form which, in accordance with paragraph (a)(8) of this section, may be 
used only with respect to taxable years beginning after December 31, 
1958, and ending before December 31, 1961.
    (7)(i) Use of Form 1040A. Form 1040A may be filed only by those 
individuals entitled to use such form as provided by and in accordance 
with the instructions for such form.
    (ii) Computation and payment of tax. Unless a taxpayer is entitled 
to elect under section 6014 and Sec. 1.6014-1 not to show the tax on 
Form 1040A and does so elect, he shall compute and show on his return on 
Form 1040A the amount of the tax imposed by subtitle A of the Code and 
shall, without notice and demand therefor, pay any unpaid balance of 
such tax not later than the date fixed for filing the return.
    (iii) Change of election to use Form 1040A. A taxpayer who has 
elected to make his return on Form 1040A may change such election. Such 
change of election shall be within the time and subject to the 
conditions prescribed in section 144(b) and Sec. 1.144-2 relating to 
change of election to take, or not to take the standard deduction.
    (8) Use of Form 1040W for certain taxable years--(i) In general. An 
individual may use Form 1040W as his return for any taxable year 
beginning after December 31, 1958, and ending before December 31, 1961, 
in which the gross income of the individual, regardless of the amount 
thereof:
    (a) Consists entirely of remuneration for personal services 
performed as an employee (whether or not such remuneration constitutes 
wages as defined in section 3401(a)), dividends, or interest, and
    (b) Does not include more than $200 from dividends and interest.


For purposes of determining whether gross income from dividends and 
interest exceeds $200, dividends from domestic corporations are taken 
into account to the extent that they are includible in gross income. For 
purposes of this subparagraph, any reference to Form 1040 in Sec. Sec. 
1.4-2, 1.142-1, and 1.144-1 and this section shall also be deemed a 
reference to Form 1040W.
    (ii) Change of election to use Form 1040W. A taxpayer who has 
elected to make his return on Form 1040W may change such election. Such 
change of election shall be within the time and subject to the 
conditions prescribed in section 144(b) and Sec. 1.144-2, relating to 
change of election to take, or not to take, the standard deduction.
    (iii) Joint return of husband and wife on Form 1040W. A husband and 
wife, eligible under section 6013 and the regulations thereunder to file 
a joint return for the taxable year, may, subject to the provisions of 
this subparagraph, make a joint return on Form 1040W for

[[Page 90]]

any taxable year beginning after December 31, 1958, and ending before 
December 31, 1961, in which the aggregate gross income of the spouses 
(regardless of amount) consists entirely of remuneration for personal 
services performed as an employee (whether or not such remuneration 
constitutes wages as defined in section 3401(a)), dividends, or 
interest, and does not include more than $200 from dividends and 
interest. For purposes of determining whether gross income from sources 
to which the $200 limitation applies exceeds such amount in cases where 
both spouses receive dividends from domestic corporations, the amount of 
such dividends received by each spouse is taken into account to the 
extent that such dividends are includible in gross income. See section 
116 and Sec. Sec. 1.116-1 and 1.116-2. If a joint return is made by 
husband and wife on Form 1040W, the liability for the tax shall be joint 
and several.
    (9) Items of tax preference. For a taxable year ending after 
December 31, 1969, an individual shall attach Form 4625 to the return 
required by this paragraph if during the year the individual:
    (i) Has items of tax preference (described in section 57) in excess 
of its minimum tax exemption (determined under Sec. 1.58-1) or
    (ii) Uses a net operating loss carryover from a prior taxable year 
in which it deferred minimum tax under section 56(b).
    (b) Return of nonresident alien individual--(1) Requirement of 
return--(i) In general. Except as otherwise provided in subparagraph (2) 
of this paragraph, every nonresident alien individual (other than one 
treated as a resident under section 6013 (g) or (h)) who is engaged in 
trade or business in the United States at any time during the taxable 
year or who has income which is subject to taxation under subtitle A of 
the Code shall make a return on Form 1040NR. For this purpose it is 
immaterial that the gross income for the taxable year is less than the 
minimum amount specified in section 6012(a) for making a return. Thus, a 
nonresident alien individual who is engaged in a trade or business in 
the United States at any time during the taxable year is required to 
file a return on Form 1040 NR even though (a) he has no income which is 
effectively connected with the conduct of a trade or business in the 
United States, (b) he has no income from sources within the United 
States, or (c) his income is exempt from income tax by reason of an 
income tax convention or any section of the Code. However, if the 
nonresident alien individual has no gross income for the taxable year, 
he is not required to complete the return schedules but must attach a 
statement to the return indicating the nature of any exclusions claimed 
and the amount of such exclusions to the extent such amounts are readily 
determinable.
    (ii) Treaty income. If the gross income of a nonresident alien 
individual includes treaty income, as defined in paragraph (b)(1) of 
Sec. 1.871-12, a statement shall be attached to the return on Form 
1040NR showing with respect to that income:
    (a) The amounts of tax withheld,
    (b) The names and post office addresses of withholding agents, and
    (c) Such other information as may be required by the return form, or 
by the instructions issued with respect to the form, to show the 
taxpayer's entitlement to the reduced rate of tax under the tax 
convention.
    (2) Exceptions--(i) Return not required when tax is fully paid at 
source. A nonresident alien individual (other than one treated as a 
resident under section 6013 (g) or (h)) who at no time during the 
taxable year is engaged in a trade or business in the United States is 
not required to make a return for the taxable year if his tax liability 
for the taxable year is fully satisfied by the withholding of tax at 
source under chapter 3 of the Code. This subdivision does not apply to a 
nonresident alien individual who has income for the taxable year which 
is treated under section 871 (c) or (d) and Sec. 1.871-9 (relating to 
students or trainees) or Sec. 1.871-10 (relating to real property 
income) as income which is effectively connected for the taxable year 
with the conduct of a trade or business in the United States by that 
individual, or to a nonresident alien individual making a claim under 
Sec. 301.6402-3 of this chapter (Procedure and Administration 
Regulations) for the refund of an overpayment of tax for

[[Page 91]]

the taxable year. In addition, this subdivision does not apply to a 
nonresident alien individual who has income for the taxable year that is 
treated under section 871(b)(1) as effectively connected with the 
conduct of a trade or business within the United States by reason of the 
operation of section 897. For purposes of this subdivision, some of the 
items of income from sources within the United States upon which the tax 
liability will not have been fully satisfied by the withholding of tax 
at source under chapter 3 of the Code are:
    (a) Interest upon so-called tax-free covenant bonds upon which, in 
accordance with section 1451 and Sec. 1.1451-1, a tax of only 2 percent 
is required to be withheld at the source,
    (b) In the case of bonds or other evidences of indebtedness issued 
after September 28, 1965, amounts described in section 871(a)(1)(C),
    (c) Capital gains described in section 871(a)(2) and paragraph (d) 
of Sec. 1.871-7, and
    (d) Accrued interest received in connection with the sale of bonds 
between interest dates, which, in accordance with paragraph (h) of Sec. 
1.1441-4, is not subject to withholding of tax at the source.
    (ii) Return of individual for taxable year of change of U.S. 
citizenship or residence--(a) If an alien individual becomes a citizen 
or resident of the United States during the taxable year and is a 
citizen or resident of the United States on the last day of such year, 
he must make a return on Form 1040 for the taxable year. However, a 
separate schedule is required to be attached to this return to show the 
income tax computation for the part of the taxable year during which the 
alien was neither a citizen nor resident of the United States, unless an 
election under section 6013 (g) or (h) is in effect for the alien. A 
Form 1040NR, clearly marked ``Statement'' across the top, may be used as 
such a separate schedule.
    (b) If an individual abandons his U.S. citizenship or residence 
during the taxable year and is not a citizen or resident of the United 
States on the last day of such year, he must make a return on Form 
1040NR for the taxable year, even if an election under section 6013(g) 
was in effect for the taxable year preceding the year of abandonment. 
However, a separate schedule is required to be attached to this return 
to show the income tax computation for the part of the taxable year 
during which the individual was a citizen or resident of the United 
States. A Form 1040, clearly marked ``Statement'' across the top, may be 
used as such a separate schedule.
    (c) A return is required under this subdivision (ii) only if the 
individual is otherwise required to make a return for the taxable year.
    (iii) Beneficiaries of estates or trusts. A nonresident alien 
individual who is a beneficiary of an estate or trust which is engaged 
in trade or business in the United States is not required to make a 
return for the taxable year merely because he is deemed to be engaged in 
trade or business within the United States under section 875(2). 
However, such nonresident alien beneficiary will be required to make a 
return if he otherwise satisfies the conditions of subparagraph (1)(i) 
of this paragraph for making a return.
    (iv) Certain alien residents of Puerto Rico. This paragraph does not 
apply to a nonresident alien individual who is a bona fide resident of 
Puerto Rico during the taxable year. See section 876 and paragraph 
(a)(1)(iii) of this section.
    (3) Representative or agent for nonresident alien individual--(i) 
Cases where power of attorney is not required. The responsible 
representative or agent within the United States of a nonresident alien 
individual shall make on behalf of his nonresident alien principal a 
return of, and shall pay the tax on, all income coming within his 
control as representative or agent which is subject to the income tax 
under subtitle A of the Code. The agency appointment will determine how 
completely the agent is substituted for the principal for tax purposes. 
Any person who collects interest or dividends on deposited securities of 
a nonresident alien individual, executes ownership certificates in 
connection therewith, or sells such securities under special 
instructions shall not be deemed merely by reason of such acts to be the 
responsible representative or agent of the nonresident

[[Page 92]]

alien individual. If the responsible representative or agent does not 
have a specific power of attorney from the nonresident alien individual 
to file a return in his behalf, the return shall be accompanied by a 
statement to the effect that the representative or agent does not 
possess specific power of attorney to file a return for such individual 
but that the return is being filed in accordance with the provisions of 
this subdivision.
    (ii) Cases where power of attorney is required. Whenever a return of 
income of a nonresident alien individual is made by an agent acting 
under a duly authorized power of attorney for that purpose, the return 
shall be accompanied by the power of attorney in proper form, or a copy 
thereof, specifically authorizing him to represent his principal in 
making, executing, and filing the income tax return. Form 2848 may be 
used for this purpose. The agent, as well as the taxpayer, may incur 
liability for the penalties provided for erroneous, false, or fraudulent 
returns. For the requirements regarding signing of returns, see Sec. 
1.6061-1. The rules of paragraph (e) of Sec. 601.504 of this chapter 
(Statement of Procedural Rules) shall apply under this subparagraph in 
determining whether a copy of a power of attorney must be certified.
    (iii) Limitation. A return of income shall be required under this 
subparagraph only if the nonresident alien individual is otherwise 
required to make a return in accordance with this paragraph.
    (4) Disallowance of deductions and credits. For provisions 
disallowing deductions and credits when a return of income has not been 
filed by or on behalf of a nonresident alien individual, see section 
874(a) and the regulations thereunder.
    (5) Effective date. This paragraph shall apply for taxable years 
beginning after December 31, 1966, except that it shall not be applied 
to require (i) the filing of a return for any taxable year ending before 
January 1, 1974, which, pursuant to instructions applicable to the 
return, is not required to be filed or (ii) the amendment of a return 
for such a taxable year which, pursuant to such instructions, is 
required to be filed. For corresponding rules applicable to taxable 
years beginning before January 1, 1967, see 26 CFR 1.6012-1(b) (Revised 
as of January 1, 1967).
    (c) Cross reference. For returns by fiduciaries for individuals, 
estates, and trusts, see Sec. 1.6012-3.

(Sec. 1445 (98 Stat. 655; 26 U.S.C. 1445), sec. 6012 (68A Stat. 732; 26 
U.S.C. 6012), and 7805 (68A Stat. 917; 26 U.S.C. 7805) of the Internal 
Revenue Code of 1954)

[T.D. 6500, 25 FR 12108, Nov. 26, 1960]

    Editorial Note: For Federal Register citations affecting Sec. 
1.6012-1, see the List of CFR Sections Affected, which appears in the 
Finding Aids section of the printed volume and at www.govinfo.gov.



Sec. 1.6012-2  Corporations required to make returns of income.

    (a) In general--(1) Requirement of return. Except as provided in 
paragraphs (e) and (g)(1) of this section with respect to charitable and 
other organizations having unrelated business income and to certain 
foreign corporations, respectively, every corporation, as defined in 
section 7701(a)(3), subject to taxation under subtitle A of the Code 
shall make a return of income regardless of whether it has taxable 
income or regardless of the amount of its gross income.
    (2) Existence of corporation. A corporation in existence during any 
portion of a taxable year is required to make a return. If a corporation 
was not in existence throughout an annual accounting period (either 
calendar year or fiscal year), the corporation is required to make a 
return for that fractional part of a year during which it was in 
existence. A corporation is not in existence after it ceases business 
and dissolves, retaining no assets, whether or not under State law it 
may thereafter be treated as continuing as a corporation for certain 
limited purposes connected with winding up its affairs, such as for the 
purpose of suing and being sued. If the corporation has valuable claims 
for which it will bring suit during this period, it has retained assets 
and therefore continues in existence. A corporation does not go out of 
existence if it is turned over to receivers or trustees who continue to 
operate it. If a corporation has received a charter but has never 
perfected its organization and has transacted no business and has no

[[Page 93]]

income from any source, it may upon presentation of the facts to the 
district director be relieved from the necessity of making a return. In 
the absence of a proper showing of such facts to the district director, 
a corporation will be required to make a return.
    (3) Form of return. The return required of a corporation under this 
section shall be made on Form 1120 unless the corporation is a type for 
which a special form is prescribed. The special forms of returns and 
schedules required of particular types of corporations are set forth in 
paragraphs (b) to (g), inclusive, of this section.
    (4) Disclosure of uncertain tax positions. A corporation required to 
make a return under this section shall attach Schedule UTP, Uncertain 
Tax Position Statement, or any successor form, to such return, in 
accordance with forms, instructions, or other appropriate guidance 
provided by the IRS.
    (5) Effective/applicability date. Paragraph (a)(4) of this section 
applies to returns filed for tax years beginning on or after January 1, 
2010.
    (b) Personal holding companies. A personal holding company, as 
defined in section 542, including a foreign corporation within the 
definition of such section, shall attach Schedule PH, Computation of 
U.S. Personal Holding Company Tax, to the return required by paragraph 
(a) or (g), as the case may be, of this section.
    (c) Insurance companies--(1) Domestic life insurance companies--(i) 
In general. A life insurance company subject to tax under section 801 
shall make a return on Form 1120-L, ``U.S. Life Insurance Company Income 
Tax Return.'' Except as provided in paragraph (c)(4) of this section, 
such company shall file with its return--
    (A) A copy of its annual statement which shows the reserves used by 
the company in computing the taxable income reported on its return; and
    (B) A copy of Schedule A (real estate) and of Schedule D (bonds and 
stocks), or any successor thereto, of such annual statement.
    (ii) Mutual savings banks. Mutual savings banks conducting life 
insurance business and meeting the requirements of section 594 are 
subject to partial tax computed on Form 1120, ``U.S. Corporation Income 
Tax Return,'' and partial tax computed on Form 1120-L. The Form 1120-L 
is attached as a schedule to Form 1120, together with the annual 
statement and schedules required to be filed with Form 1120-L.
    (2) Domestic nonlife insurance companies. Every domestic insurance 
company other than a life insurance company shall make a return on Form 
1120-PC, ``U.S. Property and Casualty Insurance Company Income Tax 
Return.'' This includes organizations described in section 501(m)(1) 
that provide commercial-type insurance and organizations described in 
section 833. Except as provided in paragraph (c)(4) of this section, 
such company shall file with its return a copy of its annual statement 
(or a pro forma annual statement), including the underwriting and 
investment exhibit (or any successor thereto) for the year covered by 
such return.
    (3) Foreign insurance companies. The provisions of paragraphs (c)(1) 
and (c)(2) of this section concerning the returns and statements of 
insurance companies subject to tax under section 801 or section 831 also 
apply to foreign insurance companies subject to tax under those 
sections, except that the copy of the annual statement required to be 
submitted with the return shall, in the case of a foreign insurance 
company that is not required to file an annual statement, be a copy of 
the pro forma annual statement relating to the United States business of 
such company.
    (4) Exception for insurance companies filing their Federal income 
tax returns electronically. If an insurance company described in 
paragraph (c)(1), (c)(2), or (c)(3) of this section files its Federal 
income tax return electronically, it should not include on or with such 
return its annual statement (or pro forma annual statement), or any 
portion thereof. Such statement must be available at all times for 
inspection by authorized Internal Revenue Service officers or employees 
and retained for so long as such statements may be material in the 
administration of any internal revenue law. See Sec. 1.6001-1(e).
    (5) Definition. For purposes of this section, the term annual 
statement means the annual statement, the form

[[Page 94]]

of which is approved by the National Association of Insurance 
Commissioners (NAIC), which is filed by an insurance company for the 
year with the insurance departments of States, Territories, and the 
District of Columbia. The term annual statement also includes a pro 
forma annual statement if the insurance company is not required to file 
the NAIC annual statement.
    (d) Affiliated groups. For the forms to be used by affiliated 
corporations filing a consolidated return, see Sec. 1.1502-75.
    (e) Charitable and other organizations with unrelated business 
income. Every organization described in section 511(a)(2) which is 
subject to the tax imposed by section 511(a)(1) on its unrelated 
business taxable income shall make a return on Form 990-T for each 
taxable year if it has gross income, included in computing unrelated 
business taxable income for such taxable year, of $1,000 or more. The 
filing of a return of unrelated business income does not relieve the 
organization of the duty of filing other required returns.
    (f) Subchapter T cooperatives--(1) In general. For taxable years 
ending on or after December 31, 2007, a cooperative organization 
described in section 1381 (including a farmers' cooperative exempt from 
tax under section 521) is required to make a return, whether or not it 
has taxable income and regardless of the amount of its gross income, on 
Form 1120-C, ``U.S. Income Tax Return for Cooperative Associations,'' or 
such other form as may be designated by the Commissioner.
    (2) Farmers' cooperatives. For taxable years ending before December 
31, 2007, a farmers' cooperative organization described in section 
521(b)(1) (including a farmers' cooperative that is not exempt from tax 
under section 521) is required to make a return on Form 990-C, 
``Farmers' Cooperative Association Income Tax Return.''
    (3) Effective/applicability date. This paragraph (f) is applicable 
on or after July 30, 2007.
    (g) Returns by foreign corporations--(1) Requirement of return--(i) 
In general. Except as otherwise provided in subparagraph (2) of this 
paragraph, every foreign corporation which is engaged in trade or 
business in the United States at any time during the taxable year or 
which has income which is subject to taxation under subtitle A of the 
Code (relating to income taxes) shall make a return on Form 1120-F. 
Thus, for example, a foreign corporation which is engaged in trade or 
business in the United States at any time during the taxable year is 
required to file a return on Form 1120-F even though (a) it has no 
income which is effectively connected with the conduct of a trade or 
business in the United States, (b) it has no income from sources within 
the United States, or (c) its income is exempt from income tax by reason 
of an income tax convention or any section of the Code. However, if the 
foreign corporation has no gross income for the taxable year, it is not 
required to complete the return schedules but must attach a statement to 
the return indicating the nature of any exclusions claimed and the 
amount of such exclusions to the extent such amounts are readily 
determinable.
    (ii) Treaty income. If the gross income of a foreign corporation 
includes treaty income, as defined in paragraph (b)(1) of Sec. 1.871-
12, a statement shall be attached to the return on Form 1120-F showing 
with respect to that income:
    (a) The amounts of tax withheld,
    (b) The names and post office addresses of withholding agents, and
    (c) Such other information as may be required by the return form or 
by the instructions issued with respect to the form, to show the 
taxpayer's entitlement to the reduced rate of tax under the tax 
convention.
    (iii) Balance sheet and reconciliation of income. At the election of 
the taxpayer, the balance sheets and reconciliation of income, as shown 
on Form 1120-F, may be limited to:
    (a) The assets of the corporation located in the United States and 
to its other assets used in the trade or business conducted in the 
United States, and
    (b) Its income effectively connected with the conduct of a trade or 
business in the United States and its other income from sources within 
the United States.
    (2) Exceptions--(i) Return not required when tax is fully paid at 
source--(a) In general. A foreign corporation which at

[[Page 95]]

no time during the taxable year is engaged in a trade or business in the 
United States is not required to make a return for the taxable year if 
its tax liability for the taxable year is fully satisfied by the 
withholding of tax at source under chapter 3 of the Code. For purposes 
of this subdivision, some of the items of income from sources within the 
United States upon which the tax liability will not have been fully 
satisfied by the withholding of tax at source under chapter 3 of the 
Code are:
    (1) Interest upon so-called tax-free covenant bonds upon which, in 
accordance with section 1451 and Sec. 1.1451-1, a tax of only 2 percent 
is required to be withheld at source,
    (2) In the case of bonds or other evidence of indebtedness issued 
after September 25, 1965, amounts described in section 881(a)(3),
    (3) Accrued interest received in connection with the sale of bonds 
between interest dates, which, in accordance with paragraph (h) of Sec. 
1.1441-4, is not subject to withholding of tax at source.
    (b) Corporations not included. This subdivision (i) shall not apply:
    (1) To a foreign corporation which has income for the taxable year 
which is treated under section 882(d) or (e) and Sec. 1.882-2 as income 
which is effectively connected for the taxable year with the conduct of 
a trade or business in the United States by that corporation,
    (2) To a foreign corporation making a claim under Sec. 301.6402-3 
of this chapter (Procedure and Administration Regulations) for the 
refund of an overpayment of tax for the taxable year, or
    (3) To a foreign corporation described in paragraph (c)(2)(i) of 
Sec. 1.532-1 whose accumulated taxable income for the taxable year is 
determined under paragraph (b)(2) of Sec. 1.535-1.
    (ii) Beneficiaries of estates or trusts. A foreign corporation which 
is a beneficiary of an estate or trust which is engaged in trade or 
business in the United States is not required to make a return for the 
taxable year merely because it is deemed to be engaged in trade or 
business within the United States under section 875(2). However, such 
foreign corporation will be required to make a return if it otherwise 
satisfies the conditions of subparagraph (1)(i) of this paragraph for 
making a return.
    (iii) Special returns and schedules. The provisions of paragraphs 
(b) through (f) of this section shall apply to a foreign corporation 
except that a foreign corporation which is an insurance company to which 
paragraph (c)(3) of this section applies shall make a return on Form 
1120-F and not on Form 1120. If a foreign corporation which is an 
insurance company to which paragraph (c) (1) or (2) of this section 
applies has income for the taxable year from sources within the United 
States which is not effectively connected for that year with the conduct 
of a trade or business in the United States by that corporation, the 
corporation shall attach to its return on Form 1120L or 1120M, as the 
case may be, a separate schedule showing the nature and amount of the 
items of such income, the rate of tax applicable thereto, and the amount 
of tax withheld therefrom under chapter 3 of the Code.
    (3) Representative or agent for foreign corporation--(i) Cases where 
power of attorney is not required. The responsible representative or 
agent within the United States of a foreign corporation shall make on 
behalf of his principal a return of, and shall pay the tax on, all 
income coming within his control as representative or agent which is 
subject to the income tax under subtitle A of the Code. The agency 
appointment will determine how completely the agent is substituted for 
the principal for tax purposes. Any person who collects interest or 
dividends on deposited securities of a foreign corporation, executes 
ownership certificates in connection therewith, or sells such securities 
under special instructions shall not be deemed merely by reason of such 
acts to be the responsible representative or agent of the foreign 
corporation. If the responsible representative or agent does not have a 
specific power of attorney from the foreign corporation to file a return 
in its behalf, the return shall be accompanied by a statement to the 
effect that the representative or agent does not possess specific power 
of attorney to file a return for such corporation but that the return is 
being filed in accordance with the provisions of this subdivision.

[[Page 96]]

    (ii) Cases where power of attorney is required. Whenever a return of 
income of a foreign corporation is made by an agent acting under a duly 
authorized power of attorney for that purpose, the return shall be 
accompanied by the power of attorney in proper form, or a copy thereof 
specifically authorizing him to represent his principal in making, 
executing, and filing the income tax return. Form 2848 may be used for 
this purpose. The agent, as well as the taxpayer, may incur liability 
for the penalties provided for erroneous, false, or fraudulent returns. 
For the requirements regarding signing of returns, see Sec. 1.6062-1. 
The rules of paragraph (e) of Sec. 601.504 of this chapter (Statement 
of Procedural Rules) shall apply under this subparagraph in determining 
whether a copy of a power of attorney must be certified.
    (iii) Limitation. A return of income shall be required under this 
subparagraph only if the foreign corporation is otherwise required to 
make a return in accordance with this paragraph.
    (4) Disallowance of deductions and credits. For provisions 
disallowing deductions and credits when a return of income has not been 
filed by or on behalf of a foreign corporation, see section 882(c)(2) 
and the regulations thereunder, and paragraph (b) (2) and (3) of Sec. 
1.535-1.
    (5) Effective date. This paragraph shall apply for taxable years 
beginning after December 31, 1966, except that it shall not be applied 
to require (i) the filing of a return for any taxable year ending before 
January 1, 1974, which, pursuant to instructions applicable to the 
return, is not required to be filed or (ii) the amendment of a return 
for such a taxable year which, pursuant to such instructions, is 
required to be filed. For corresponding rules applicable to taxable 
years beginning before January 1, 1967, see 26 CFR 1.6012-2(g) (Revised 
as of January 1, 1967).
    (h) Electing small business corporations. An electing small business 
corporation, whether or not subject to the tax imposed by section 1378, 
shall make a return on Form 1120-S. See also section 6037 and the 
regulations thereunder.
    (i) Hospital organizations with noncompliant hospital facilities. 
Every hospital organization (as defined in Sec. 1.501(r)-1(b)(18)) that 
is subject to the tax imposed by Sec. 1.501(r)-2(d) shall make a return 
on Form 990-T. The filing of a return to pay the tax described in Sec. 
1.501(r)-2(d) does not relieve the organization of the duty of filing 
other required returns.
    (j) Items of tax preference--(1) In general. Every corporation 
required to make a return under this section, and having items of tax 
preference (described in section 57 and the regulation thereunder) in an 
amount specified by Form 4626, shall file such form as part of its 
return.
    (2) Organizations with unrelated business income and foreign 
corporations. Regardless of the provisions of paragraphs (e) and (g) of 
this section, any organization described in either such paragraph having 
items of tax preference (described in section 57 and the regulations 
thereunder) in any amount entering into the computation or unrelated 
business income is required to make a return on form 990-T or form 120F, 
respectively, and to attach the required form as part of such return.
    (k) Other provisions. For returns by fiduciaries or corporations, 
see Sec. 1.6012-3. For information returns by corporations regarding 
payments of dividends, see Sec. Sec. 1.6042-1 through 1.6042-3, 
inclusive; regarding corporate dissolutions or liquidations, see Sec. 
1.6043-1; regarding distributions in liquidation, see Sec. 1.6043-2; 
regarding payments of patronage dividends, see Sec. Sec. 1.6044-1 
through 1.6044-4, inclusive; and regarding certain payments of interest, 
see Sec. Sec. 1.6049-1 and 1.6049-1. For returns as to formation or 
reorganization of foreign corporations, see Sec. Sec. 1.6046-1 through 
1.6046-3, inclusive.
    (l) Effective/applicability date. Paragraph (c) of this section 
applies to any taxable year beginning on or after May 30, 2006. However, 
taxpayers may apply paragraph (c) of this section to any original 
Federal income tax return (including any amended return filed on or 
before the due date (including extensions) of such original return) 
timely filed on or after May 30, 2006. For taxable years beginning 
before May 30, 2006, see Sec. 1.6012-2 as contained in 26 CFR part 1 in 
effect on April 1, 2006.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960]

[[Page 97]]


    Editorial Note: For Federal Register citations affecting Sec. 
1.6012-2, see the List of CFR Sections Affected, which appears in the 
Finding Aids section of the printed volume and at www.govinfo.gov.



Sec. 1.6012-3  Returns by fiduciaries.

    (a) For estates and trusts--(1) In general. Every fiduciary, or at 
least one of joint fiduciaries, must make a return of income on form 
1041 (or by use of a composite return pursuant to Sec. 1.6012-5) and 
attach the required form if the estate or trust has items of tax 
preference (as defined in section 57 and the regulations thereunder) in 
any amount:
    (i) For each estate for which he acts if the gross income of such 
estate for the taxable year is $600 or more;
    (ii) For each trust for which he acts, except a trust exempt under 
section 501(a), if such trust has for the taxable year any taxable 
income, or has for the taxable year gross income of $600 or more 
regardless of the amount of taxable income; and
    (iii) For each estate and each trust for which he acts, except a 
trust exempt under section 501(a), regardless of the amount of income 
for the taxable year, if any beneficiary of such estate or trust is a 
nonresident alien.
    (iv) For each trust electing to be taxed as, or as part of, an 
estate under section 645 for which a trustee acts, and for each related 
estate joining in a section 645 election for which an executor acts, if 
the aggregate gross income of the electing trust(s) and related estate, 
if any, joining in the election for the taxable year is $600 or more. 
(For the respective filing requirements of the trustee of each electing 
trust and executor of any related estate, see Sec. 1.645-1).
    (2) Wills and trust instruments. At the request of the Internal 
Revenue Service, a copy of the will or trust instrument (including any 
amendments), accompanied by a written declaration of the fiduciary under 
the penalties of perjury that it is a true and complete copy, shall be 
filed together with a statement by the fiduciary indicating the 
provisions of the will or trust instrument (including any amendments) 
which, in the fiduciary's opinion, determine the extent to which the 
income of the estate or trust is taxable to the estate or trust, the 
beneficiaries, or the grantor, respectively.
    (3) Domiciliary and ancillary representatives. In the case of an 
estate required to file a return under subparagraph (1) of this 
paragraph, having both domiciliary and ancillary representatives, the 
domiciliary and ancillary representatives must each file a return on 
Form 1041. The domiciliary representative is required to include in the 
return rendered by him as such domiciliary representative the entire 
income of the estate. The return of the ancillary representative shall 
be filed with the district director for his internal revenue district 
and shall show the name and address of the domiciliary representative, 
the amount of gross income received by the ancillary representative, and 
the deductions to be claimed against such income, including any amount 
of income properly paid or credited by the ancillary representative to 
any legatee, heir, or other beneficiary. If the ancillary representative 
for the estate of a nonresident alien is a citizen or resident of the 
United States, and the domiciliary representative is a nonresident 
alien, such ancillary representative is required to render the return 
otherwise required of the domiciliary representative.
    (4) Two or more trusts. A trustee of two or more trusts must make a 
separate return for each trust, even though such trusts were created by 
the same grantor for the same beneficiary or beneficiaries.
    (5) Trusts with unrelated business income. Every fiduciary for a 
trust described in section 511(b)(2) which is subject to the tax imposed 
on its unrelated business taxable income by section 511(b)(1) shall make 
a return on Form 990-T for each taxable year if the trust has gross 
income, included in computing unrelated business taxable income for such 
taxable year, of $1,000 or more. The filing of a return of unrelated 
business income does not relieve the fiduciary of such trust from the 
duty of filing other required returns.
    (6) Charitable remainder trusts. Every fiduciary for a charitable 
remainder annuity trust (as defined in Sec. 1.664-2) or a charitable 
remainder unitrust (as defined in Sec. 1.664-3) shall make a return on 
Form 1041-B for each taxable year of

[[Page 98]]

the trust even though it is nonexempt because it has unrelated business 
taxable income. The return on Form 1041-B shall be made in accordance 
with the instructions for the form and shall be filed with the 
designated Internal Revenue office on or before the 15th day of the 
fourth month following the close of the taxable year of the trust. A 
copy of the instrument governing the trust, accompanied by a written 
declaration of the fiduciary under the penalties of perjury that it is a 
true and complete copy, shall be attached to the return for the first 
taxable year of the trust.
    (7) Certain trusts described in section 4947(a)(1). For taxable 
years beginning after December 31, 1980, in the case of a trust 
described in section 4947(a)(1) which has no taxable income for a 
taxable year, the filing requirements of section 6012 and this section 
shall be satisfied by the filing, pursuant to Sec. 53.6011-1 of this 
chapter (Foundation Excise Tax Regulations) and Sec. 1.6033-2(a), by 
the fiduciary of such trust of--
    (i) Form 990-PF if such trust is treated as a private foundation, or
    (ii) Form 990 if such trust is not treated as a private foundation.


When the provisions of this paragraph (a)(7) are met, the fiduciary 
shall not be required to file Form 1041.
    (8) Estate and trusts liable for qualified tax. In the case of an 
estate or trust which is liable for one or more qualified State 
individual income taxes, as defined in section 6362, for a taxable year, 
see paragraph (b) of Sec. 301.6361-1 of this chapter (Regulations on 
Procedure and Administration) for rules relating to returns required to 
be made.
    (9) A trust any portion of which is treated as owned by the grantor 
or another person pursuant to sections 671 through 678. In the case of a 
trust any portion of which is treated as owned by the grantor or another 
person under the provisions of subpart E (section 671 and following) 
part I, subchapter J, chapter 1 of the Internal Revenue Code see Sec. 
1.671-4.
    (10) Hospital organizations organized as trusts with noncompliant 
hospital facilities. Every fiduciary for a hospital organization (as 
defined in Sec. 1.501(r)-1(b)(18)) organized as a trust described in 
section 511(b)(2) that is subject to the tax imposed by Sec. 1.501(r)-
2(d) shall make a return on Form 990-T. The filing of a return to pay 
the tax described in Sec. 1.501(r)-2(d) does not relieve the 
organization of the duty of filing other required returns.
    (b) For other persons--(1) Decedents. The executor or administrator 
of the estate of a decedent, or other person charged with the property 
of a decedent, shall make the return of income required in respect of 
such decedent. For the decedent's taxable year which ends with the date 
of his death, the return shall cover the period during which he was 
alive. For the filing of returns of income for citizens and alien 
residents of the United States, and alien residents of Puerto Rico, see 
paragraph (a) of Sec. 1.6012-1. For the filing of a joint return after 
death of spouse, see paragraph (d) of Sec. 1.6013-1.
    (2) Nonresident alien individuals--(i) In general. A resident or 
domestic fiduciary or other person charged with the care of the person 
or property of a nonresident alien individual shall make a return for 
that individual and pay the tax unless:
    (a) The nonresident alien individual makes a return of, and pays the 
tax on, his income for the taxable year,
    (b) A responsible representative or agent in the United States of 
the nonresident alien individual makes a return of, and pays the tax on, 
the income of such alien individual for the taxable year, or
    (c) The nonresident alien individual has appointed a person in the 
United States to act as his agent for the purpose of making a return of 
income and, if such fiduciary is required to file a Form 1041 for an 
estate or trust of which such alien individual is a beneficiary, such 
fiduciary attaches a copy of the agency appointment to his return on 
Form 1041.
    (ii) Income to be returned. A return of income shall be required 
under this subparagraph only if the nonresident alien individual is 
otherwise required to make a return in accordance with paragraph (b) of 
Sec. 1.6012-1. The provisions of that paragraph shall apply in 
determining the form of return to be used and the income to be returned.
    (iii) Disallowance of deductions and credits. For provisions 
disallowing deductions and credits when a return of

[[Page 99]]

income has not been filed by or on behalf of a nonresident alien 
individual, see section 874 and the regulations thereunder.
    (iv) Alien resident of Puerto Rico. This subparagraph shall not 
apply to the return of a nonresident alien individual who is a bona fide 
resident of Puerto Rico during the entire taxable year. See Sec. 1.876-
1.
    (v) Cross reference. For requirements of withholding tax at source 
on nonresident alien individuals and of returns with respect to such 
withheld taxes, see Sec. Sec. 1.1441-1 to 1.1465-1, inclusive.
    (3) Persons under a disability. A fiduciary acting as the guardian 
of a minor, or as the guardian or committee of an insane person, must 
make the return of income required in respect of such person unless, in 
the case of a minor, the minor himself makes the return or causes it to 
be made.
    (4) Corporations. A receiver, trustee in dissolution, trustee in 
bankruptcy, or assignee, who, by order of a court of competent 
jurisdiction, by operation of law or otherwise, has possession of or 
holds title to all or substantially all the property or business of a 
corporation, shall make the return of income for such corporation in the 
same manner and form as corporations are required to make such returns. 
Such return shall be filed whether or not the receiver, trustee, or 
assignee is operating the property or business of the corporation. A 
receiver in charge of only a small part of the property of a 
corporation, such as a receiver in mortgage foreclosure proceedings 
involving merely a small portion of its property, need not make the 
return of income. See also Sec. 1.6041-1, relating to returns regarding 
information at source; Sec. Sec. 1.6042-1 to 1.6042-3, inclusive, 
relating to returns regarding payments of dividends; Sec. Sec. 1.6044-1 
to 1.6044-4, inclusive, relating to returns regarding payments of 
patronage dividends; and Sec. Sec. 1.6049-1 and 1.6049-2, relating to 
returns regarding certain payments of interest.
    (5) Individuals in receivership. A receiver who stands in the place 
of an individual must make the return of income required in respect of 
such individual. A receiver of only part of the property of an 
individual need not file a return, and the individual must make his own 
return.
    (c) Joint fiduciaries. In the case of joint fiduciaries, a return is 
required to be made by only one of such fiduciaries. A return made by 
one of joint fiduciaries shall contain a statement that the fiduciary 
has sufficient knowledge of the affairs of the person for whom the 
return is made to enable him to make the return, and that the return is, 
to the best of his knowledge and belief, true and correct.
    (d) Other provisions. For the definition of the term ``fiduciary'', 
see section 7701(a)(6) and the regulations thereunder. For information 
returns required to be made by fiduciaries under section 6041, see Sec. 
1.6041-1. As to further duties and liabilities of fiduciaries, see 
section 6903 and Sec. 301.6903-1 of this chapter (Regulations on 
Procedure and Administration).

[T.D. 6500, 25 FR 12108, Nov. 26, 1960]

    Editorial Note: For Federal Register citations affecting Sec. 
1.6012-3, see the List of CFR Sections Affected, which appears in the 
Finding Aids section of the printed volume and at www.govinfo.gov.



Sec. 1.6012-4  Miscellaneous returns.

    For returns by regulated investment companies of tax on 
undistributed capital gain designated for special treatment under 
section 852(b)(3)(D), see Sec. 1.852-9. For returns with respect to tax 
withheld on nonresident aliens and foreign corporations and on tax-free 
covenant bonds, see Sec. Sec. 1.1461-1 to 1.1465-1, inclusive. For the 
requirement of an annual report by persons completing a Government 
contract, see 26 CFR (1939) 17.16 (Treasury Decision 4906, approved June 
23, 1939), and 26 CFR (1939) 16.15 (Treasury Decision 4909, approved 
June 28, 1939) , as made applicable to section 1471 of the 1954 Code by 
Treasury Decision 6091, approved August 16, 1954 (19 FR 5167, C.B. 1954-
2, 47). See also Sec. 1.1471-1.

[T.D. 7332, 39 FR 44231, Dec. 23, 1974, as amended by T.D. 9849, 84 FR 
9237, Mar. 14, 2019]

    Editorial Note: For the convenience of the user Sec. Sec. 16.15 and 
17.16 of 26 CFR (1939) are set forth below:

Sec. 16.15 Annual reports for income taxable years.

[[Page 100]]

    (a) General requirements. Every contracting party completing a 
contract or subcontract within the contracting party's income-taxable 
year ending after April 3, 1939 shall file with the district director of 
internal revenue for the internal revenue district in which the 
contracting party's Federal income tax returns are required to be filed 
an annual report on the prescribed form of the profit and excess profit 
on all contracts and subcontracts coming within the scope of the act and 
the regulations in this part and completed within the particular income-
taxable year. There shall be included as a part of such a report a 
statement, preferably in columnar form, showing separately for each such 
contract or subcontract completed by the contracting party within the 
income-taxable year the total contract price, the cost of performing the 
contract or subcontract and the resulting profit or loss on each 
contract or subcontract together with a summary statement showing in 
detail the computation of the net profit or net loss upon all contracts 
and subcontracts completed within the income-taxable year and the amount 
of the excess profit, if any, for the income-taxable year covered by the 
report. A copy of the report made to the Secretary of the Army (see 
Sec. 16.14) with respect to each contract or subcontract covered in the 
annual report, shall be filed as a part of such annual report. In case 
the income-taxable year of the contracting party is a period of less 
than twelve months (see Sec. 16.1), the report required by this section 
shall be made for such period and not for a full year.
    (b) Time for filing annual reports. Annual reports of contracts and 
subcontracts coming within the scope of the act and the regulations in 
this part completed by a contracting party within an income-taxable year 
must be filed on or before the 15th day of the ninth month following the 
close of the contracting party's income-taxable year. It is important 
that the contracting party render on or before the due date an annual 
report as nearly complete and final as it is possible for the 
contracting party to prepare. An extension of time granted the 
contracting party for filing its Federal income tax return does not 
serve to extend the time for filing the annual report required by this 
section. Authority consistent with authorizations for granting 
extensions of time for filing Federal income tax returns is hereby 
delegated to the various collectors of internal revenue for granting 
extensions of time for filing the reports required by this section. 
Application for extensions of time for filing such reports should be 
addressed to the district director of internal revenue for the district 
in which the contracting party files its Federal income tax returns and 
must contain a full recital of the causes for the delay.

Sec. 17.16 Annual reports for income-taxable years.
    (a) General requirements. Every contracting party completing a 
contract or subcontract within the contracting party's income-taxable 
year ending after April 3, 1939 shall file, with the district director 
of internal revenue for the internal revenue district in which the 
contracting party's Federal income tax return is required to be filed, 
annual reports on the prescribed forms of the profit and excess profit 
on all contracts and subcontracts coming within the scope of the act. If 
any contracts or subcontracts so completed by the contracting party were 
entered into for the construction or manufacture of any complete naval 
vessel or any portion thereof, the profit and excess profit on all such 
contracts and subcontracts completed within the income-taxable year 
ending after April 3, 1939 shall be computed in accordance with the 
provisions of Sec. 17.6. If any contracts or subcontracts so completed 
by the contracting party were entered into for the construction or 
manufacture of any complete naval aircraft or any portion thereof, the 
profit and excess profit on all such contracts and subcontracts 
completed within the income-taxable year ending after April 3, 1939 
shall be computed in accordance with the provisions of Sec. 17.7. There 
shall be included as a part of the annual report a statement, preferably 
in columnar form, showing separately for each contract or subcontract 
completed by the contracting party within the income-taxable year and 
covered by the report, the total contract price, the cost of performing 
the contract or subcontract and resulting profit or loss on each 
contract or subcontract together with a summary statement showing in 
detail the computation of the net profit or net loss upon each group of 
contracts and subcontracts covered by the report and the amount of the 
excess profit, if any, with respect to each group of contracts and 
subcontracts covered by the report. A copy of the report made to the 
Secretary of the Navy (see Sec. 17.15) with respect to each contract or 
subcontract covered in the annual report, shall be filed as a part of 
such annual report. In case the income-taxable year of the contracting 
party is a period of less than twelve months (see Sec. 17.1), the 
reports required by this section shall be made for such period and not 
for a full year.
    (b) Time for filing annual reports. Annual reports of contracts and 
subcontracts completed by a contracting party within an income-taxable 
year ending after April 3, 1939 shall be filed on or before the 15th day 
of the ninth month following the close of the contracting party's 
income-taxable year. It is important that the contracting party render 
on or before the due date annual reports as nearly complete and final as 
it is possible for the contracting party to prepare. An extension of 
time granted the contracting party

[[Page 101]]

for filing its Federal income tax return does not serve to extend the 
time for filing the annual reports required by this section. Authority 
consistent with authorizations for granting extensions of time for 
filing Federal income tax returns is hereby delegated to the various 
district directors of internal revenue for granting extensions of time 
for filing the reports required by this section. Application for 
extension of time for filing such reports should be addressed to the 
district director of internal revenue for the district in which the 
contracting party files its Federal income tax returns and must contain 
a full recital of the causes for the delay.



Sec. 1.6012-5  Composite return in lieu of specified form.

    The Commissioner may authorize the use, at the option of a person 
required to make a return, of a composite return in lieu of any form 
specified in this part for use by such a person, subject to such 
conditions, limitations, and special rules governing the preparation, 
execution, filing, and correction thereof as the Commissioner may deem 
appropriate. Such composite return shall consist of a form prescribed by 
the Commissioner and an attachment or attachments of magnetic tape or 
other approved media. Notwithstanding any provisions in this part to the 
contrary, a single form and attachment may comprise the returns of more 
than one such person. To the extent that the use of a composite return 
has been authorized by the Commissioner, references in this part to a 
specific form for use by such a person shall be deemed to refer also to 
a composite return under this section.

[T.D. 7200, 37 FR 16544, Aug. 16, 1972]



Sec. 1.6012-6  Returns by political organizations.

    (a) Requirement of return--(1) In general. For taxable years 
beginning after December 31, 1974, every political organization 
described in section 527(e)(1), and every fund described in section 
527(f)(3) or section 527(g), and every organization described in section 
501(c) and exempt from taxation under section 501(a) shall, if a tax is 
imposed on such an organization or fund by section 527(b), make a return 
of income on or before the fifteenth day of the fourth month following 
the close of the taxable year.
    (2) Taxable years beginning after December 31, 1971, and before 
January 1, 1975. For taxable years beginning after December 31, 1971, 
and before January 1, 1975, any political organization which would be 
described in section 527(e)(1) if such section applied to such years 
shall not be required to make a return if such organization would not be 
required to make a return under paragraph (a)(1) of this section.
    (b) Form of return. The return required by an organization or fund 
upon which a tax is imposed by section 527(b) shall be made on Form 
1120-POL.
    (c) Applicability date. This section applies to returns filed on or 
after January 30, 2020. Section 1.6012-6T (as contained in 26 CFR part 
1, revised April 2019) applies to returns filed before January 30, 2020.

[T.D. 7516, 42 FR 57312, Nov. 2, 1977; 43 FR 2721, Jan. 19, 1978; T.D. 
9821, 82 FR 33444, July 20, 2017; T.D. 9892, 85 FR 5324, Jan. 30, 2020]



Sec. 1.6013-1  Joint returns.

    (a) In general. (1) A husband and wife may elect to make a joint 
return under section 6013(a) even though one of the spouses has no gross 
income or deductions. For rules for determining whether individuals 
occupy the status of husband and wife for purposes of filing a joint 
return, see paragraph (a) of Sec. 1.6013-4. For any taxable year with 
respect to which a joint return has been filed, separate returns shall 
not be made by the spouses after the time for filing the return of 
either has expired. See, however, paragraph (d)(5) of this section for 
the right of an executor to file a late separate return for a deceased 
spouse and thereby disaffirm a timely joint return made by the surviving 
spouse.
    (2) A joint return of a husband and wife (if not made by an agent of 
one or both spouses) shall be signed by both spouses. The provisions of 
paragraph (a)(5) of Sec. 1.6012-1, relating to returns made by agents, 
shall apply where one spouse signs a return as agent for the other, or 
where a third party signs a return as agent for one or both spouses.
    (b) Nonresident alien. A joint return shall not be made if either 
the husband or wife at any time during the taxable year is a nonresident 
alien, unless an election is in effect for the taxable

[[Page 102]]

year under section 6013 (g) or (h) and the regulations thereunder.
    (c) Different taxable years. Except as otherwise provided in this 
section, a husband and wife shall not file a joint return if they have 
different taxable years.
    (d) Joint return after death. (1) Section 6013(a)(2) provides that a 
joint return may be made for the survivor and the deceased spouse or for 
both deceased spouses if the taxable years of such spouses begin on the 
same day and end on different days only because of the death of either 
or both. Thus, if a husband and wife make this return on a calendar year 
basis, and the wife dies on August 1, 1956, a joint return may be made 
with respect to the calendar year 1956 of the husband and the taxable 
year of the wife beginning on January 1, 1956, and ending with her death 
on August 1, 1956. Similarly, if husband and wife both make their 
returns on the basis of a fiscal year beginning on July 1 and the wife 
dies on October 1, 1956, a joint return may be made with respect to the 
fiscal year of the husband beginning on July 1, 1956, and ending on June 
30, 1957, and with respect to the taxable year of the wife beginning on 
July 1, 1956, and ending with her death on October 1, 1956.
    (2) The provision allowing a joint return to be made for the taxable 
year in which the death of either or both spouses occurs is subject to 
two limitations. The first limitation is that if the surviving spouse 
remarries before the close of his taxable year, he shall not make a 
joint return with the first spouse who died during the taxable year. In 
such a case, however, the surviving spouse may make a joint return with 
his new spouse provided the other requirements with respect to the 
filing of a joint return are met. The second limitation is that the 
surviving spouse shall not make a joint return with the deceased spouse 
if the taxable year of either spouse is a fractional part of a year 
under section 443(a)(1) resulting from a change of accounting period. 
For example, if a husband and wife make their returns on the calendar 
year basis and the wife dies on March 1, 1956, and thereafter the 
husband receives permission to change his annual accounting period to a 
fiscal year beginning July 1, 1956, no joint return shall be made for 
the short taxable year ending June 30, 1956. Similarly, if a husband and 
wife who make their returns on a calendar year basis receive permission 
to change to a fiscal year beginning July 1, 1956, and the wife dies on 
June 1, 1956, no joint return shall be made for the short taxable year 
ending June 30, 1956.
    (3) Section 6013(a)(3) provides for the method of making a joint 
return in the case of the death of one spouse or both spouses. The 
general rule is that, in the case of the death of one spouse, or of both 
spouses, the joint return with respect to the decedent may be made only 
by his executor or administrator, as defined in paragraph (c) of Sec. 
1.6013-4. An exception is made to this general rule whereby, in the case 
of the death of one spouse, the joint return may be made by the 
surviving spouse with respect to both him and the decedent if all the 
following conditions exist:
    (i) No return has been made by the decedent for the taxable year in 
respect of which the joint return is made;
    (ii) No executor or administrator has been appointed at or before 
the time of making such joint return; and
    (iii) No executor or administrator is appointed before the last day 
prescribed by law for filing the return of the surviving spouse.


These conditions are to be applied with respect to the return for each 
of the taxable years of the decedent for which a joint return may be 
made if more than one such taxable year is involved. Thus, in the case 
of husband and wife on the calendar year basis, if the wife dies in 
February 1957, a joint return for the husband and wife for 1956 may be 
made if the conditions set forth in this subparagraph are satisfied with 
respect to such return. A joint return also may be made by the survivor 
for both himself and the deceased spouse for the calendar year 1957 if 
it is separately determined that the conditions set forth in this 
subparagraph are satisfied with respect to the return for such year. If, 
however, the deceased spouse should, prior to her death, make a return 
for 1956, the surviving spouse may not thereafter make a joint return 
for himself and the deceased spouse for 1956.

[[Page 103]]

    (4) If an executor or administrator is appointed at or before the 
time of making the joint return or before the last day prescribed by law 
for filing the return of the surviving spouse, the surviving spouse 
cannot make a joint return for himself and the deceased spouse whether 
or not a separate return for the deceased spouse is made by such 
executor or administrator. In such a case, any return made solely by the 
surviving spouse shall be treated as his separate return. The joint 
return, if one is to be made, must be made by both the surviving spouse 
and the executor or administrator. In determining whether an executor or 
administrator is appointed before the last day prescribed by law for 
filing the return of the surviving spouse, an extension of time for 
making the return is included.
    (5) If the surviving spouse makes the joint return provided for in 
subparagraph (3) of this paragraph and thereafter an executor or 
administrator of the decedent is appointed, the executor or 
administrator may disaffirm such joint return. This disaffirmance, in 
order to be effective, must be made within one year after the last day 
prescribed by law for filing the return of the surviving spouse 
(including any extension of time for filing such return) and must be 
made in the form of a separate return for the taxable year of the 
decedent with respect to which the joint return was made. In the event 
of such proper disaffirmance the return made by the survivor shall 
constitute his separate return, that is, the joint return made by him 
shall be treated as his return and the tax thereon shall be computed by 
excluding all items properly includible in the return of the deceased 
spouse. The separate return made by the executor or administrator shall 
constitute the return of the deceased spouse for the taxable year.
    (6) The time allowed the executor or administrator to disaffirm the 
joint return by the making of a separate return does not establish a new 
due date for the return of the deceased spouse. Accordingly, the 
provisions of sections 6651 and 6601, relating to delinquent returns and 
delinquency in payment of tax, are applicable to such return made by the 
executor in disaffirmance of the joint return.
    (e) Return of surviving spouse treated as joint return. For 
provisions relating to the treatment of the return of a surviving spouse 
as a joint return for each of the next two taxable years following the 
year of the death of the spouse, see section 2 and Sec. 1.2-2.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 7274, 38 FR 
11345, May 7, 1973; T.D. 7670, 45 FR 6929, Jan. 31, 1980]



Sec. 1.6013-2  Joint return after filing separate return.

    (a) In general. (1) Where an individual has filed a separate return 
for a taxable year for which a joint return could have been made by him 
and his spouse under section 6013(a), and the time prescribed by law for 
filing the return for such taxable year has expired, such individual and 
his spouse may, under conditions hereinafter set forth, make a joint 
return for such taxable year. The joint return filed pursuant to section 
6013(b) shall constitute the return of the husband and wife for such 
year, and all payments, credits, refunds, or other repayments, made or 
allowed with respect to the separate return of either spouse are to be 
taken into account in determining the extent to which the tax based on 
the joint return has been paid.
    (2) If a joint return is made under section 6013(b), any election, 
other than the election to file a separate return, made by either spouse 
in his separate return for the taxable year with respect to the 
treatment of any income, deduction, or credit of such spouse shall not 
be changed in the making of the joint return where such election would 
have been irrevocable if the joint return had not been made. Thus, if 
one spouse has made an irrevocable election to adopt and use the last-
in, first-out inventory method under section 472, this election may not 
be changed upon making the joint return under section 6013(b).
    (3) A joint return made under section 6013(b) after the death of 
either spouse shall, with respect to the decedent, be made only by his 
executor or administrator. Thus, where no executor or administrator has 
been appointed, a joint

[[Page 104]]

return cannot be made under section 6013(b).
    (4) A nonresidential alien treated as a resident under section 6013 
(g) or (h) for any taxable year ending on or after December 31, 1975, 
and the alien's U.S. citizen or resident spouse may file a joint return 
for that taxable year, even though one or both of the spouses have 
previously filed separate returns for that taxable year. In this case, 
the rule in paragraph (a)(3) of this section does not apply.
    (b) Limitations with respect to making of election. A joint return 
shall not be made under section 6013(b)(1) with respect to a taxable 
year:
    (1) Beginning on or before July 30, 1996, unless there is paid in 
full at or before the time of the filing of the joint return the amount 
shown as tax upon such joint return; or
    (2) After the expiration of three years from the last day prescribed 
by law for filing the return for such taxable year determined without 
regard to any extension of time granted to either spouse; or
    (3) After there has been mailed to either spouse, with respect to 
such taxable year, a notice of deficiency under section 6212, if the 
spouse, as to such notice, files a petition with the Tax Court of the 
United States within the time prescribed in section 6213; or
    (4) After either spouse has commenced a suit in any court for the 
recovery of any part of the tax for such taxable year; or
    (5) After either spouse has entered into a closing agreement under 
section 7121 with respect to such taxable year, or after any civil or 
criminal case arising against either spouse with respect to such taxable 
year has been compromised under section 7122.
    (c) When return deemed filed; assessment and collection; credit or 
refund. (1) For the purpose of section 6501, relating to the period of 
limitations upon assessment and collection, and section 6651, relating 
to delinquent returns, a joint return made under section 6013(b) shall 
be deemed to have been filed, giving due regard to any extension of time 
granted to either spouse, on the following date:
    (i) Where both spouses filed separate returns, prior to making the 
joint return under section 6013(b), on the date the last separate return 
of either spouse was filed for the taxable year, but not earlier than 
the last date prescribed by law for the filing of the return of either 
spouse;
    (ii) Where only one spouse was required and did file a return prior 
to the making of the joint return under section 6013(b), on the date of 
the filing of the separate return, but not earlier than the last day 
prescribed by law for the filing of such return; or
    (iii) Where both spouses were required to file a return, but only 
one spouse did so file, on the date of the filing of the joint return 
under section 6013(b).
    (2) For the purpose of section 6511, relating to refunds and 
credits, a joint return made under section 6013(b) shall be deemed to 
have been filed on the last date prescribed by law for filing the return 
for such taxable year, determined without regard to any extension of 
time granted to either spouse for filing the return or paying the tax.
    (d) Additional time for assessment. In the case of a joint return 
made under section 6013(b), the period of limitations provided in 
sections 6501 and 6502 shall not be less than one year after the date of 
the actual filing of such joint return. The expiration of the one year 
is to be determined without regard to the rules provided in paragraph 
(c)(1) of this section, relating to the application of sections 6501 and 
6651 with respect to a joint return made under section 6013(b).
    (e) Additions to the tax and penalties. (1) Where the amount shown 
as the tax by the husband and wife on a joint return made under section 
6013(b) exceeds the aggregate of the amounts shown as tax on the 
separate return of each spouse, and such excess is attributable to 
negligence, intentional disregard of rules and regulations, or fraud at 
the time of the making of such separate return, there shall be assessed, 
collected, and paid in the same manner as if it were a deficiency an 
additional amount as provided by the following:
    (i) If any part of such excess is attributable to negligence, or 
intentional disregard of rules and regulations, at the time of the 
making of such separate return, but without any intent to

[[Page 105]]

defraud, this additional amount shall be 5 percent of the total amount 
of the excess.
    (ii) If any part of such excess is attributable to fraud with intent 
to evade tax at the time of the making of such separate return, this 
additional amount shall be 50 percent of the total amount of the excess. 
The latter addition is in lieu of the 50 percent addition to the tax 
provided in section 6653(b).
    (2) For purposes of section 7206 (1) and (2) and section 7207 
(relating to criminal penalties in the case of fraudulent returns), the 
term ``return'' includes a separate return filed by a spouse with 
respect to a taxable year for which a joint return is made under section 
6013(b) after the filing of a separate return.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 7670, 45 FR 
6929, Jan. 31, 1980; T.D. 8725, 62 FR 39117, July 22, 1997]



Sec. 1.6013-3  Treatment of joint return after death of either spouse.

    For purposes of section 21 (relating to change in rates during a 
taxable year), section 443 (relating to returns for a period of less 
than 12 months), and section 7851(a)(1)(A) (relating to the 
applicability of certain provisions of the Internal Revenue Code of 1954 
and the Internal Revenue Code of 1939), where the husband and wife have 
different taxable years because of death of either spouse, the joint 
return shall be treated as if the taxable years of both ended on the 
date of the closing of the surviving spouse's taxable year. Thus, in 
cases where the Internal Revenue Code of 1939 otherwise would apply to 
the taxable year of the decedent spouse and the Internal Revenue Code of 
1954 would apply to the taxable year of the surviving spouse, this 
provision makes the Internal Revenue Code of 1954 applicable to the 
taxable years of both spouses if a joint return is filed.



Sec. 1.6013-4  Applicable rules.

    (a) Status as husband and wife. For the purpose of filing a joint 
return under section 6013, the status as husband and wife of two 
individuals having taxable years beginning on the same day shall be 
determined:
    (1) If the taxable year of each individual is the same, as of the 
close of such year; and
    (2) If the close of the taxable year is different by reason of the 
death of one spouse, as of the time of such death.


An individual legally separated from his spouse under a decree of 
divorce or of separate maintenance shall not be considered as married. 
However, the mere fact that spouses have not lived together during the 
course of the taxable year shall not prohibit them from making a joint 
return. A husband and wife who are separated under an interlocutory 
decree of divorce retain the relationship of husband and wife until the 
decree becomes final. The fact that the taxpayer and his spouse are 
divorced or legally separated at any time after the close of the taxable 
year shall not deprive them of their right to file a joint return for 
such taxable year under section 6013.
    (b) Computation of income, deductions, and tax. If a joint return is 
made, the gross income and adjusted gross income of husband and wife on 
the joint return are computed in an aggregate amount and the deductions 
allowed and the taxable income are likewise computed on an aggregate 
basis. Deductions limited to a percentage of the adjusted gross income, 
such as the deduction for charitable, etc., contributions and gifts, 
under section 170, will be allowed with reference to such aggregate 
adjusted gross income. A similar rule is applied in the case of the 
limitation of section 1211(b) on the allowance of losses resulting from 
the sale or exchange of capital assets (see Sec. 1.1211-1). Although 
there are two taxpayers on a joint return, there is only one taxable 
income. The tax on the joint return shall be computed on the aggregate 
income and the liability with respect to the tax shall be joint and 
several. For computation of tax in the case of a joint return, see Sec. 
1.2-1. For tax in the case of a joint return of husband and wife 
electing to pay the optional tax under section 3, see Sec. 1.3-1. For 
the election not to show on a joint return the amount of tax due in 
connection therewith, see paragraph (c) of Sec. 1.6014-1 and paragraph 
(d) of Sec. 1.6014-2. For separate computations of the self-employment

[[Page 106]]

tax of each spouse on a joint return, see paragraph (b) of Sec. 1.6017-
1.
    (c) Definition of executor or administrator. For purposes of section 
6013 the term ``executor or administrator'' means the person who is 
actually appointed to such office and not a person who is merely in 
charge of the property of the decedent.
    (d) Return signed under duress. If an individual asserts and 
establishes that he or she signed a return under duress, the return is 
not a joint return. The individual who signed such return under duress 
is not jointly and severally liable for the tax shown on the return or 
any deficiency in tax with respect to the return. The return is adjusted 
to reflect only the tax liability of the individual who voluntarily 
signed the return, and the liability is determined at the applicable 
rates in section 1(d) for married individuals filing separate returns. 
Section 6212 applies to the assessment of any deficiency in tax on such 
return.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 7102, 36 FR 
5497, Mar. 24, 1971; T.D. 9003, 67 FR 47285, July 18, 2002]



Sec. 1.6013-6  Election to treat nonresident alien individual 
as resident of the United States.

    (a) Election for special treatment--(1) In general. Two individuals 
who are husband and wife at the close of a taxable year ending on or 
after December 31, 1975, may make an election under this section for 
that taxable year if, at the close of that year, one spouse is a citizen 
or resident of the United States and the other spouse is a nonresident 
alien. The effect of the election is that each spouse is treated as a 
resident of the United States for purposes of chapters 1, 5, and 24 and 
sections 6012, 6013, 6072, and 6091 of the Code for the entire taxable 
year. An election made under this section is in effect for the taxable 
year for which made and for all subsequent years of the husband and 
wife, except:
    (i) Any taxable year for which the election is suspended, as 
described in paragraph (a)(3) of this section, and
    (ii) Any taxable year for which the election is terminated in 
accordance with paragraph (b) of this section and all subsequent taxable 
years.


A husband and wife may not make an election if an election previously 
made under this section by either spouse has been terminated under 
paragraph (b) of this section.
    (2) Particular rules. (i) As used in paragraph (a)(3) of this 
section, the term ``U.S. spouse'' means any married individual who is a 
citizen or resident of the United States at any time during a taxable 
year.
    (ii) An individual's residence is determined by application of the 
principles of Sec. Sec. 301.7701(b)-1 through 301.7701(b)-9 of this 
chapter relating to what constitutes residence in the United States by 
an alien individual.
    (iii) Whether two individuals are married at the close of a taxable 
year is determined by application of the rules in Sec. 1.6013-4(a).
    (iv) The provisions of section 879 and the regulations thereunder 
shall not apply for any taxable year for which an election under this 
section is in effect.
    (v) An individual who makes an election under this section may not, 
for United States income tax purposes, claim under any United States 
income tax treaty not to be a U.S. resident. The relationship of U.S. 
income tax treaties and the election under this section is illustrated 
by the following example.

    Example. H, a U.S. citizen, is married to W, a nonresident alien of 
the United States and a domiciliary of country X. H and W maintain their 
only permanent home in country X. W receives both U.S. source and 
country X source interest during the taxable year. The interest is not 
effectively connected with a permanent establishment or a fixed base in 
any country. H and W make the section 6013 (g) election. Under article 
ii (1) of the United States--country X Income Tax Convention interest 
derived and beneficially owned by a resident of one contracting state is 
exempt from tax in the other contracting state. Article 4 (1) of the 
treaty provides that an individual is a resident of a contracting state 
if subject to tax in that country by reason of the individual's 
domicile, residence, or citizenship. Under article 4 (1) of the treaty, 
W is a resident of country X by virtue of her domicile in country X and 
also of the United States by virtue of the section 6013 (g) election. 
Article 4 (2) of the treaty provides that if an individual is a resident 
of both the United States and country X by reason of article 4 (1), the 
individual shall be deemed to be a resident of the contracting state in

[[Page 107]]

which he or she has a permanent home available. Because W's sole 
permanent home is in country X, under article 4 (2) of the treaty W is 
treated as a resident of country X for purposes of the treaty. Because W 
has elected under section 6013(g) to be treated as a U.S. resident (and 
thus to be taxed on worldwide income), W may not, for U.S. income tax 
purposes, claim under the treaty not to be a U.S. resident. W, 
therefore, is subject to U.S. income tax on the interest. For purposes 
of country X income tax, W is considered a resident of country X under 
the treaty.

    (3) Suspension of election. (i) An election made under this section 
is suspended and is not in effect for a taxable year subsequent to the 
first taxable year for which made if neither spouse is a U.S. spouse 
during that subsequent taxable year. Thus, for example, the election is 
in suspense if both spouses are nonresident aliens for the entire 
taxable year.
    (ii) If either spouse dies during any taxable year for which the 
election under this section is in effect, other than the first taxable 
year for which the election is to be in effect, the taxable year shall 
include, solely for purposes of this paragraph (a)(3), only those days 
during the taxable year on which both spouses are alive. Thus, for 
example, if the U.S. spouse dies during the taxable year, the election 
is not suspended for that year even if the surviving nonresident alien 
spouse never acquires U.S. citizenship or residency. Similarly, if the 
nonresident alien spouse dies during the taxable year, the election is 
not suspended for that year even if the surviving U.S. spouse 
subsequently abandons U.S. citizenship or residency. However, if neither 
spouse was a U.S. spouse at any time during the period of the taxable 
year when both spouses were alive, the election is suspended for that 
year even if the surviving spouse subsequently acquires U.S. citizenship 
or residency.


For the effect of the death of either spouse on the status of the 
election in subsequent taxable years, see paragraph (b)(2) of this 
section.
    (4) Time and manner of making an election. (i) A husband and wife 
shall make the election under this section by attaching a statement to a 
joint return for the first taxable year for which the election is to be 
in effect. The election must be made before the expiration of the period 
prescribed by section 6511(a) (or section 6511(c) if the period is 
extended by agreement) for making a claim for credit or refund. If 
either or both spouses die after the close of the taxable year but 
before the joint return is filed, the election may be made by the 
executor, administrator, or other person charged with the property of 
the deceased spouse. If the election is made with a joint amended 
return, the amended return should be made on Form 1040 or 1040A, the 
word ``Amended'' should be written clearly on the front of the return, 
and an amended return also must be filed for each subsequent taxable 
year as to which a return previously has been filed by either spouse.
    (ii) The statement must contain a declaration that the election is 
being made and that the requirements of paragraph (a)(1) of this section 
are met for the taxable year. The statement must also contain the name, 
address, and taxpayer identifying number of each spouse. If the election 
is being made on behalf of a deceased spouse, the statement must contain 
the name and address of the executor, administrator, or other person 
making the election on behalf of the decreased spouse. The statement 
must be signed by both persons making the election.
    (b) Termination of election--(1) Revocation. (i) An election under 
this section shall terminate if either spouse revokes the election. An 
election that is revoked terminates as of the first taxable year for 
which the last day prescribed by section 6072(a) and 6081(a) for filing 
the return of tax has not yet occurred.
    (ii) Revocation of the election is made by filing a statement of 
revocation in the following manner. If the spouse revoking the election 
is required to file a return under section 6012, the statement is filed 
by attaching it to the return for the first taxable year to which the 
revocation applies. If the spouse revoking the election is not required 
to file a return under section 6012, but files a claim for refund under 
section 6511, the statement is filed by attaching it to the claim for 
refund. If the spouse revoking the election is not required to file a 
return and does not file a claim for refund, the statement is

[[Page 108]]

filed by submitting it to the service center director with whom was 
filed the most recent joint return of the spouses. The revocation may, 
if the revoking spouse dies after the close of the first taxable year to 
which the revocation applies but before the return, claim for refund, or 
statement of revocation is filed, be made by the executor, administrator 
or other person charged with the property of the deceased spouse.
    (iii) A revocation of the election is effective as of a particular 
taxable year if it is filed on or before the last day prescribed by 
section 6072(a) and 6081(a) for filing the return of tax for that 
taxable year. However, the revocation is not final until that last day.
    (iv) The statement of revocation must contain a declaration that the 
election under this section is being revoked. The statement must also 
contain the name, address, and taxpayer identifying number of each 
spouse. If the revocation is being made on behalf of a deceased spouse, 
the statement must contain the name and address of the executor, 
administrator, or other person revoking the election on behalf of the 
deceased spouse. The statement must also include a list of the States, 
foreign countries, and possessions of the United States which have 
community property laws and in which:
    (A) Each spouse is domiciled, or
    (B) real property is located from which either of the spouses 
receives income.


The statement must be signed by the person revoking the election.
    (2) Death. An election under this section shall terminate if either 
spouse dies. An election that terminates on account of death terminates 
as of the first taxable year of the surviving spouse following the 
taxable year in which the death occurred. However, if the surviving 
spouse is a citizen or resident of the United States who is entitled to 
the benefits of section 2, the election terminates as of the first 
taxable year following the last taxable year for which the surviving 
spouse is entitled to the benefits of section 2. If both spouses die 
within the same taxable year, the election terminates as of the first 
day after the close of the taxable year in which the deaths occurred.
    (3) Legal separation. An election under this section terminates if 
the spouses legally separate under a degree of divorce or of separate 
maintenance. An election that terminates on account of legal separation 
terminates as of the close of the taxable year preceding the taxable 
year in which the separation occurs. The rules in Sec. 1.6013-4(a) are 
relevant in determining whether two spouses are legally separated.
    (4) Inadequate records. An election under this section may be 
terminated by the Commissioner if it is determined that either spouse 
has failed to keep adequate records. An election that is terminated on 
account of inadequate records terminates as of the close of the taxable 
year preceding the taxable year for which the Commissioner determines 
that the election should be terminated. Adequate records are the books, 
records, and other information reasonably necessary to ascertain the 
amount of liability for taxes under chapters 1, 5, and 24 of the code of 
either spouse for the taxable year. Adequate records also includes the 
granting of access to the books and records.
    (c) Illustrations. The application of this section is illustrated by 
the following examples. In each case the individual's taxable year is 
the calendar year and the spouses are not legally separated.

    Example 1. W, a U.S. citizen for the entire taxable year 1979, is 
married to H, a nonresident alien individual. W and H may make the 
section 6013(g) election for 1979 by filing the statement of election 
with a joint return. If W and H make the election, income from sources 
within and without the United States received by W and H in 1979 and 
subsequent years must be included in gross income for each taxable year 
unless the election later is terminated or suspended. While W and H must 
file a joint return for 1979, joint or separate returns may be filed for 
subsequent years.
    Example 2. H and W are husband and wife and are both nonresident 
alien individuals. In June 1980 H becomes a U.S. resident and remains a 
resident for the balance of the year. H and W may make the section 
6013(g) election for 1980. If H and W make the election, income from 
sources within and without the United States received by H and W for the 
entire taxable year 1980 and subsequent years must be included in gross 
income for each taxable year, unless the election later is terminated or 
suspended.

[[Page 109]]

    Example 3. W, a U.S. resident on December 31, 1981, is married to H, 
a nonresident alien. W and H make the section 6013(g) election and file 
joint returns for 1981 and succeeding years. On January 10, 1987, W 
becomes a nonresident alien. H has remained a nonresident alien. W and H 
may file a joint return or separate returns for 1987. As neither W or H 
is a U.S. resident at any time during 1988, their election is suspended 
for 1988. If W and H have U.S. source or foreign source income 
effectively connected with the conduct of a U.S. trade or business in 
1988, they must file separate returns as nonresident aliens. W becomes a 
U.S. resident again on January 5, 1990. Their election no longer is in 
suspense. Income from sources within and without the United States 
received by W or H in the years their election is not suspended must be 
included in gross income for each taxable year.
    Example 4. H, a U.S. citizen for the entire taxable year 1979, is 
married to W, who is not a U.S. citizen. While W believes that she is a 
U.S. resident, H and W make the section 6013(g) election for 1979 to 
cover the possibility that later it would be determined that she is a 
nonresident alien during 1979. The election for 1979 will not be 
considered evidence that W was a nonresident alien in prior years. 
Income from sources within and without the United States received by H 
and W in 1979 and subsequent years must be included in gross income for 
each taxable year, unless the election later is terminated or suspended.

[T.D. 7670, 45 FR 6929, Jan. 31, 1980, as amended by T.D. 7842, 47 FR 
49842, Nov. 3, 1982; T.D. 8411, 57 FR 15241, Apr. 27, 1992]



Sec. 1.6013-7  Joint return for year in which nonresident alien 
becomes resident of the United States.

    (a) Election for special treatment--(1) In general. Two individuals 
who are husband and wife at the close of a taxable year ending on or 
after December 31, 1975, may make an election under this section for 
that taxable year if one spouse is a citizen or resident of the United 
States on the last day of that taxable year and the other spouse is a 
nonresident alien at the beginning of that taxable year and a citizen or 
resident of the United States at the close of that taxable year. Two 
married individuals who are nonresident aliens at the beginning of a 
taxable year and who are U.S. citizens or residents on the last day of 
that taxable year qualify for the election. The effect of the election 
is that each spouse is treated as a resident of the United States for 
purposes of chapters 1, 5, and 24 and sections 6012, 6013, 6072, and 
6091 of the code for all of that taxable year. A husband and wife may 
not make an election if an election has previously been made under this 
section by either spouse.
    (2) Particular rules. The rules in subdivisions (ii) through (v) of 
Sec. 1.6013-6(a)(2) are applicable to this section.
    (3) Time and manner of making an election. A husband and wife shall 
make the election under this section in accordance with the rules in 
Sec. 1.6013-6(a)(4).
    (b) Section 6013(g) election in effect. If an election under section 
6013(g) is in effect for a year subsequent to the first taxable year for 
which made and during that subsequent year the husband and wife meet the 
requirements of section 6013(h) and paragraph (a)(1) of this section, 
then the election under section 6013(g) shall apply to that subsequent 
taxable year. A separate election under section 6013(h) is not required 
for that subsequent taxable year.

[T.D. 7670, 45 FR 6931, Jan. 31, 1980]



Sec. 1.6014-1  Tax not computed by taxpayer for taxable years
beginning before January 1, 1970.

    (a) In general. If an individual is entitled under paragraph (a)(7) 
of Sec. 1.6012-1 to use as his return Form 1040A, he may elect not to 
show thereon the amount of the tax due in connection with such return if 
his gross income is less than $5,000.
    (b) Computation and payment of tax. A taxpayer who, in accordance 
with paragraph (a) of this section, elects not to show the tax on Form 
1040A is not required to pay the unpaid balance of such tax at the time 
he files the return. In such case, the tax will be computed for the 
taxpayer by the Internal Revenue Service, and a notice will be mailed to 
the taxpayer stating the amount of tax due. Where it is determined that 
a refund of tax is due, the Internal Revenue Service will send such 
refund to the taxpayer. See paragraph (c) of Sec. 301.6402-3 of this 
chapter (Regulations on Procedure and Administration).
    (c) Joint return. (1) A husband and wife who, pursuant to paragraph 
(a)(7) of Sec. 1.6012-1, file a joint return on Form

[[Page 110]]

1040A may elect not to show the tax on such return if their aggregate 
gross income for the taxable year is less than $5,000.
    (2) The tax computed for the taxpayer who files Form 1040A and 
elects not to show thereon the tax due shall be the lesser of the 
following amounts:
    (i) A tax computed as though the return on Form 1040A constituted 
the separate returns of the spouses, or
    (ii) A tax computed as though the return on Form 1040A constituted a 
joint return.
    (d) Married individuals filing separate returns. In the case of a 
married individual who files a separate return and who elects under this 
section not to show his tax on Form 1040A his tax shall be computed with 
reference to the 10-percent standard deduction rather than the minimum 
standard deduction.
    (e) This section shall apply to taxable years beginning before 
January 1, 1970.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6581, 26 FR 
11678, Dec. 6, 1961; T.D. 6792, 30 FR 531, Jan. 15, 1965; T.D. 7102, 36 
FR 5497, Mar. 24, 1971]



Sec. 1.6014-2  Tax not computed by taxpayer for taxable years 
beginning after December 31, 1969.

    (a) In general. An individual subject to the tax imposed by section 
1 of the Code may, in accordance with the instructions applicable to the 
income tax return to be filed, elect, for any taxable year beginning 
after December 31, 1969, not to show on his income tax return for such 
year the amount of tax due in connection with such return.
    (b) Restriction on making an election. The election pursuant to this 
section shall not be made by an individual who does not file his return 
(or amended return) making such election on or before the date 
prescribed in section 6072(a) for the filing of the original return 
(determined without regard to any extension of time).
    (c) Effects of election. (1) A taxpayer who, in accordance with the 
provisions of this section, elects not to show the tax on his income tax 
return is not required to pay the unpaid balance of such tax at the time 
he files the return. In such case, the tax will be computed for the 
taxpayer by the Internal Revenue Service, and a notice will be mailed to 
the taxpayer stating the amount of tax due. Where it is determined that 
a refund of tax is due, the Internal Revenue Service will send such 
refund to the taxpayer. See paragraph (c) of Sec. 301.6402-3 of this 
chapter (Regulations on Procedure and Administration). The computation 
of tax by the Internal Revenue Service shall be treated for purposes of 
this chapter as if made by the taxpayer, and such computation or the 
issuance of a notice or refund pursuant thereto shall not relieve the 
taxpayer of liability for any deficiency (although the deficiency is 
based upon an amount of tax different from that computed for the 
taxpayer by the Internal Revenue Service) or affect the rights of the 
Internal Revenue Service with respect to any subsequent audit or other 
review of the taxpayer's return.
    (2) Where the election provided for in this section is made by a 
taxpayer who takes the standard deduction and who has adjusted gross 
income of less than $10,000, such election constitutes an election to 
pay the tax imposed by section 3.
    (3) A taxpayer who makes an election under section 6014 shall not be 
precluded from claiming:
    (i) Status as a head of household or a surviving spouse;
    (ii) The credit under section 31 (relating to tax withheld on 
wages);
    (iii) The credit under section 37 (relating to retirement income);
    (iv) The credit under section 38 (relating to investment in certain 
depreciable property);
    (v) The credit under section 39 (relating to certain uses of 
gasoline and lubricating oil);
    (vi) The credit under section 41 (relating to contributions to 
candidates for public office);
    (vii) The credit under section 42 (relating to personal exemptions);
    (viii) The credit under section 43 (relating to earned income);
    (ix) The credit under section 44 (relating to purchase of new 
principal residence); or
    (x) The credit under section 45 (relating to overpayments of tax).
    (d) Joint returns. (1) A husband and wife who file a joint return 
may elect not to show the tax on such return in

[[Page 111]]

accordance with the rules prescribed in paragraphs (a) and (b) of this 
section.
    (2) The tax computed for a husband and wife who elect pursuant to 
this section not to show their tax on their joint income tax return 
shall be the lesser of the following amounts:
    (i) A tax computed as though the return of income constituted a 
joint return, or
    (ii) If sufficient information is provided for the taxable income of 
each spouse to be determined, a tax computed as though the return of 
income constituted the separate returns of the spouses.
    (e) Married individuals filing separate returns. This section shall 
apply to married individuals filing separate returns unless otherwise 
provided in the instructions accompanying a return. The instructions may 
require the taxpayer to attach to his return a statement to the effect 
that his tax and the tax of his spouse were determined in accordance 
with the rules of sections 141(d) and 142(a).
    (f) Revocation of election. An election pursuant to this section may 
be revoked on an amended return (whether such return is filed before or 
after the date prescribed in section 6072(a) for filing the original 
return).

[T.D. 7102, 36 FR 5497, Mar. 24, 1971, as amended by T.D. 7298, 38 FR 
35234, Dec. 26, 1973; T.D. 7391, 40 FR 55856, Dec. 2, 1975]



Sec. 1.6015-0  Table of contents.

    This section lists captions contained in Sec. Sec. 1.6015-1 through 
1.6015-9.

   Sec. 1.6015-1 Relief from joint and several liability on a joint 
                                 return.

    (a) In general.
    (b) Duress.
    (c) Prior closing agreement or offer in compromise.
    (1) In general.
    (2) Exception for agreements relating to TEFRA partnership 
proceedings.
    (3) Examples.
    (d) Fraudulent scheme.
    (e) Res judicata and collateral estoppel.
    (f) Community property laws.
    (1) In general.
    (2) Example.
    (g) Scope of this section and Sec. Sec. 1.6015-2 through 1.6015-9.
    (h) Definitions.
    (1) Requesting spouse.
    (2) Nonrequesting spouse.
    (3) Item.
    (4) Erroneous item.
    (5) Election or request.
    (i) [Reserved]
    (j) Transferee liability.
    (1) In general.
    (2) Example.

Sec. 1.6015-2 Relief from liability applicable to all qualifying joint 
                                 filers.

    (a) In general.
    (b) Understatement.
    (c) Knowledge or reason to know.
    (d) Inequity.
    (e) Partial relief.
    (1) In general.
    (2) Example.

Sec. 1.6015-3 Allocation of liability for individuals who are no longer 
     married, are legally separated, or are not members of the same 
                               household.

    (a) Election to allocate liability.
    (b) Definitions.
    (1) Divorced.
    (2) Legally separated.
    (3) Members of the same household.
    (i) Temporary absences.
    (ii) Separate dwellings.
    (c) Limitations.
    (1) No refunds.
    (2) Actual knowledge.
    (i) In general.
    (A) Omitted income.
    (B) Deduction or credit.
    (1) Erroneous deductions in general.
    (2) Fictitious or inflated deduction.
    (ii) Partial knowledge.
    (iii) Knowledge of the source not sufficient.
    (iv) Factors supporting actual knowledge.
    (v) Abuse exception.
    (3) Disqualified asset transfers.
    (i) In general.
    (ii) Disqualified asset defined.
    (iii) Presumption.
    (4) Examples.
    (d) Allocation.
    (1) In general.
    (2) Allocation of erroneous items.
    (i) Benefit on the return.
    (ii) Fraud.
    (iii) Erroneous items of income.
    (iv) Erroneous deduction items.
    (3) Burden of proof.
    (4) General allocation method.
    (i) Proportionate allocation.
    (ii) Separate treatment items.
    (iii) Child's liability.
    (iv) Allocation of certain items.
    (A) Alternative minimum tax.
    (B) Accuracy-related and fraud penalties.
    (5) Examples.
    (6) Alternative allocation methods.
    (i) Allocation based on applicable tax rates.
    (ii) Allocation methods provided in subsequent published guidance.

[[Page 112]]

    (iii) Example.

                    Sec. 1.6015-4 Equitable relief.

          Sec. 1.6015-5 Time and manner for requesting relief.

    (a) Requesting relief.
    (b) Time period for filing a request for relief.
    (1) In general.
    (2) Definitions.
    (i) Collection activity.
    (ii) Section 6330 notice.
    (3) Requests for relief made before commencement of collection 
activity.
    (4) Examples.
    (5) Premature requests for relief.
    (c) Effect of a final administrative determination.

    Sec. 1.6015-6 Nonrequesting spouse's notice and opportunity to 
               participate in administrative proceedings.

    (a) In general.
    (b) Information submitted.
    (c) Effect of opportunity to participate.
    (2) Waiver of the restrictions on collection.

                    Sec. 1.6015-7 Tax Court review.

    (a) In general.
    (b) Time period for petitioning the Tax Court.
    (c) Restrictions on collection and suspension of the running of the 
period of limitations.
    (1) Restrictions on collection under Sec. 1.6015-2 or 1.6015-3.
    (2) Waiver of the restrictions on collection.
    (3) Suspension of the running of the period of limitations.
    (i) Relief under Sec. 1.6015-2 or 1.6015-3.
    (ii) Relief under Sec. 1.6015-4.
    (4) Definitions.
    (i) Levy.
    (ii) Proceedings in court.
    (iii) Assessment to which the election relates.

                 Sec. 1.6015-8 Applicable liabilities.

    (a) In general.
    (b) Liabilities paid on or before July 22, 1998.
    (c) Examples.

                     Sec. 1.6015-9 Effective date.

[T.D. 9003, 67 FR 47285, July 18, 2002]



Sec. 1.6015-1  Relief from joint and several liability on a joint
return.

    (a) In general. (1) An individual who qualifies and elects under 
section 6013 to file a joint Federal income tax return with another 
individual is jointly and severally liable for the joint Federal income 
tax liabilities for that year. A spouse or former spouse may be relieved 
of joint and several liability for Federal income tax for that year 
under the following three relief provisions:
    (i) Innocent spouse relief under Sec. 1.6015-2.
    (ii) Allocation of deficiency under Sec. 1.6015-3.
    (iii) Equitable relief under Sec. 1.6015-4.
    (2) A requesting spouse may submit a single claim electing relief 
under both or either Sec. Sec. 1.6015-2 and 1.6015-3, and requesting 
relief under Sec. 1.6015-4. However, equitable relief under Sec. 
1.6015-4 is available only to a requesting spouse who fails to qualify 
for relief under Sec. Sec. 1.6015-2 and 1.6015-3. If a requesting 
spouse elects the application of either Sec. 1.6015-2 or 1.6015-3, the 
Internal Revenue Service will consider whether relief is appropriate 
under the other elective provision and, to the extent relief is 
unavailable under either, under Sec. 1.6015-4. If a requesting spouse 
seeks relief only under Sec. 1.6015-4, the Secretary may not grant 
relief under Sec. 1.6015-2 or 1.6015-3 in the absence of an affirmative 
election made by the requesting spouse under either of those sections. 
If in the course of reviewing a request for relief only under Sec. 
1.6015-4, the IRS determines that the requesting spouse may qualify for 
relief under Sec. 1.6015-2 or 1.6015-3 instead of Sec. 1.6015-4, the 
Internal Revenue Service will correspond with the requesting spouse to 
see if the requesting spouse would like to amend his or her request to 
elect the application of Sec. 1.6015-2 or 1.6015-3. If the requesting 
spouse chooses to amend the claim for relief, the requesting spouse must 
submit an affirmative election under Sec. 1.6015-2 or 1.6015-3. The 
amended claim for relief will relate back to the original claim for 
purposes of determining the timeliness of the claim.
    (3) Relief is not available for liabilities that are required to be 
reported on a joint Federal income tax return but are not income taxes 
imposed under Subtitle A of the Internal Revenue Code (e.g., domestic 
service employment taxes under section 3510).
    (b) Duress. For rules relating to the treatment of returns signed 
under duress, see Sec. 1.6013-4(d).

[[Page 113]]

    (c) Prior closing agreement or offer in compromise--(1) In general. 
A requesting spouse is not entitled to relief from joint and several 
liability under Sec. 1.6015-2, 1.6015-3, or 1.6015-4 for any tax year 
for which the requesting spouse has entered into a closing agreement 
with the Commissioner that disposes of the same liability that is the 
subject of the claim for relief. In addition, a requesting spouse is not 
entitled to relief from joint and several liability under Sec. 1.6015-
2, 1.6015-3, or 1.6015-4 for any tax year for which the requesting 
spouse has entered into an offer in compromise with the Commissioner. 
For rules relating to the effect of closing agreements and offers in 
compromise, see sections 7121 and 7122, and the regulations thereunder.
    (2) Exception for agreements relating to TEFRA partnership 
proceedings. The rule in paragraph (c)(1) of this section regarding the 
unavailability of relief from joint and several liability when the 
liability to which the claim for relief relates was the subject of a 
prior closing agreement entered into by the requesting spouse, shall not 
apply to an agreement described in section 6224(c) with respect to 
partnership items (or any penalty, addition to tax, or additional amount 
that relates to adjustments to partnership items) that is entered into 
while the requesting spouse is a party to a pending partnership-level 
proceeding conducted under the provisions of subchapter C of chapter 63 
of subtitle F of the Internal Revenue Code (TEFRA partnership 
proceeding). If, however, a requesting spouse enters into a closing 
agreement pertaining to any penalty, addition to tax, or additional 
amount that relates to adjustments to partnership items, at a time when 
the requesting spouse is not a party to a pending TEFRA partnership 
proceeding (e.g., in connection with an affected items proceeding), then 
the provisions of paragraph (c)(1) shall apply. Similarly, if a 
requesting spouse enters into a closing agreement with respect to both 
partnership items (including affected items) and nonpartnership items, 
while the requesting spouse is a party to a pending TEFRA partnership 
proceeding, the provisions of paragraph (c)(1) shall apply to the 
portion of the closing agreement that relates to nonpartnership items 
and the provisions of this paragraph (c)(2) shall apply to the remainder 
of the closing agreement.
    (3) Examples. The following examples illustrate the rules of this 
paragraph (c):

    Example 1. H and W file joint returns for taxable years 2002-2004, 
on which they claim losses attributable to H's limited partnership 
interest in Partnership A. In January 2006, the Internal Revenue Service 
commences an audit under the provisions of subchapter C of chapter 63 of 
subtitle F of the Internal Revenue Code (TEFRA partnership proceeding) 
regarding Partnership A's 2002-2004 taxable years, and sends H and W a 
notice under section 6223(a)(1). In September 2007, H files a bankruptcy 
petition under chapter 7 of the Bankruptcy Code and receives a discharge 
in April 2008. In August 2008, H and W enter into a closing agreement 
with the Internal Revenue Service, in which H and W agree to the 
disallowance of some of the claimed losses from Partnership A for 
taxable years 2002 through 2007. W may not later claim relief from joint 
and several liability under section 6015 as to the disallowed losses 
attributable to Partnership A for taxable years 2002 to 2007. This is 
because at the time W entered into the closing agreement, H's 
partnership items attributable to Partnership A had converted to 
nonpartnership items as a result of H's filing of the bankruptcy 
petition. The conversion of H's items also terminated W's status as a 
partner in the TEFRA partnership proceeding regarding Partnership A. 
Consequently, the closing agreement did not pertain to partnership items 
and W was not a party to a pending partnership-level proceeding 
regarding Partnership A when she entered into the closing agreement. 
Accordingly, the exception in paragraph (c)(2) of this section for 
agreements relating to TEFRA partnership proceedings does not apply.
    Example 2. H and W file a joint return for taxable year 2002, on 
which they claim $25,000 in losses attributable to H's general 
partnership interest in Partnership B. In November 2003, the Service 
proposes a deficiency in tax relating to H's and W's 2002 joint return 
arising from omitted taxable interest income in the amount of $2,000 
that is attributable to H. In July 2005, the Internal Revenue Service 
commences a TEFRA partnership proceeding regarding Partnership B's 2002 
and 2003 taxable years, and sends H and W a notice under section 
6223(a)(1). In March 2006, H and W enter into a closing agreement with 
the Service. The closing agreement provides for the disallowance of the 
claimed losses from Partnership B in excess of H's and W's out-of-pocket 
expenditures relating to Partnership B for taxable year 2002 and

[[Page 114]]

any subsequent year(s) in which H and W claimed losses from Partnership 
B. In addition, H and W agree to the imposition of the accuracy-related 
penalty under section 6662 with respect to the disallowed losses 
attributable to partnership B. In the closing agreement, H and W also 
agree to the deficiency resulting from the omitted interest income for 
taxable year 2002. W may not later claim relief from joint and several 
liability under section 6015 as to the deficiency in tax attributable to 
the omitted income of $2,000 for taxable year 2002, because this portion 
of the closing agreement pertains to nonpartnership items. In contrast, 
W may claim relief from joint and several liability as to the disallowed 
losses and accuracy-related penalty attributable to Partnership B for 
taxable year 2002 or any subsequent year(s). This is because this 
portion of the closing agreement pertains to partnership and affected 
items and was entered into at a time when W was a party to the pending 
partnership-level proceeding regarding Partnership B. Consequently, W 
never had the opportunity to raise the innocent spouse defense in the 
course of that TEFRA partnership proceeding. (See Sec. 1.6015-5(b)(5) 
relating to premature claims).

    (d) Fraudulent scheme. If the Secretary establishes that a spouse 
transferred assets to the other spouse as part of a fraudulent scheme, 
relief is not available under section 6015, and section 6013(d)(3) 
applies to the return. For purposes of this section, a fraudulent scheme 
includes a scheme to defraud the Service or another third party, 
including, but not limited to, creditors, ex-spouses, and business 
partners.
    (e) Res judicata and collateral estoppel. A requesting spouse is 
barred from relief from joint and several liability under section 6015 
by res judicata for any tax year for which a court of competent 
jurisdiction has rendered a final decision on the requesting spouse's 
tax liability if relief under section 6015 was at issue in the prior 
proceeding, or if the requesting spouse meaningfully participated in 
that proceeding and could have raised relief under section 6015. A 
requesting spouse has not meaningfully participated in a prior 
proceeding if, due to the effective date of section 6015, relief under 
section 6015 was not available in that proceeding. Also, any final 
decisions rendered by a court of competent jurisdiction regarding issues 
relevant to section 6015 are conclusive and the requesting spouse may be 
collaterally estopped from relitigating those issues.
    (f) Community property laws--(1) In general. In determining whether 
relief is available under Sec. 1.6015-2, 1.6015-3, or 1.6015-4, items 
of income, credits, and deductions are generally allocated to the 
spouses without regard to the operation of community property laws. An 
erroneous item is attributed to the individual whose activities gave 
rise to such item. See Sec. 1.6015-3(d)(2).
    (2) Example. The following example illustrates the rule of this 
paragraph (f):

    Example. (i) H and W are married and have lived in State A (a 
community property state) since 1987. On April 15, 2003, H and W file a 
joint Federal income tax return for the 2002 taxable year. In August 
2005, the Internal Revenue Service proposes a $17,000 deficiency with 
respect to the 2002 joint return. A portion of the deficiency is 
attributable to $20,000 of H's unreported interest income from his 
individual bank account. The remainder of the deficiency is attributable 
to $30,000 of W's disallowed business expense deductions. Under the laws 
of State A, H and W each own \1/2\ of all income earned and property 
acquired during the marriage.
    (ii) In November 2005, H and W divorce and W timely elects to 
allocate the deficiency. Even though the laws of State A provide that 
\1/2\ of the interest income is W's, for purposes of relief under this 
section, the $20,000 unreported interest income is allocable to H, and 
the $30,000 disallowed deduction is allocable to W. The community 
property laws of State A are not considered in allocating items for this 
purpose.

    (g) Scope of this section and Sec. Sec. 1.6015-2 through 1.6015-9. 
This section and Sec. Sec. 1.6015-2 through 1.6015-9 do not apply to 
any portion of a liability for any taxable year for which a claim for 
credit or refund is barred by operation of law or rule of law.
    (h) Definitions--(1) Requesting spouse. A requesting spouse is an 
individual who filed a joint return and elects relief from Federal 
income tax liability arising from that return under Sec. 1.6015-2 or 
1.6015-3, or requests relief from Federal income tax liability arising 
from that return under Sec. 1.6015-4.
    (2) Nonrequesting spouse. A nonrequesting spouse is the individual 
with whom the requesting spouse filed the joint return for the year for 
which relief from liability is sought.

[[Page 115]]

    (3) Item. An item is that which is required to be separately listed 
on an individual income tax return or any required attachments. Items 
include, but are not limited to, gross income, deductions, credits, and 
basis.
    (4) Erroneous item. An erroneous item is any item resulting in an 
understatement or deficiency in tax to the extent that such item is 
omitted from, or improperly reported (including improperly 
characterized) on an individual income tax return. For example, 
unreported income from an investment asset resulting in an 
understatement or deficiency in tax is an erroneous item. Similarly, 
ordinary income that is improperly reported as capital gain resulting in 
an understatement or deficiency in tax is also an erroneous item. In 
addition, a deduction for an expense that is personal in nature that 
results in an understatement or deficiency in tax is an erroneous item 
of deduction. An erroneous item is also an improperly reported item that 
affects the liability on other returns (e.g., an improper net operating 
loss that is carried back to a prior year's return). Penalties and 
interest are not erroneous items. Rather, relief from penalties and 
interest will generally be determined based on the proportion of the 
total erroneous items from which the requesting spouse is relieved. If a 
penalty relates to a particular erroneous item, see Sec. 1.6015-
3(d)(4)(iv)(B).
    (5) Election or request. A qualifying election under Sec. 1.6015-2 
or 1.6015-3, or request under Sec. 1.6015-4, is the first timely claim 
for relief from joint and several liability for the tax year for which 
relief is sought. A qualifying election also includes a requesting 
spouse's second election to seek relief from joint and several liability 
for the same tax year under Sec. 1.6015-3 when the additional 
qualifications of paragraphs (h)(5)(i) and (ii) of this section are 
met--
    (i) The requesting spouse did not qualify for relief under Sec. 
1.6015-3 when the Internal Revenue Service considered the first election 
solely because the qualifications of Sec. 1.6015-3(a) were not 
satisfied; and
    (ii) At the time of the second election, the qualifications for 
relief under Sec. 1.6015-3(a) are satisfied.
    (i) [Reserved]
    (j) Transferee liability--(1) In general. The relief provisions of 
section 6015 do not negate liability that arises under the operation of 
other laws. Therefore, a requesting spouse who is relieved of joint and 
several liability under Sec. 1.6015-2, 1.6015-3, or 1.6015-4 may 
nevertheless remain liable for the unpaid tax (including additions to 
tax, penalties, and interest) to the extent provided by Federal or state 
transferee liability or property laws. For the rules regarding the 
liability of transferees, see sections 6901 through 6904 and the 
regulations thereunder. In addition, the requesting spouse's property 
may be subject to collection under Federal or state property laws.
    (2) Example. The following example illustrates the rule of this 
paragraph (j):

    Example. H and W timely file their 1998 joint income tax return on 
April 15, 1999. H dies in March 2000, and the executor of H's will 
transfers all of the estate's assets to W. In July 2001, the Internal 
Revenue Service assesses a deficiency for the 1998 return. The items 
giving rise to the deficiency are attributable to H. W is relieved of 
the liability under section 6015, and H's estate remains solely liable. 
The Internal Revenue Service may seek to collect the deficiency from W 
to the extent permitted under Federal or state transferee liability or 
property laws.

[T.D. 9003, 67 FR 47285, July 18, 2002]



Sec. 1.6015-2  Relief from liability applicable to all qualifying
joint filers.

    (a) In general. A requesting spouse may be relieved of joint and 
several liability for tax (including additions to tax, penalties, and 
interest) from an understatement for a taxable year under this section 
if the requesting spouse elects the application of this section in 
accordance with Sec. Sec. 1.6015-1(h)(5) and 1.6015-5, and--
    (1) A joint return was filed for the taxable year;
    (2) On the return there is an understatement attributable to 
erroneous items of the nonrequesting spouse;
    (3) The requesting spouse establishes that in signing the return he 
or she did not know and had no reason to know of the understatement; and
    (4) It is inequitable to hold the requesting spouse liable for the 
deficiency attributable to the understatement.

[[Page 116]]

    (b) Understatement. The term understatement has the meaning given to 
such term by section 6662(d)(2)(A) and the regulations thereunder.
    (c) Knowledge or reason to know. A requesting spouse has knowledge 
or reason to know of an understatement if he or she actually knew of the 
understatement, or if a reasonable person in similar circumstances would 
have known of the understatement. For rules relating to a requesting 
spouse's actual knowledge, see Sec. 1.6015-3(c)(2). All of the facts 
and circumstances are considered in determining whether a requesting 
spouse had reason to know of an understatement. The facts and 
circumstances that are considered include, but are not limited to, the 
nature of the erroneous item and the amount of the erroneous item 
relative to other items; the couple's financial situation; the 
requesting spouse's educational background and business experience; the 
extent of the requesting spouse's participation in the activity that 
resulted in the erroneous item; whether the requesting spouse failed to 
inquire, at or before the time the return was signed, about items on the 
return or omitted from the return that a reasonable person would 
question; and whether the erroneous item represented a departure from a 
recurring pattern reflected in prior years' returns (e.g., omitted 
income from an investment regularly reported on prior years' returns).
    (d) Inequity. All of the facts and circumstances are considered in 
determining whether it is inequitable to hold a requesting spouse 
jointly and severally liable for an understatement. One relevant factor 
for this purpose is whether the requesting spouse significantly 
benefitted, directly or indirectly, from the understatement. A 
significant benefit is any benefit in excess of normal support. Evidence 
of direct or indirect benefit may consist of transfers of property or 
rights to property, including transfers that may be received several 
years after the year of the understatement. Thus, for example, if a 
requesting spouse receives property (including life insurance proceeds) 
from the nonrequesting spouse that is beyond normal support and 
traceable to items omitted from gross income that are attributable to 
the nonrequesting spouse, the requesting spouse will be considered to 
have received significant benefit from those items. Other factors that 
may also be taken into account, if the situation warrants, include the 
fact that the requesting spouse has been deserted by the nonrequesting 
spouse, the fact that the spouses have been divorced or separated, or 
that the requesting spouse received benefit on the return from the 
understatement. For guidance concerning the criteria to be used in 
determining whether it is inequitable to hold a requesting spouse 
jointly and severally liable under this section, see Rev. Proc. 2000-15 
(2000-1 C.B. 447), or other guidance published by the Treasury and IRS 
(see Sec. 601.601(d)(2) of this chapter).
    (e) Partial relief--(1) In general. If a requesting spouse had no 
knowledge or reason to know of only a portion of an erroneous item, the 
requesting spouse may be relieved of the liability attributable to that 
portion of that item, if all other requirements are met with respect to 
that portion.
    (2) Example. The following example illustrates the rules of this 
paragraph (e):

    Example. H and W are married and file their 2004 joint income tax 
return in March 2005. In April 2006, H is convicted of embezzling $2 
million from his employer during 2004. H kept all of his embezzlement 
income in an individual bank account, and he used most of the funds to 
support his gambling habit. H and W had a joint bank account into which 
H and W deposited all of their reported income. Each month during 2004, 
H transferred an additional $10,000 from the individual account to H and 
W's joint bank account. W paid the household expenses using this joint 
account, and regularly received the bank statements relating to the 
account. W had no knowledge or reason to know of H's embezzling 
activities. However, W did have knowledge and reason to know of $120,000 
of the $2 million of H's embezzlement income at the time she signed the 
joint return because that amount passed through the couple's joint bank 
account. Therefore, W may be relieved of the liability arising from 
$1,880,000 of the unreported embezzlement income, but she may not be 
relieved of the liability for the deficiency arising from $120,000 of 
the unreported embezzlement income of which she knew and had reason to 
know.

[T.D. 9003, 67 FR 47285, July 18, 2002]

[[Page 117]]



Sec. 1.6015-3  Allocation of deficiency for individuals who are no 
longer married, are legally separated, or are not members of the 
same household.

    (a) Election to allocate deficiency. A requesting spouse may elect 
to allocate a deficiency if, as defined in paragraph (b) of this 
section, the requesting spouse is divorced, widowed, or legally 
separated, or has not been a member of the same household as the 
nonrequesting spouse at any time during the 12-month period ending on 
the date an election for relief is filed. For purposes of this section, 
the marital status of a deceased requesting spouse will be determined on 
the earlier of the date of the election or the date of death in 
accordance with section 7703(a)(1). Subject to the restrictions of 
paragraph (c) of this section, an eligible requesting spouse who elects 
the application of this section in accordance with Sec. Sec. 1.6015-
1(h)(5) and 1.6015-5 generally may be relieved of joint and several 
liability for the portion of any deficiency that is allocated to the 
nonrequesting spouse pursuant to the allocation methods set forth in 
paragraph (d) of this section. Relief may be available to both spouses 
filing the joint return if each spouse is eligible for and elects the 
application of this section.
    (b) Definitions--(1) Divorced. A determination of whether a 
requesting spouse is divorced for purposes of this section will be made 
in accordance with section 7703 and the regulations thereunder. Such 
determination will be made as of the date the election is filed.
    (2) Legally separated. A determination of whether a requesting 
spouse is legally separated for purposes of this section will be made in 
accordance with section 7703 and the regulations thereunder. Such 
determination will be made as of the date the election is filed.
    (3) Members of the same household--(i) Temporary absences. A 
requesting spouse and a nonrequesting spouse are considered members of 
the same household during either spouse's temporary absences from the 
household if it is reasonable to assume that the absent spouse will 
return to the household, and the household or a substantially equivalent 
household is maintained in anticipation of such return. Examples of 
temporary absences may include, but are not limited to, absence due to 
incarceration, illness, business, vacation, military service, or 
education.
    (ii) Separate dwellings. A husband and wife who reside in the same 
dwelling are considered members of the same household. In addition, a 
husband and wife who reside in two separate dwellings are considered 
members of the same household if the spouses are not estranged or one 
spouse is temporarily absent from the other's household within the 
meaning of paragraph (b)(3)(i) of this section.
    (c) Limitations--(1) No refunds. Relief under this section is only 
available for unpaid liabilities resulting from understatements of 
liability. Refunds are not authorized under this section.
    (2) Actual knowledge--(i) In general. If, under section 
6015(c)(3)(C), the Secretary demonstrates that, at the time the return 
was signed, the requesting spouse had actual knowledge of an erroneous 
item that is allocable to the nonrequesting spouse, the election to 
allocate the deficiency attributable to that item is invalid, and the 
requesting spouse remains liable for the portion of the deficiency 
attributable to that item. The Service, having both the burden of 
production and the burden of persuasion, must establish, by a 
preponderance of the evidence, that the requesting spouse had actual 
knowledge of the erroneous item in order to invalidate the election.
    (A) Omitted income. In the case of omitted income, knowledge of the 
item includes knowledge of the receipt of the income. For example, 
assume W received $5,000 of dividend income from her investment in X Co. 
but did not report it on the joint return. H knew that W received $5,000 
of dividend income from X Co. that year. H had actual knowledge of the 
erroneous item (i.e., $5,000 of unreported dividend income from X Co.), 
and no relief is available under this section for the deficiency 
attributable to the dividend income from X Co. This rule applies equally 
in situations where the other spouse has unreported income although the 
spouse does not have an actual receipt of cash

[[Page 118]]

(e.g., dividend reinvestment or a distributive share from a flow-through 
entity shown on Schedule K-1, ``Partner's Share of Income, Credits, 
Deductions, etc.'').
    (B) Deduction or credit--(1) Erroneous deductions in general. In the 
case of an erroneous deduction or credit, knowledge of the item means 
knowledge of the facts that made the item not allowable as a deduction 
or credit.
    (2) Fictitious or inflated deduction. If a deduction is fictitious 
or inflated, the IRS must establish that the requesting spouse actually 
knew that the expenditure was not incurred, or not incurred to that 
extent.
    (ii) Partial knowledge. If a requesting spouse had actual knowledge 
of only a portion of an erroneous item, then relief is not available for 
that portion of the erroneous item. For example, if H knew that W 
received $1,000 of dividend income and did not know that W received an 
additional $4,000 of dividend income, relief would not be available for 
the portion of the deficiency attributable to the $1,000 of dividend 
income of which H had actual knowledge. A requesting spouse's actual 
knowledge of the proper tax treatment of an item is not relevant for 
purposes of demonstrating that the requesting spouse had actual 
knowledge of an erroneous item. For example, assume H did not know W's 
dividend income from X Co. was taxable, but knew that W received the 
dividend income. Relief is not available under this section. In 
addition, a requesting spouse's knowledge of how an erroneous item was 
treated on the tax return is not relevant to a determination of whether 
the requesting spouse had actual knowledge of the item. For example, 
assume that H knew of W's dividend income, but H failed to review the 
completed return and did not know that W omitted the dividend income 
from the return. Relief is not available under this section.
    (iii) Knowledge of the source not sufficient. Knowledge of the 
source of an erroneous item is not sufficient to establish actual 
knowledge. For example, assume H knew that W owned X Co. stock, but H 
did not know that X Co. paid dividends to W that year. H's knowledge of 
W's ownership in X Co. is not sufficient to establish that H had actual 
knowledge of the dividend income from X Co. In addition, a requesting 
spouse's actual knowledge may not be inferred when the requesting spouse 
merely had reason to know of the erroneous item. Even if H's knowledge 
of W's ownership interest in X Co. indicates a reason to know of the 
dividend income, actual knowledge of such dividend income cannot be 
inferred from H's reason to know. Similarly, the IRS need not establish 
that a requesting spouse knew of the source of an erroneous item in 
order to establish that the requesting spouse had actual knowledge of 
the item itself. For example, assume H knew that W received $1,000, but 
he did not know the source of the $1,000. W and H omit the $1,000 from 
their joint return. H has actual knowledge of the item giving rise to 
the deficiency ($1,000), and relief is not available under this section.
    (iv) Factors supporting actual knowledge. To demonstrate that a 
requesting spouse had actual knowledge of an erroneous item at the time 
the return was signed, the IRS may rely upon all of the facts and 
circumstances. One factor that may be relied upon in demonstrating that 
a requesting spouse had actual knowledge of an erroneous item is whether 
the requesting spouse made a deliberate effort to avoid learning about 
the item in order to be shielded from liability. This factor, together 
with all other facts and circumstances, may demonstrate that the 
requesting spouse had actual knowledge of the item, and the requesting 
spouse's election would be invalid with respect to that entire item. 
Another factor that may be relied upon in demonstrating that a 
requesting spouse had actual knowledge of an erroneous item is whether 
the requesting spouse and the nonrequesting spouse jointly owned the 
property that resulted in the erroneous item. Joint ownership is a 
factor supporting a finding that the requesting spouse had actual 
knowledge of an erroneous item. For purposes of this paragraph, a 
requesting spouse will not be considered to have had an ownership 
interest in an item based solely on the operation of community property 
law. Rather, a requesting spouse who resided in a community property 
state at the time the return

[[Page 119]]

was signed will be considered to have had an ownership interest in an 
item only if the requesting spouse's name appeared on the ownership 
documents, or there otherwise is an indication that the requesting 
spouse asserted dominion and control over the item. For example, assume 
H and W live in State A, a community property state. After their 
marriage, H opens a bank account in his name. Under the operation of the 
community property laws of State A, W owns \1/2\ of the bank account. 
However, W does not have an ownership interest in the account for 
purposes of this paragraph (c)(2)(iv) because the account is not held in 
her name and there is no other indication that she asserted dominion and 
control over the item.
    (v) Abuse exception. If the requesting spouse establishes that he or 
she was the victim of domestic abuse prior to the time the return was 
signed, and that, as a result of the prior abuse, the requesting spouse 
did not challenge the treatment of any items on the return for fear of 
the nonrequesting spouse's retaliation, the limitation on actual 
knowledge in this paragraph (c) will not apply. However, if the 
requesting spouse involuntarily executed the return, the requesting 
spouse may choose to establish that the return was signed under duress. 
In such a case, Sec. 1.6013-4(d) applies.
    (3) Disqualified asset transfers--(i) In general. The portion of the 
deficiency for which a requesting spouse is liable is increased (up to 
the entire amount of the deficiency) by the value of any disqualified 
asset that was transferred to the requesting spouse. For purposes of 
this paragraph (c)(3), the value of a disqualified asset is the fair 
market value of the asset on the date of the transfer.
    (ii) Disqualified asset defined. A disqualified asset is any 
property or right to property that was transferred from the 
nonrequesting spouse to the requesting spouse if the principal purpose 
of the transfer was the avoidance of tax or payment of tax (including 
additions to tax, penalties, and interest).
    (iii) Presumption. Any asset transferred from the nonrequesting 
spouse to the requesting spouse during the 12-month period before the 
mailing date of the first letter of proposed deficiency (e.g., a 30-day 
letter or, if no 30-day letter is mailed, a notice of deficiency) is 
presumed to be a disqualified asset. The presumption also applies to any 
asset that is transferred from the nonrequesting spouse to the 
requesting spouse after the mailing date of the first letter of proposed 
deficiency. The presumption does not apply, however, if the requesting 
spouse establishes that the asset was transferred pursuant to a decree 
of divorce or separate maintenance or a written instrument incident to 
such a decree. If the presumption does not apply, but the Internal 
Revenue Service can establish that the purpose of the transfer was the 
avoidance of tax or payment of tax, the asset will be disqualified, and 
its value will be added to the amount of the deficiency for which the 
requesting spouse remains liable. If the presumption applies, a 
requesting spouse may still rebut the presumption by establishing that 
the principal purpose of the transfer was not the avoidance of tax or 
payment of tax.
    (4) Examples. The following examples illustrate the rules in this 
paragraph (c):

    Example 1. Actual knowledge of an erroneous item. (i) H and W file 
their 2001 joint Federal income tax return on April 15, 2002. On the 
return, H and W report W's self-employment income, but they do not 
report W's self-employment tax on that income. H and W divorce in July 
2003. In August 2003, H and W receive a 30-day letter from the Internal 
Revenue Service proposing a deficiency with respect to W's unreported 
self-employment tax on the 2001 return. On November 4, 2003, H files an 
election to allocate the deficiency to W. The erroneous item is the 
self-employment income, and it is allocable to W. H knows that W earned 
income in 2001 as a self-employed musician, but he does not know that 
self-employment tax must be reported on and paid with a joint return.
    (ii) H's election to allocate the deficiency to W is invalid 
because, at the time H signed the joint return, H had actual knowledge 
of W's self-employment income. The fact that H was unaware of the tax 
consequences of that income (i.e., that an individual is required to pay 
self-employment tax on that income) is not relevant.
    Example 2. Actual knowledge not inferred from a requesting spouse's 
reason to know. (i) H has long been an avid gambler. H supports his 
gambling habit and keeps all of his gambling winnings in an individual 
bank account, held solely in his name. W knows about H's gambling habit 
and that he keeps

[[Page 120]]

a separate bank account, but she does not know whether he has any 
winnings because H does not tell her, and she does not otherwise know of 
H's bank account transactions. H and W file their 2001 joint Federal 
income tax return on April 15, 2002. On October 31, 2003, H and W 
receive a 30-day letter proposing a $100,000 deficiency relating to H's 
unreported gambling income. In February 2003, H and W divorce, and in 
March 2004, W files an election under section 6015(c) to allocate the 
$100,000 deficiency to H.
    (ii) While W may have had reason to know of the gambling income 
because she knew of H's gambling habit and separate account, W did not 
have actual knowledge of the erroneous item (i.e., the gambling 
winnings). The Internal Revenue Service may not infer actual knowledge 
from W's reason to know of the income. Therefore, W's election to 
allocate the $100,000 deficiency to H is valid.
    Example 3. Actual knowledge and failure to review return. (i) H and 
W are legally separated. In February 1999, W signs a blank joint Federal 
income tax return for 1998 and gives it to H to fill out. The return was 
timely filed on April 15, 1999. In September 2001, H and W receive a 30-
day letter proposing a deficiency relating to $100,000 of unreported 
dividend income received by H with respect to stock of ABC Co. owned by 
H. W knew that H received the $100,000 dividend payment in August 1998, 
but she did not know whether H reported that payment on the joint 
return.
    (ii) On January 30, 2002, W files an election to allocate the 
deficiency from the 1998 return to H. W claims she did not review the 
completed joint return, and therefore, she had no actual knowledge that 
there was an understatement of the dividend income. W's election to 
allocate the deficiency to H is invalid because she had actual knowledge 
of the erroneous item (dividend income from ABC Co.) at the time she 
signed the return. The fact that W signed a blank return is irrelevant. 
The result would be the same if W had not reviewed the completed return 
or if W had reviewed the completed return and had not noticed that the 
item was omitted.
    Example 4. Actual knowledge of an erroneous item of income. (i) H 
and W are legally separated. In June 2004, a deficiency is proposed with 
respect to H's and W's 2002 joint Federal income tax return that is 
attributable to $30,000 of unreported income from H's plumbing business 
that should have been reported on a Schedule C. No Schedule C was 
attached to the return. At the time W signed the return, W knew that H 
had a plumbing business but did not know whether H received any income 
from the business. W's election to allocate to H the deficiency 
attributable to the $30,000 of unreported plumbing income is valid.
    (ii) Assume the same facts as in paragraph (i) of this Example 5 
except that, at the time W signed the return, W knew that H received 
$20,000 of plumbing income. W's election to allocate to H the deficiency 
attributable to the $20,000 of unreported plumbing income (of which W 
had actual knowledge) is invalid. W's election to allocate to H the 
deficiency attributable to the $10,000 of unreported plumbing income (of 
which W did not have actual knowledge) is valid.
    (iii) Assume the same facts as in paragraph (i) of this Example 5 
except that, at the time W signed the return, W did not know the exact 
amount of H's plumbing income. W did know, however, that H received at 
least $8,000 of plumbing income. W's election to allocate to H the 
deficiency attributable to $8,000 of unreported plumbing income (of 
which W had actual knowledge) is invalid. W's election to allocate to H 
the deficiency attributable to the remaining $22,000 of unreported 
plumbing income (of which W did not have actual knowledge) is valid.
    (iv) Assume the same facts as in paragraph (i) of this Example 5 
except that H reported $26,000 of plumbing income on the return and 
omitted $4,000 of plumbing income from the return. At the time W signed 
the return, W knew that H was a plumber, but she did not know that H 
earned more than $26,000 that year. W's election to allocate to H the 
deficiency attributable to the $4,000 of unreported plumbing income is 
valid because she did not have actual knowledge that H received plumbing 
income in excess of $26,000.
    (v) Assume the same facts as in paragraph (i) of this Example 5 
except that H reported only $20,000 of plumbing income on the return and 
omitted $10,000 of plumbing income from the return. At the time W signed 
the return, W knew that H earned at least $26,000 that year as a 
plumber. However, W did not know that, in reality, H earned $30,000 that 
year as a plumber. W's election to allocate to H the deficiency 
attributable to the $6,000 of unreported plumbing income (of which W had 
actual knowledge) is invalid. W's election to allocate to H the 
deficiency attributable to the $4,000 of unreported plumbing income (of 
which W did not have actual knowledge) is valid.
    Example 5. Actual knowledge of a deduction that is an erroneous 
item. (i) H and W are legally separated. In February 2005, a deficiency 
is asserted with respect to their 2002 joint Federal income tax return. 
The deficiency is attributable to a disallowed $1,000 deduction for 
medical expenses H claimed he incurred. At the time W signed the return, 
W knew that H had not incurred any medical expenses. W's election to 
allocate to H the deficiency attributable to the disallowed medical 
expense deduction is invalid because W had actual knowledge that H had 
not incurred any medical expenses.
    (ii) Assume the same facts as in paragraph (i) of this Example 6 
except that, at the time W signed the return, W did not know whether

[[Page 121]]

H had incurred any medical expenses. W's election to allocate to H the 
deficiency attributable to the disallowed medical expense deduction is 
valid because she did not have actual knowledge that H had not incurred 
any medical expenses.
    (iii) Assume the same facts as in paragraph (i) of this Example 6 
except that the Internal Revenue Service disallowed $400 of the $1,000 
medical expense deduction. At the time W signed the return, W knew that 
H had incurred some medical expenses but did not know the exact amount. 
W's election to allocate to H the deficiency attributable to the 
disallowed medical expense deduction is valid because she did not have 
actual knowledge that H had not incurred medical expenses (in excess of 
the floor amount under section 213(a)) of more than $600.
    (iv) Assume the same facts as in paragraph (i) of this Example 6 
except that H claims a medical expense deduction of $10,000 and the 
Internal Revenue Service disallows $9,600. At the time W signed the 
return, W knew H had incurred some medical expenses but did not know the 
exact amount. W also knew that H incurred medical expenses (in excess of 
the floor amount under section 213(a)) of no more than $1,000. W's 
election to allocate to H the deficiency attributable to the portion of 
the overstated deduction of which she had actual knowledge ($9,000) is 
invalid. W's election to allocate the deficiency attributable to the 
portion of the overstated deduction of which she had no knowledge ($600) 
is valid.
    Example 6. Disqualified asset presumption. (i) H and W are divorced. 
In May 1999, W transfers $20,000 to H, and in April 2000, H and W 
receive a 30-day letter proposing a $40,000 deficiency on their 1998 
joint Federal income tax return. The liability remains unpaid, and in 
October 2000, H elects to allocate the deficiency under this section. 
Seventy-five percent of the net amount of erroneous items are allocable 
to W, and 25% of the net amount of erroneous items are allocable to H.
    (ii) In accordance with the proportionate allocation method (see 
paragraph (d)(4) of this section), H proposes that $30,000 of the 
deficiency be allocated to W and $10,000 be allocated to himself. H 
submits a signed statement providing that the principal purpose of the 
$20,000 transfer was not the avoidance of tax or payment of tax, but he 
does not submit any documentation indicating the reason for the 
transfer. H has not overcome the presumption that the $20,000 was a 
disqualified asset. Therefore, the portion of the deficiency for which H 
is liable ($10,000) is increased by the value of the disqualified asset 
($20,000). H is relieved of liability for $10,000 of the $30,000 
deficiency allocated to W, and remains jointly and severally liable for 
the remaining $30,000 of the deficiency (assuming that H does not 
qualify for relief under any other provision).
    Example 7. Disqualified asset presumption inapplicable. On May 1, 
2001, H and W receive a 30-day letter regarding a proposed deficiency on 
their 1999 joint Federal income tax return relating to unreported 
capital gain from H's sale of his investment in Z stock. W had no actual 
knowledge of the stock sale. The deficiency is assessed in November 
2001, and in December 2001, H and W divorce. According to a decree of 
divorce, H must transfer \1/2\ of his interest in mutual fund A to W. 
The transfer takes place in February 2002. In August 2002, W elects to 
allocate the deficiency to H. Although the transfer of \1/2\ of H's 
interest in mutual fund A took place after the 30-day letter was mailed, 
the mutual fund interest is not presumed to be a disqualified asset 
because the transfer of H's interest in the fund was made pursuant to a 
decree of divorce.
    Example 8. Overcoming the disqualified asset presumption. (i) H and 
W are married for 25 years. Every September, on W's birthday, H gives W 
a gift of $500. On February 28, 2002, H and W receive a 30-day letter 
from the Internal Revenue Service relating to their 1998 joint 
individual Federal income tax return. The deficiency relates to H's 
Schedule C business, and W had no knowledge of the items giving rise to 
the deficiency. H and W are legally separated in June 2003, and, despite 
the separation, H continues to give W $500 each year for her birthday. H 
is not required to give such amounts pursuant to a decree of divorce or 
separate maintenance.
    (ii) On January 27, 2004, W files an election to allocate the 
deficiency to H. The $1,500 transferred from H to W from February 28, 
2001 (a year before the 30-day letter was mailed) to the present is 
presumed disqualified. However, W may overcome the presumption that such 
amounts were disqualified by establishing that such amounts were 
birthday gifts from H and that she has received such gifts during their 
entire marriage. Such facts would show that the amounts were not 
transferred for the purpose of avoidance of tax or payment of tax.

    (d) Allocation--(1) In general. (i) An election to allocate a 
deficiency limits the requesting spouse's liability to that portion of 
the deficiency allocated to the requesting spouse pursuant to this 
section.
    (ii) Only a requesting spouse may receive relief. A nonrequesting 
spouse who does not also elect relief under this section remains liable 
for the entire amount of the deficiency. Even if both spouses elect to 
allocate a deficiency under this section, there may be a portion of the 
deficiency that is not allocable, for which both spouses remain jointly 
and severally liable.

[[Page 122]]

    (2) Allocation of erroneous items. For purposes of allocating a 
deficiency under this section, erroneous items are generally allocated 
to the spouses as if separate returns were filed, subject to the 
following four exceptions:
    (i) Benefit on the return. An erroneous item that would otherwise be 
allocated to the nonrequesting spouse is allocated to the requesting 
spouse to the extent that the requesting spouse received a tax benefit 
on the joint return.
    (ii) Fraud. The Internal Revenue Service may allocate any item 
between the spouses if the Internal Revenue Service establishes that the 
allocation is appropriate due to fraud by one or both spouses.
    (iii) Erroneous items of income. Erroneous items of income are 
allocated to the spouse who was the source of the income. Wage income is 
allocated to the spouse who performed the services producing such wages. 
Items of business or investment income are allocated to the spouse who 
owned the business or investment. If both spouses owned an interest in 
the business or investment, the erroneous item of income is generally 
allocated between the spouses in proportion to each spouse's ownership 
interest in the business or investment, subject to the limitations of 
paragraph (c) of this section. In the absence of clear and convincing 
evidence supporting a different allocation, an erroneous income item 
relating to an asset that the spouses owned jointly is generally 
allocated 50% to each spouse, subject to the limitations in paragraph 
(c) of this section and the exceptions in paragraph (c)(2)(iv) of this 
section. For rules regarding the effect of community property laws, see 
Sec. 1.6015-1(f) and paragraph (c)(2)(iv) of this section.
    (iv) Erroneous deduction items. Erroneous deductions related to a 
business or investment are allocated to the spouse who owned the 
business or investment. If both spouses owned an interest in the 
business or investment, an erroneous deduction item is generally 
allocated between the spouses in proportion to each spouse's ownership 
interest in the business or investment. In the absence of clear and 
convincing evidence supporting a different allocation, an erroneous 
deduction item relating to an asset that the spouses owned jointly is 
generally allocated 50% to each spouse, subject to the limitations in 
paragraph (c) of this section and the exceptions in paragraph (d)(4) of 
this section. Deduction items unrelated to a business or investment are 
also generally allocated 50% to each spouse, unless the evidence shows 
that a different allocation is appropriate.
    (3) Burden of proof. Except for establishing actual knowledge under 
paragraph (c)(2) of this section, the requesting spouse must prove that 
all of the qualifications for making an election under this section are 
satisfied and that none of the limitations (including the limitation 
relating to transfers of disqualified assets) apply. The requesting 
spouse must also establish the proper allocation of the erroneous items.
    (4) General allocation method--(i) Proportionate allocation. (A) The 
portion of a deficiency allocable to a spouse is the amount that bears 
the same ratio to the deficiency as the net amount of erroneous items 
allocable to the spouse bears to the net amount of all erroneous items. 
This calculation may be expressed as follows:
[GRAPHIC] [TIFF OMITTED] TR18JY02.004

where X = the portion of the deficiency allocable to the spouse.

    (B) The proportionate allocation applies to any portion of the 
deficiency other than--
    (1) Any portion of the deficiency attributable to erroneous items 
allocable to the nonrequesting spouse of which the requesting spouse had 
actual knowledge;

[[Page 123]]

    (2) Any portion of the deficiency attributable to separate treatment 
items (as defined in paragraph (d)(4)(ii) of this section);
    (3) Any portion of the deficiency relating to the liability of a 
child (as defined in paragraph (d)(4)(iii) of this section) of the 
requesting spouse or nonrequesting spouse;
    (4) Any portion of the deficiency attributable to alternative 
minimum tax under section 55;
    (5) Any portion of the deficiency attributable to accuracy-related 
or fraud penalties;
    (6) Any portion of the deficiency allocated pursuant to alternative 
allocation methods authorized under paragraph (d)(6) of this section.
    (ii) Separate treatment items. Any portion of a deficiency that is 
attributable to an item allocable solely to one spouse and that results 
from the disallowance of a credit, or a tax or an addition to tax (other 
than tax imposed by section 1 or section 55) that is required to be 
included with a joint return (a separate treatment item) is allocated 
separately to that spouse. If such credit or tax is attributable in 
whole or in part to both spouses, then the IRS will determine on a case 
by case basis how such item will be allocated. Once the proportionate 
allocation is made, the liability for the requesting spouse's separate 
treatment items is added to the requesting spouse's share of the 
liability.
    (iii) Child's liability. Any portion of a deficiency relating to the 
liability of a child of the requesting and nonrequesting spouse is 
allocated jointly to both spouses. For purposes of this paragraph, a 
child does not include the taxpayer's stepson or stepdaughter, unless 
such child was legally adopted by the taxpayer. If the child is the 
child of only one of the spouses, and the other spouse had not legally 
adopted such child, any portion of a deficiency relating to the 
liability of such child is allocated solely to the parent spouse.
    (iv) Allocation of certain items--(A) Alternative minimum tax. Any 
portion of a deficiency relating to the alternative minimum tax under 
section 55 will be allocated appropriately.
    (B) Accuracy-related and fraud penalties. Any accuracy-related or 
fraud penalties under section 6662 or 6663 are allocated to the spouse 
whose item generated the penalty.
    (5) Examples. The following examples illustrate the rules of this 
paragraph (d). In each example, assume that the requesting spouse or 
spouses qualify to elect to allocate the deficiency, that any election 
is timely made, and that the deficiency remains unpaid. In addition, 
unless otherwise stated, assume that neither spouse has actual knowledge 
of the erroneous items allocable to the other spouse. The examples are 
as follows:

    Example 1. Allocation of erroneous items. (i) H and W file a 2003 
joint Federal income tax return on April 15, 2004. On April 28, 2006, a 
deficiency is assessed with respect to their 2003 return. Three 
erroneous items give rise to the deficiency--
    (A) Unreported interest income, of which W had actual knowledge, 
from H's and W's joint bank account;
    (B) A disallowed business expense deduction on H's Schedule C; and
    (C) A disallowed Lifetime Learning Credit for W's post-secondary 
education, paid for by W.
    (ii) H and W divorce in May 2006, and in September 2006, W timely 
elects to allocate the deficiency. The erroneous items are allocable as 
follows:
    (A) The interest income would be allocated \1/2\ to H and \1/2\ to 
W, except that W has actual knowledge of it. Therefore, W's election to 
allocate the portion of the deficiency attributable to this item is 
invalid, and W remains jointly and severally liable for it.
    (B) The business expense deduction is allocable to H.
    (C) The Lifetime Learning Credit is allocable to W.
    Example 2. Proportionate allocation. (i) W and H timely file their 
2001 joint Federal income tax return on April 15, 2002. On August 16, 
2004, a $54,000 deficiency is assessed with respect to their 2001 joint 
return. H and W divorce on October 14, 2004, and W timely elects to 
allocate the deficiency. Five erroneous items give rise to the 
deficiency--
    (A) A disallowed $15,000 business deduction allocable to H;
    (B) $20,000 of unreported income allocable to H;
    (C) A disallowed $5,000 deduction for educational expense allocable 
to H;
    (D) A disallowed $40,000 charitable contribution deduction allocable 
to W; and
    (E) A disallowed $40,000 interest deduction allocable to W.
    (ii) In total, there are $120,000 worth of erroneous items, of which 
$80,000 are attributable to W and $40,000 are attributable to H.

[[Page 124]]



           W's items                                          ..  .........  H's items
-------------------------------------------------------------    -----------------------------------------------
  $40,000  charitable deduction                               ..    $15,000  business deduction
   40,000  interest deduction                                 ..     20,000  unreported income
           .................................................  ..      5,000  education deduction
----------                                                       -----------
  $80,000  .................................................  ..    $40,000
 

    (iii) The ratio of erroneous items allocable to W to the total 
erroneous items is \2/3\ ($80,000/$120,000). W's liability is limited to 
$36,000 of the deficiency (\2/3\ of $54,000). The Internal Revenue 
Service may collect up to $36,000 from W and up to $54,000 from H (the 
total amount collected, however, may not exceed $54,000). If H also made 
an election, there would be no remaining joint and several liability, 
and the Internal Revenue Service would be permitted to collect $36,000 
from W and $18,000 from H.
    Example 3. Proportionate allocation with joint erroneous item. (i) 
On September 4, 2001, W elects to allocate a $3,000 deficiency for the 
1998 tax year to H. Three erroneous items give rise to the deficiency--
    (A) Unreported interest in the amount of $4,000 from a joint bank 
account;
    (B) A disallowed deduction for business expenses in the amount of 
$2,000 attributable to H's business; and
    (C) Unreported wage income in the amount of $6,000 attributable to 
W's second job.
    (ii) The erroneous items total $12,000. Generally, income, 
deductions, or credits from jointly held property that are erroneous 
items are allocable 50% to each spouse. However, in this case, both 
spouses had actual knowledge of the unreported interest income. 
Therefore, W's election to allocate the portion of the deficiency 
attributable to this item is invalid, and W and H remain jointly and 
severally liable for this portion. Assume that this portion is $1,000. W 
may allocate the remaining $2,000 of the deficiency.

           H's items                                          ..  .........  W's items
-------------------------------------------------------------    -----------------------------------------------
   $2,000  business deduction                                 ..     $6,000  wage income
 

    Total allocable items: $8,000
    (iii) The ratio of erroneous items allocable to W to the total 
erroneous items is \3/4\ ($6,000/$8,000). W's liability is limited to 
$1,500 of the deficiency (\3/4\ of $2,000) allocated to her. The 
Internal Revenue Service may collect up to $2,500 from W (\3/4\ of the 
total allocated deficiency plus $1,000 of the deficiency attributable to 
the joint bank account interest) and up to $3,000 from H (the total 
amount collected, however, cannot exceed $3,000).
    (iv) Assume H also elects to allocate the 1998 deficiency. H is 
relieved of liability for \3/4\ of the deficiency, which is allocated to 
W. H's relief totals $1,500 (\3/4\ of $2,000). H remains liable for 
$1,500 of the deficiency (\1/4\ of the allocated deficiency plus $1,000 
of the deficiency attributable to the joint bank account interest).
    Example 4. Separate treatment items (STIs). (i) On September 1, 
2006, a $28,000 deficiency is assessed with respect to H's and W's 2003 
joint return. The deficiency is the result of 4 erroneous items--
    (A) A disallowed Lifetime Learning Credit of $2,000 attributable to 
H;
    (B) A disallowed business expense deduction of $8,000 attributable 
to H;
    (C) Unreported income of $24,000 attributable to W; and
    (D) Unreported self-employment tax of $14,000 attributable to W.
    (ii) H and W both elect to allocate the deficiency.
    (iii) The $2,000 Lifetime Learning Credit and the $14,000 self-
employment tax are STIs totaling $16,000. The amount of erroneous items 
included in computing the proportionate allocation ratio is $32,000 
($24,000 unreported income and $8,000 disallowed business expense 
deduction). The amount of the deficiency subject to proportionate 
allocation is reduced by the amount of STIs ($28,000-$16,000 = $12,000).
    (iv) Of the $32,000 of proportionate allocation items, $24,000 is 
allocable to W, and $8,000 is allocable to H.

W's share of allocable items       ..  H's share of allocable items
\3/4\ ($24,000/$32,000)            ..  \1/4\ ($8,000/$32,000)
 

    (v) W's liability for the portion of the deficiency subject to 
proportionate allocation is limited to $9,000 (\3/4\ of $12,000) and H's 
liability for such portion is limited to $3,000 (\1/4\ of $12,000).

[[Page 125]]

    (vi) After the proportionate allocation is completed, the amount of 
the STIs is added to each spouse's allocated share of the deficiency.

           W's share of total deficiency                      ..  .........  H's share of total deficiency
-------------------------------------------------------------    -----------------------------------------------
  $ 9,000  allocated deficiency                               ..     $3,000  allocated deficiency
   14,000  self-employment tax                                ..      2,000  Lifetime Learning Credit
----------                                                       -----------
  $23,000  .................................................  ..     $5,000
 

    (vii) Therefore, W's liability is limited to $23,000 and H's 
liability is limited to $5,000.
    Example 5. Requesting spouse receives a benefit on the joint return 
from the nonrequesting spouse's erroneous item. (i) In 2001, H reports 
gross income of $4,000 from his business on Schedule C, and W reports 
$50,000 of wage income. On their 2001 joint Federal income tax return, H 
deducts $20,000 of business expenses resulting in a net loss from his 
business of $16,000. H and W divorce in September 2002, and on May 22, 
2003, a $5,200 deficiency is assessed with respect to their 2001 joint 
return. W elects to allocate the deficiency. The deficiency on the joint 
return results from a disallowance of all of H's $20,000 of deductions.
    (ii) Since H used only $4,000 of the disallowed deductions to offset 
gross income from his business, W benefitted from the other $16,000 of 
the disallowed deductions used to offset her wage income. Therefore, 
$4,000 of the disallowed deductions are allocable to H and $16,000 of 
the disallowed deductions are allocable to W. W's liability is limited 
to $4,160 (\4/5\ of $5,200). If H also elected to allocate the 
deficiency, H's election to allocate the $4,160 of the deficiency to W 
would be invalid because H had actual knowledge of the erroneous items.
    Example 6. Calculation of requesting spouse's benefit on the joint 
return when the nonrequesting spouse's erroneous item is partially 
disallowed. Assume the same facts as in Example 5, except that H deducts 
$18,000 for business expenses on the joint return, of which $16,000 are 
disallowed. Since H used only $2,000 of the $16,000 disallowed 
deductions to offset gross income from his business, W received benefit 
on the return from the other $14,000 of the disallowed deductions used 
to offset her wage income. Therefore, $2,000 of the disallowed 
deductions are allocable to H and $14,000 of the disallowed deductions 
are allocable to W. W's liability is limited to $4,550 (\7/8\ of 
$5,200).

    (6) Alternative allocation methods--(i) Allocation based on 
applicable tax rates. If a deficiency arises from two or more erroneous 
items that are subject to tax at different rates (e.g., ordinary income 
and capital gain items), the deficiency will be allocated after first 
separating the erroneous items into categories according to their 
applicable tax rate. After all erroneous items are categorized, a 
separate allocation is made with respect to each tax rate category using 
the proportionate allocation method of paragraph (d)(4) of this section.
    (ii) Allocation methods provided in subsequent published guidance. 
Additional alternative methods for allocating erroneous items under 
section 6015(c) may be prescribed by the Treasury and IRS in subsequent 
revenue rulings, revenue procedures, or other appropriate guidance.
    (iii) Example. The following example illustrates the rules of this 
paragraph (d)(6):

    Example. Allocation based on applicable tax rates. H and W timely 
file their 1998 joint Federal income tax return. H and W divorce in 
1999. On July 13, 2001, a $5,100 deficiency is assessed with respect to 
H's and W's 1998 return. Of this deficiency, $2,000 results from 
unreported capital gain of $6,000 that is attributable to W and $4,000 
of capital gain that is attributable to H (both gains being subject to 
tax at the 20% marginal rate). The remaining $3,100 of the deficiency is 
attributable to $10,000 of unreported dividend income of H that is 
subject to tax at a marginal rate of 31%. H and W both timely elect to 
allocate the deficiency, and qualify under this section to do so. There 
are erroneous items subject to different tax rates; thus, the 
alternative allocation method of this paragraph (d)(6) applies. The 
three erroneous items are first categorized according to their 
applicable tax rates, then allocated. Of the total amount of 20% tax 
rate items ($10,000), 60% is allocable to W and 40% is allocable to H. 
Therefore, 60% of the $2,000 deficiency attributable to these items (or 
$1,200) is allocated to W. The remaining 40% of this portion of the 
deficiency ($800) is allocated to H. The only 31% tax rate item is 
allocable to H. Accordingly, H is liable for $3,900 of the deficiency 
($800 + $3,100), and W is liable for the remaining $1,200.

[T.D. 9003, 67 FR 47285, July 18, 2002]

[[Page 126]]



Sec. 1.6015-4  Equitable relief.

    (a) A requesting spouse who files a joint return for which a 
liability remains unpaid and who does not qualify for full relief under 
Sec. 1.6015-2 or 1.6015-3 may request equitable relief under this 
section. The Internal Revenue Service has the discretion to grant 
equitable relief from joint and several liability to a requesting spouse 
when, considering all of the facts and circumstances, it would be 
inequitable to hold the requesting spouse jointly and severally liable.
    (b) This section may not be used to circumvent the limitation of 
Sec. 1.6015-3(c)(1) (i.e., no refunds under Sec. 1.6015-3). Therefore, 
relief is not available under this section to obtain a refund of 
liabilities already paid, for which the requesting spouse would 
otherwise qualify for relief under Sec. 1.6015-3.
    (c) For guidance concerning the criteria to be used in determining 
whether it is inequitable to hold a requesting spouse jointly and 
severally liable under this section, see Rev. Proc. 2000-15 (2000-1 C.B. 
447), or other guidance published by the Treasury and IRS (see Sec. 
601.601(d)(2) of this chapter).

[T.D. 9003, 67 FR 47285, July 18, 2002]



Sec. 1.6015-5  Time and manner for requesting relief.

    (a) Requesting relief. To elect the application of Sec. 1.6015-2 or 
1.6015-3, or to request equitable relief under Sec. 1.6015-4, a 
requesting spouse must file Form 8857, ``Request for Innocent Spouse 
Relief'' (or other specified form); submit a written statement 
containing the same information required on Form 8857, which is signed 
under penalties of perjury; or submit information in the manner 
prescribed by the Treasury and IRS in forms, relevant revenue rulings, 
revenue procedures, or other published guidance (see Sec. 601.601(d)(2) 
of this chapter).
    (b) Time period for filing a request for relief--(1) In general. To 
elect the application of Sec. 1.6015-2 or 1.6015-3, or to request 
equitable relief under Sec. 1.6015-4, a requesting spouse must file 
Form 8857 or other similar statement with the Internal Revenue Service 
no later than two years from the date of the first collection activity 
against the requesting spouse after July 22, 1998, with respect to the 
joint tax liability.
    (2) Definitions--(i) Collection activity. For purposes of this 
paragraph (b), collection activity means a section 6330 notice; an 
offset of an overpayment of the requesting spouse against a liability 
under section 6402; the filing of a suit by the United States against 
the requesting spouse for the collection of the joint tax liability; or 
the filing of a claim by the United States in a court proceeding in 
which the requesting spouse is a party or which involves property of the 
requesting spouse. Collection activity does not include a notice of 
deficiency; the filing of a Notice of Federal Tax Lien; or a demand for 
payment of tax. The term property of the requesting spouse, for purposes 
of this paragraph (b), means property in which the requesting spouse has 
an ownership interest (other than solely through the operation of 
community property laws), including property owned jointly with the 
nonrequesting spouse.
    (ii) Section 6330 notice. A section 6330 notice refers to the notice 
sent, pursuant to section 6330, providing taxpayers notice of the 
Service's intent to levy and of their right to a collection due process 
(CDP) hearing.
    (3) Requests for relief made before commencement of collection 
activity. An election or request for relief may be made before 
collection activity has commenced. For example, an election or request 
for relief may be made in connection with an audit or examination of the 
joint return or a demand for payment, or pursuant to the CDP hearing 
procedures under section 6320 in connection with the filing of a Notice 
of Federal Tax Lien. For more information on the rules regarding 
collection due process for liens, see the Treasury regulations under 
section 6320. However, no request for relief may be made before the date 
specified in paragraph (b)(5) of this section.
    (4) Examples. The following examples illustrate the rules of this 
paragraph (b):

    Example 1. On January 11, 2000, a section 6330 notice is mailed to H 
and W regarding their 1997 joint Federal income tax liability. The 
Internal Revenue Service levies on W's

[[Page 127]]

employer on June 5, 2000. The Internal Revenue Service levies on H's 
employer on July 10, 2000. An election or request for relief must be 
made by January 11, 2002, which is two years after the Internal Revenue 
Service sent the section 6330 notice.
    Example 2. The Internal Revenue Service offsets an overpayment 
against a joint liability for 1995 on January 12, 1998. The offset only 
partially satisfies the liability. The Internal Revenue Service takes no 
other collection actions. On July 24, 2001, W elects relief with respect 
to the unpaid portion of the 1995 liability. W's election is timely 
because the Internal Revenue Service has not taken any collection 
activity after July 22, 1998; therefore, the two-year period has not 
commenced.
    Example 3. Assume the same facts as in Example 2, except that the 
Internal Revenue Service sends a section 6330 notice on January 22, 
1999. W's election is untimely because it is filed more than two years 
after the first collection activity after July 22, 1998.
    Example 4. H and W do not remit full payment with their timely filed 
joint Federal income tax return for the 1989 tax year. No collection 
activity is taken after July 22, 1998, until the United States files a 
suit against both H and W to reduce the tax assessment to judgment and 
to foreclose the tax lien on their jointly-held business property on 
July 1, 1999. H elects relief on October 2, 2000. The election is timely 
because it is made within two years of the filing of a collection suit 
by the United States against H.
    Example 5. W files a Chapter 7 bankruptcy petition on July 10, 2000. 
On September 5, 2000, the United States files a proof of claim for her 
joint 1998 income tax liability. W elects relief with respect to the 
1998 liability on August 20, 2002. The election is timely because it is 
made within two years of the date the United States filed the proof of 
claim in W's bankruptcy case.

    (5) Premature requests for relief. The Internal Revenue Service will 
not consider premature claims for relief under Sec. 1.6015-2, 1.6015-3, 
or 1.6015-4. A premature claim is a claim for relief that is filed for a 
tax year prior to the receipt of a notification of an audit or a letter 
or notice from the IRS indicating that there may be an outstanding 
liability with regard to that year. Such notices or letters do not 
include notices issued pursuant to section 6223 relating to TEFRA 
partnership proceedings. A premature claim is not considered an election 
or request under Sec. 1.6015-1(h)(5).
    (c) Effect of a final administrative determination--(1) In general. 
A requesting spouse is entitled to only one final administrative 
determination of relief under Sec. 1.6015-1 for a given assessment, 
unless the requesting spouse properly submits a second request for 
relief that is described in Sec. 1.6015-1(h)(5).
    (2) Example. The following example illustrates the rule of this 
paragraph (c):

    Example: In January 2001, W becomes a limited partner in partnership 
P, and in February 2001, she starts her own business from which she 
earns $100,000 of net income for the year. H and W file a joint return 
for tax year 2001, on which they claim $20,000 in losses from their 
investment in P, and they omit W's self-employment tax. In March 2003, 
the Internal Revenue Service commences an audit under the provisions of 
subchapter C of chapter 63 of subtitle F of the Internal Revenue Code 
(TEFRA partnership proceeding) and sends H and W a notice under section 
6223(a)(1). In September 2003, the Internal Revenue Service audits H's 
and W's 2001 joint return regarding the omitted self-employment tax. H 
may file a claim for relief from joint and several liability for the 
self-employment tax liability because he has received a notification of 
an audit indicating that there may be an outstanding liability on the 
joint return. However, his claim for relief regarding the TEFRA 
partnership proceeding is premature under paragraph (b)(5) of this 
section. H will have to wait until the Internal Revenue Service sends 
him a notice of computational adjustment or assesses the liability 
resulting from the TEFRA partnership proceeding before he files a claim 
for relief with respect to any such liability. The assessment relating 
to the TEFRA partnership proceeding is separate from the assessment for 
the self-employment tax; therefore, H's subsequent claim for relief for 
the liability from the TEFRA partnership proceeding is not precluded by 
his previous claim for relief from the self-employment tax liability 
under this paragraph (c).

[T.D. 9003, 67 FR 47285, July 18, 2002, as amended at 67 FR 54735, Aug. 
26, 2002]



Sec. 1.6015-6  Nonrequesting spouse's notice and opportunity to 
participate in administrative proceedings.

    (a) In general. (1) When the Internal Revenue Service receives an 
election under Sec. 1.6015-2 or 1.6015-3, or a request for relief under 
Sec. 1.6015-4, the Internal Revenue Service must send a notice to the 
nonrequesting spouse's last known address that informs the nonrequesting 
spouse of the requesting spouse's claim for relief. For further guidance 
regarding the definition of last known address, see Sec. 301.6212-2 of 
this chapter.

[[Page 128]]

The notice must provide the nonrequesting spouse with an opportunity to 
submit any information that should be considered in determining whether 
the requesting spouse should be granted relief from joint and several 
liability. A nonrequesting spouse is not required to submit information 
under this section. Upon the request of either spouse, the Internal 
Revenue Service will share with one spouse the information submitted by 
the other spouse, unless such information would impair tax 
administration.
    (2) The Internal Revenue Service must notify the nonrequesting 
spouse of the Service's preliminary and final determinations with 
respect to the requesting spouse's claim for relief under section 6015.
    (b) Information submitted. The Internal Revenue Service will 
consider all of the information (as relevant to each particular relief 
provision) that the nonrequesting spouse submits in determining whether 
relief from joint and several liability is appropriate, including 
information relating to the following--
    (1) The legal status of the requesting and nonrequesting spouses' 
marriage;
    (2) The extent of the requesting spouse's knowledge of the erroneous 
items or underpayment;
    (3) The extent of the requesting spouse's knowledge or participation 
in the family business or financial affairs;
    (4) The requesting spouse's education level;
    (5) The extent to which the requesting spouse benefitted from the 
erroneous items;
    (6) Any asset transfers between the spouses;
    (7) Any indication of fraud on the part of either spouse;
    (8) Whether it would be inequitable, within the meaning of 
Sec. Sec. 1.6015-2(d) and 1.6015-4, to hold the requesting spouse 
jointly and severally liable for the outstanding liability;
    (9) The allocation or ownership of items giving rise to the 
deficiency; and
    (10) Anything else that may be relevant to the determination of 
whether relief from joint and several liability should be granted.
    (c) Effect of opportunity to participate. The failure to submit 
information pursuant to paragraph (b) of this section does not affect 
the nonrequesting spouse's ability to seek relief from joint and several 
liability for the same tax year. However, information that the 
nonrequesting spouse submits pursuant to paragraph (b) of this section 
is relevant in determining whether relief from joint and several 
liability is appropriate for the nonrequesting spouse should the 
nonrequesting spouse also submit an application for relief.

[T.D. 9003, 67 FR 47285, July 18, 2002]



Sec. 1.6015-7  Tax Court review.

    (a) In general. Requesting spouses may petition the Tax Court to 
review the denial of relief under Sec. 1.6015-1.
    (b) Time period for petitioning the Tax Court. Pursuant to section 
6015(e), the requesting spouse may petition the Tax Court to review a 
denial of relief under Sec. 1.6015-1 within 90 days after the date 
notice of the Service's final determination is mailed by certified or 
registered mail (90-day period). If the IRS does not mail the requesting 
spouse a final determination letter within 6 months of the date the 
requesting spouse files an election under Sec. 1.6015-2 or 1.6015-3, 
the requesting spouse may petition the Tax Court to review the election 
at any time after the expiration of the 6-month period, and before the 
expiration of the 90-day period. The Tax Court also may review a claim 
for relief if Tax Court jurisdiction has been acquired under another 
section of the Internal Revenue Code such as section 6213(a) or 6330(d).
    (c) Restrictions on collection and suspension of the running of the 
period of limitations--(1) Restrictions on collection under Sec. 
1.6015-2 or 1.6015-3. Unless the Internal Revenue Service determines 
that collection will be jeopardized by delay, no levy or proceeding in 
court shall be made, begun, or prosecuted against a requesting spouse 
electing the application of Sec. 1.6015-2 or 1.6015-3 for the 
collection of any assessment to which the election relates until the 
expiration of the 90-day period described in paragraph (b) of this 
section, or if a petition is filed with the Tax Court, until the 
decision of the Tax Court becomes final under section 7481. For more 
information regarding the date on which a decision of the Tax Court

[[Page 129]]

becomes final, see section 7481 and the regulations thereunder. 
Notwithstanding the above, if the requesting spouse appeals the Tax 
Court's decision, the Internal Revenue Service may resume collection of 
the liability from the requesting spouse on the date the requesting 
spouse files the notice of appeal, unless the requesting spouse files an 
appeal bond pursuant to the rules of section 7485. Jeopardy under this 
paragraph (c)(1) means conditions exist that would require an assessment 
under section 6851 or 6861 and the regulations thereunder.
    (2) Waiver of the restrictions on collection. A requesting spouse 
may, at any time (regardless of whether a notice of the Service's final 
determination of relief is mailed), waive the restrictions on collection 
in paragraph (c)(1) of this section.
    (3) Suspension of the running of the period of limitations--(i) 
Relief under Sec. 1.6015-2 or 1.6015-3. The running of the period of 
limitations in section 6502 on collection against the requesting spouse 
of the assessment to which an election under Sec. 1.6015-2 or 1.6015-3 
relates is suspended for the period during which the Internal Revenue 
Service is prohibited by paragraph (c)(1) of this section from 
collecting by levy or a proceeding in court and for 60 days thereafter. 
However, if the requesting spouse signs a waiver of the restrictions on 
collection in accordance with paragraph (c)(2) of this section, the 
suspension of the period of limitations in section 6502 on collection 
against the requesting spouse will terminate on the date that is 60 days 
after the date the waiver is filed with the Internal Revenue Service.
    (ii) Relief under Sec. 1.6015-4. If a requesting spouse seeks only 
equitable relief under Sec. 1.6015-4, the restrictions on collection of 
paragraph (c)(1) of this section do not apply. Accordingly, the request 
for relief does not suspend the running of the period of limitations on 
collection.
    (4) Definitions--(i) Levy. For purposes of this paragraph (c), levy 
means an administrative levy or seizure described by section 6331.
    (ii) Proceedings in court. For purposes of this paragraph (c), 
proceedings in court means suits filed by the United States for the 
collection of Federal tax. Proceedings in court does not refer to the 
filing of pleadings and claims and other participation by the Internal 
Revenue Service or the United States in suits not filed by the United 
States, including Tax Court cases, refund suits, and bankruptcy cases.
    (iii) Assessment to which the election relates. For purposes of this 
paragraph (c), the assessment to which the election relates is the 
entire assessment of the deficiency to which the election relates, even 
if the election is made with respect to only part of that deficiency.

[T.D. 9003, 67 FR 47285, July 18, 2002]



Sec. 1.6015-8  Applicable liabilities.

    (a) In general. Section 6015 applies to liabilities that arise after 
July 22, 1998, and to liabilities that arose prior to July 22, 1998, 
that were not paid on or before July 22, 1998.
    (b) Liabilities paid on or before July 22, 1998. A requesting spouse 
seeking relief from joint and several liability for amounts paid on or 
before July 22, 1998, must request relief under section 6013(e) and the 
regulations thereunder.
    (c) Examples. The following examples illustrate the rules of this 
section:

    Example 1. H and W file a joint Federal income tax return for 1995 
on April 15, 1996. There is an understatement on the return attributable 
to an omission of H's wage income. On October 15, 1998, H and W receive 
a 30-day letter proposing a deficiency on the 1995 joint return. W pays 
the outstanding liability in full on November 30, 1998. In March 1999, W 
files Form 8857, requesting relief from joint and several liability 
under section 6015(b). Although W's liability arose prior to July 22, 
1998, it was unpaid as of that date. Therefore, section 6015 is 
applicable.
    Example 2. H and W file their 1995 joint Federal income tax return 
on April 15, 1996. On October 14, 1997, a deficiency of $5,000 is 
assessed regarding a disallowed business expense deduction attributable 
to H. On June 30, 1998, the Internal Revenue Service levies on the 
$3,000 in W's bank account in partial satisfaction of the outstanding 
liability. On August 31, 1998, W files a request for relief from joint 
and several liability. The liability arose prior to July 22, 1998. 
Section 6015 is applicable to the $2,000 that remained unpaid as of July 
22, 1998, and section 6013(e) is applicable to the $3,000 that was paid 
prior to July 22, 1998.

[T.D. 9003, 67 FR 47285, July 18, 2002]

[[Page 130]]



Sec. 1.6015-9  Effective date.

    Sections 1.6015-0 through 1.6015-9 are applicable for all elections 
under Sec. 1.6015-2 or 1.6015-3 or any requests for relief under Sec. 
1.6015-4 filed on or after July 18, 2002.

[T.D. 9003, 67 FR 47285, July 18, 2002]



Sec. 1.6016-1  Declarations of estimated income tax by corporations.

    (a) Requirement. For taxable years ending on or after December 31, 
1955, a declaration of estimated tax shall be made by every corporation 
(including unincorporated business enterprises electing to be taxed as 
domestic corporations under section 1361), which is subject to taxation 
under section 11 or 1201(a), or subchapter L, chapter 1 of the Code 
(relating to insurance companies), if its income tax under such sections 
or such subchapter L for the taxable year can reasonably be expected to 
exceed the sum of $100,000 plus the amount of any estimated credits 
allowable under section 32 (relating to tax withheld at source on 
nonresident aliens and foreign corporations and on tax-free covenant 
bonds), section 33 (relating to taxes of foreign countries and 
possessions of the United States), and section 38 (relating to 
investment in certain depreciable property).
    (b) Definition of estimated tax. The term ``estimated tax'', in the 
case of a corporation, means the excess of the amount which such 
corporation estimates as its income tax liability for the taxable year 
under section 11 or 1201(a), or subchapter L, chapter 1 of the Code, 
over the sum of $100,000 and any estimated credits under sections 32, 
33, and 38. However, for the rule with respect to the limitation upon 
the $100,000 exemption for members of certain electing affiliated 
groups, see section 243(b)(3)(C)(v) and the regulations thereunder.
    (c) Examples. The application of this section may be illustrated by 
the following examples:

    Example 1. M, a corporation subject to tax under section 11, 
reasonably anticipates that it will have taxable income of $224,000 for 
the calendar year 1964. The normal tax and surtax result in an expected 
liability of $105,000. M determines that it will not have any allowable 
credits under sections 32, 33, and 38 for 1964. Since M's expected tax 
($105,000) exceeds the exemption ($100,000), a declaration of estimated 
tax is required to be filed, reporting an estimated tax of $5,000 
($105,000-$100,000) for the calendar year 1964.
    Example 2. Under the facts stated in example (1), except that M 
estimates it will have an allowable foreign tax credit under section 33 
in the amount of $4,000 and an allowable investment credit under section 
38 in the amount of $3,000, no declaration is required, since M's 
expected tax ($105,000) does not exceed the $100,000 plus the allowable 
credits totaling $7,000.

[T.D. 6768, 29 FR 14921, Nov. 4, 1964]



Sec. 1.6016-2  Contents of declaration of estimated tax.

    (a) In general. The declaration of estimated tax by a corporation 
shall be made on Form 1120-ES. For the purpose of making the 
declaration, the estimated tax should be based upon the amount of gross 
income which the taxpayer can reasonably be expected to receive or 
accrue as the case may be, depending upon the method of accounting upon 
the basis of which the taxable income is computed, and the amount of the 
estimated allowable deductions and credits to be taken into account. 
Such amounts of gross income, deductions, and credits should be 
determined upon the basis of facts and circumstances existing as at the 
time prescribed for the filing of the declaration as well as those 
reasonably to be anticipated for the taxable year.
    (b) Use of prescribed form. Copies of Form 1120-ES will so far as 
possible be furnished taxpayers by district directors. A taxpayer will 
not be excused from making a declaration, however, by the fact that no 
form has been furnished. Taxpayers not supplied with the proper form 
should make application therefor to the district director in ample time 
to have their declarations prepared, verified, and filed with the 
district director on or before the date prescribed for filing the 
declaration. If the prescribed form is not available a statement 
disclosing the estimated income tax after the exemption and the credits, 
if any, should be filed as a tentative declaration within the prescribed 
time, accompanied by the payment of the required installment. Such 
tentative declaration should be supplemented, without unnecessary delay, 
by a declaration made on the proper form.

[[Page 131]]



Sec. 1.6016-3  Amendment of declaration.

    In the making of a declaration of estimated tax the corporation is 
required to take into account the then existing facts and circumstances 
as well as those reasonably to be anticipated relating to prospective 
gross income, allowable deductions, and estimated credits for the 
taxable year. Amended or revised declarations may be made in any case in 
which the corporation estimates that its gross income, deductions, or 
credits will materially change the estimated tax reported in the 
previous declaration. However, for the rule with respect to the number 
of amended declarations which may be filed for taxable years beginning 
after December 31, 1963, see paragraph (d)(2) of Sec. 1.6074-1. Such 
amended declaration may be made on either Form 1120-ES (marked 
``Amended'') or on the reverse side of the installment notice furnished 
the corporation by the district director. See, however, paragraph (b) of 
Sec. 1.6016-2 for procedure to be followed if the prescribed form is 
not available.

[T.D. 6768, 29 FR 14922, Nov. 4, 1964]



Sec. 1.6016-4  Short taxable year.

    (a) Requirement of declaration. No declaration may be made for a 
period of more than 12 months. For purposes of this section a taxable 
year of 52 or 53 weeks, in the case of a corporation which computes its 
taxable income in accordance with the election permitted by section 
441(f), shall be deemed a period of 12 months. For special rules 
affecting the time for filing declarations and paying estimated tax by 
such corporation, see paragraph (b) of Sec. 1.441-2. A separate 
declaration is required where a corporation is required to submit an 
income tax return for a period of less than 12 months, but only if such 
short period ends on or after December 31, 1955. However, no declaration 
is required if the short taxable year:
    (1) Begins on or before December 31, 1963, and is:
    (i) A period of less than 9 months, or
    (ii) A period of 9 or more months but less than 12 months and the 
requirements of section 6016(a) are not met before the 1st day of the 
last month in the short taxable year, or
    (2) Begins after December 31, 1963, and is:
    (i) A period of less than 4 months, or
    (ii) A period of 4 or more months but less than 12 months and the 
requirements of section 6016(a) are not met before the 1st day of the 
last month in the short taxable year.
    (b) Income placed on an annual basis. In cases where the short 
taxable year results from a change of annual accounting period, for the 
purpose of determining whether the anticipated income for a short 
taxable year will result in an estimated tax liability requiring the 
filing of a declaration, such income shall be placed on an annual basis 
in the manner prescribed in section 443(b)(1). If a tax computed on such 
annualized income exceeds the sum of $100,000 and any credits under part 
IV, of subchapter A, chapter 1 of the Code, the estimated tax shall be 
the same part of the excess so computed as the number of months in the 
short period is of 12 months. Thus, for example, a corporation which 
changes from a calendar year basis to a fiscal year basis beginning 
October 1, 1956, will have a short taxable year beginning January 1, 
1956, and ending September 30, 1956. If on or before August 31, 1956, 
the taxpayer anticipates that it will have income of $264,000 for the 9-
month taxable year the estimated tax is computed as follows:

(1) Anticipated taxable income for 9 months.................    $264,000
(2) Annualized income ($264,000 x 12 / 9)...................     352,000
(3) Tax liability on item (2)...............................     177,540
(4) Item (3) reduced by $100,000 (there are no credits under      77,540
 part IV, subchapter A, chapter 1 of the Code)..............
(5) Estimated tax for 9-month period ($77,540 x 9 / 12).....      58,155
 


Since the tax liability on the annualized income is in excess of 
$100,000, a declaration is required to be filed, reporting an estimated 
tax of $58,155 for the 9-month taxable period. This paragraph has no 
application where the short taxable year does not result from a change 
in the taxpayer's annual accounting period.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6768, 29 FR 
14922, Nov. 4, 1964]

[[Page 132]]



Sec. 1.6017-1  Self-employment tax returns.

    (a) In general. (1) Every individual, other than a nonresident 
alien, having net earnings from self-employment, as defined in section 
1402, of $400 or more for the taxable year shall make a return of such 
earnings. For purposes of this section, an individual who is a resident 
of the Virgin Islands, Puerto Rico, or (for any taxable year beginning 
after 1960) Guam or American Samoa is not to be considered a nonresident 
alien individual. See paragraph (d) of Sec. 1.1402(b)-1. A return is 
required under this section if an individual has self-employment income, 
as defined in section 1402(b), even though he may not be required to 
make a return under section 6012 for purposes of the tax imposed by 
section 1 or 3. Provisions applicable to returns under section 6012(a) 
shall be applicable to returns under this section.
    (2) Except as otherwise provided in this subparagraph, the return 
required by this section shall be made on Form 1040. The form to be used 
by residents of the Virgin Islands, Guam, or American Samoa is From 
1040SS. In the case of a resident of Puerto Rico who is not required to 
make a return of income under section 6012(a), the form to be used is 
Form 1040SS, except that Form 1040PR shall be used if it is furnished by 
the Internal Revenue Service to such resident for use in lieu of Form 
1040SS.
    (b) Joint returns. (1) In the case of a husband and wife filing a 
joint return under section 6013, the tax on self-employment income is 
computed on the separate self-employment income of each spouse, and not 
on the aggregate of the two amounts. The requirement of section 
6013(d)(3) that in the case of a joint return the tax is computed on the 
aggregate income of the spouses is not applicable with respect to the 
tax on self-employment income. Where the husband and wife each has net 
earnings from self-employment of $400 or more, it will be necessary for 
each to complete separate schedules of the computation of self-
employment tax with respect to the net earnings of each spouse, despite 
the fact that a joint return is filed. If the net earnings from self-
employment of either the husband or the wife are less than $400, such 
net earnings are not subject to the tax on self-employment income, even 
though they must be shown on the joint return for purposes of the tax 
imposed by section 1 or 3.
    (2) Except as otherwise expressly provided, section 6013 is 
applicable to the return of the tax on self-employment income; 
therefore, the liability with respect to such tax in the case of a joint 
return is joint and several.
    (c) Social security account numbers. (1) Every individual making a 
return of net earnings from self-employment for any period commencing 
before January 1, 1962, is required to show thereon his social security 
account number, or, if he has no such account number, to make 
application therefor on Form SS-5 before filing such return. However, 
the failure to apply for or receive a social security account number 
will not excuse the individual from the requirement that he file such 
return on or before the due date thereof. Form SS-5 may be obtained from 
any district office of the Social Security Administration or from any 
district director. The application shall be filed with a district office 
of the Social Security Administration or, in the case of an individual 
not in the United States, with the district office of the Social 
Security Administration at Baltimore, Md. An individual who has 
previously secured a social security account number as an employee shall 
use that account number on his return of net earnings from self-
employment.
    (2) For provisions applicable to the securing of identifying numbers 
and the reporting thereof on returns and schedules for periods 
commencing after December 31, 1961, see Sec. 1.6109-1.
    (d) Declaration of estimated tax with respect to taxable years 
beginning after December 31, 1966. For taxable years beginning after 
December 31, 1966, section 6015 provides that the term ``estimated tax'' 
includes the amount which an individual estimates as the amount of self-
employment tax imposed by chapter 2 for the taxable year. Thus, 
individuals upon whom self-employment tax is imposed by section 1401 
must make a declaration of estimated tax if they meet the requirements 
of section

[[Page 133]]

6015(a); except as otherwise provided under section 6015(i).

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6691, 28 FR 
12816, Dec. 3, 1963; T.D. 7427, 41 FR 34028, Aug. 12, 1976]

                           information returns



Sec. 1.6031(a)-1  Return of partnership income.

    (a) Domestic partnerships--(1) Return required. Except as provided 
in paragraphs (a)(3) and (c) of this section, every domestic partnership 
must file a return of partnership income under section 6031 (partnership 
return) for each taxable year on the form prescribed for the partnership 
return. The partnership return must be filed for the taxable year of the 
partnership regardless of the taxable years of the partners. For taxable 
years of a partnership and of a partner, see section 706 and Sec. 
1.706-1. For the rules governing partnership statements to partners and 
nominees, see Sec. 1.6031(b)-1T. For the rules requiring the disclosure 
of certain transactions, see Sec. 1.6011-4T.
    (2) Content of return. The partnership return must contain the 
information required by the prescribed form and the accompanying 
instructions.
    (3) Special rule. (i) A partnership that has no income, deductions, 
or credits for federal income tax purposes for a taxable year is not 
required to file a partnership return for that year.
    (ii) The Commissioner may, in guidance published in the Internal 
Revenue Bulletin (see Sec. 601.601(d)(2)(ii)(b) of this chapter), 
provide for an exception to partnership reporting under section 6031 and 
for conditions for the exception, if all or substantially all of a 
partnership's income is derived from the holding or disposition of tax-
exempt obligations (as defined in section 1275(a)(3) and Sec. 1.1275-
1(e)) or shares in a regulated investment company (as defined in section 
851(a)) that pays exempt-interest dividends (as defined in section 
852(b)(5)).
    (4) Failure to file. For the consequences of a failure to comply 
with the requirements of section 6031(a) and this paragraph (a), see 
sections 6229(a), 6231(f), 6698, and 7203.
    (b) Foreign partnerships--(1) General rule. (i) Filing requirement. 
A foreign partnership is not required to file a partnership return, if 
the foreign partnership does not have gross income that is (or is 
treated as) effectively connected with the conduct of a trade or 
business within the United States (ECI) and does not have gross income 
(including gains) derived from sources within the United States (U.S.-
source income). Except as provided in paragraphs (b)(2) and (3) of this 
section, a foreign partnership that has ECI or has U.S.-source income 
that is not ECI must file a partnership return for its taxable year in 
accordance with the rules for domestic partnerships in paragraph (a) of 
this section.
    (ii) Special rule. For purposes of this paragraph (b)(1) and 
paragraph (b)(3)(iii) of this section, a foreign partnership will not be 
considered to have derived income from sources within the United States 
solely because a U.S. partner marks to market his pro rata share of PFIC 
stock held by the foreign partnership pursuant to an election under 
section 1296.
    (2) Foreign partnerships with de minimis U.S.-source income and de 
minimis U.S. partners. A foreign partnership (other than a withholding 
foreign partnership, as defined in Sec. 1.1441-5(c)(2)(i)) that has 
$20,000 or less of U.S.-source income and has no ECI during its taxable 
year is not required to file a partnership return if, at no time during 
the partnership taxable year, one percent or more of any item of 
partnership income, gain, loss, deduction, or credit is allocable in the 
aggregate to direct United States partners. The United States partners 
must directly report their shares of the allocable items of partnership 
income, gain, loss, deduction, and credit.
    (3) Filing obligations for certain other foreign partnerships with 
no ECI--(i) General requirements for modified filing obligations. A 
foreign partnership will be subject to the modified filing obligations 
in paragraphs (b)(3)(ii) and (iii) of this section if, in addition to 
satisfying the requirements contained in paragraphs (b)(3)(ii) and (iii) 
of this section--
    (A) The partnership is not a withholding foreign partnership as 
defined in Sec. 1.1441-5(c)(2)(i);

[[Page 134]]

    (B) Forms 1042 and 1042-S are filed by the partnership with respect 
to the amounts subject to reporting under Sec. 1.1461-1(b) and (c), 
unless the partnership is not required to file such returns under Sec. 
1.1461-1(b)(2) and (c)(4), in which case Forms 1042 and 1042-S must be 
filed by another withholding agent or agents; and
    (C) The tax liability of the partners with respect to such amounts 
has been fully satisfied by the withholding of tax at the source, if 
applicable, under chapter 3 of the Internal Revenue Code.
    (ii) Foreign partnerships with U.S.-source income but no U.S. 
partners. A foreign partnership that has U.S.-source income is not 
required to file a partnership return if the partnership has no ECI and 
no United States partners at any time during the partnership's taxable 
year.
    (iii) Foreign partnerships with U.S.-source income and U.S. 
partners. Except as provided in paragraph (b)(2) of this section, a 
foreign partnership with one or more United States partners that has 
U.S.-source income but no ECI must file a partnership return. However, 
such a foreign partnership need not file Statements of Partner's Share 
of Income, Credit, Deduction, etc. (Schedules K-1) for any partners 
other than its direct United States partners and its passthrough 
partners (whether U.S. or foreign) through which United States partners 
hold an interest in the foreign partnership. Schedules K-1 that are not 
excepted from filing under this paragraph (b)(3)(iii) must contain the 
same information required of a domestic partnership filing under 
paragraph (a) of this section.
    (4) Information or returns required of partners who are United 
States persons--(i) In general. If a United States person is a partner 
in a partnership that is not required to file a partnership return, the 
district director or director of the relevant service center may require 
that person to render the statements or provide the information 
necessary to verify the accuracy of the reporting by that person of any 
items of partnership income, gain, loss, deduction, or credit.
    (ii) Controlled foreign partnerships. Certain United States persons 
who are partners in a foreign partnership controlled (within the meaning 
of section 6038(e)(1)) by United States persons may be required to 
provide information with respect to the partnership under section 6038.
    (5) Certain partnership elections. For a partnership that is not 
otherwise required to file a partnership return, if an election that can 
only be made by the partnership under section 703 (affecting the 
computation of taxable income derived from a partnership) is to be made 
by or for the partnership, a return on the form prescribed for the 
partnership return must be filed for the partnership. Unless otherwise 
provided in the form or the accompanying instructions, a return filed 
solely to make an election need only contain a written statement citing 
paragraph (b)(5)(ii) of this section, listing the name and address of 
the partnership making the election, and clearly identifying the 
specific election being made. A return filed under paragraph (b)(5)(ii) 
of this section solely to make an election is not a partnership return. 
Thus, such a return is not a return filed under section 6031(a) for 
purposes of sections 6501 (except regarding the specific election 
issue), 6231(a)(1)(A), and 6233. The return must be signed by--
    (i) Each partner that is a partner in the partnership at the time 
the election is made; or
    (ii) Any partner of the partnership who is authorized (under local 
law or the partnership's organizational documents) to make the election 
and who represents to having such authorization under penalties of 
perjury.
    (6) Exclusion for certain organizations. The return requirement of 
section 6031 and this section does not apply to the International 
Telecommunications Satellite Organization, the International Maritime 
Satellite Organization, or any organization that is a successor of 
either.
    (c) Partnerships excluded from the application of subchapter K of 
the Internal Revenue Code--(1) Wholly excluded--(i) Year of election. An 
eligible partnership as described in Sec. 1.761-2(a) that elects to be 
excluded from all the provisions of subchapter K of chapter 1 of the 
Internal Revenue Code in the manner specified by Sec. 1.761-2(b)(2)(i) 
must timely file

[[Page 135]]

the form prescribed for the partnership return for the taxable year for 
which the election is made. In lieu of the information otherwise 
required, the return must contain or be accompanied by the information 
required by Sec. 1.761-2(b)(2)(i).
    (ii) Subsequent years. Except as otherwise provided in paragraph 
(c)(1)(i) of this section, an eligible partnership that elects to be 
wholly excluded from the application of subchapter K is not required to 
file a partnership return.
    (2) Deemed excluded. An eligible partnership that is deemed to have 
elected exclusion from the application of subchapter K beginning with 
its first taxable year, as specified in Sec. 1.761-2(b)(2)(ii), is not 
required to file a partnership return.
    (d) Definitions--(1) Partnership. For the meaning of the term 
partnership, see Sec. 1.761-1(a).
    (2) United States person. In applying this section, a United States 
person is a person described in section 7701(a)(30); the government of 
the United States, a State, or the District of Columbia (including an 
agency or instrumentality thereof); or a corporation created or 
organized in Guam, the Commonwealth of Northern Mariana Islands, the 
U.S. Virgin Islands, and American Samoa, if the requirements of section 
881(b)(1)(A), (B), and (C) are met for such corporation. The term does 
not include an alien individual who is a resident of Puerto Rico, Guam, 
the Commonwealth of Northern Mariana Islands, the U.S. Virgin Islands, 
or American Samoa, as determined under Sec. 301.7701(b)-1(d) of this 
chapter.
    (3) United States partner. In applying this section, a United States 
partner is any United States person who holds a direct or indirect 
interest in the partnership.
    (4) Indirect interest. An indirect interest is any interest held 
through one or more passthrough partners, as defined in section 
6231(a)(9).
    (e) Procedural requirements--(1) Place for filing. The return of a 
partnership must be filed with the service center prescribed in the 
relevant IRS revenue procedure, publication, form, or instructions to 
the form (see Sec. 601.601(d)(2)).
    (2) Time for filing. The return of a partnership must be filed on or 
before the date prescribed by section 6072(b).
    (3) Magnetic media filing. For magnetic media filing requirements 
with respect to partnerships, see section 6011(e)(2) and the regulations 
thereunder.
    (f) Applicability date. This section applies to returns filed on or 
after January 30, 2020. Section 1.6031(a)-1T (as contained in 26 CFR 
part 1, revised April 2019) applies to returns filed before January 30, 
2020.

[T.D. 8841, 64 FR 61500, Nov. 12, 1999, as amended by T.D. 9000, 67 FR 
41328, June 18, 2002; T.D. 9094, 68 FR 63734, Nov. 10, 2003; 68 FR 
70584, Dec. 18, 2003; T.D. 9123, 69 FR 24078, May 3, 2004; T.D. 9177, 70 
FR 7176, Feb. 11, 2005; T.D. 9821, 82 FR 33444, July 20, 2017; T.D. 
9892, 85 FR 5324, Jan. 30, 2020]



Sec. 1.6031(b)-1T  Statements to partners (temporary).

    (a) Statement required to be furnished to partners--(1) In general. 
Except as provided in this paragraph (a)(1) and paragraph (a)(2)(ii) of 
this section, any partnership required under section 6031(a) and the 
regulations thereunder to file a partnership return for a taxable year 
shall furnish to every person who was a partner (within the meaning of 
section 7701(a)(2)) at any time during the taxable year a written 
statement containing the information described in paragraph (a)(3) of 
this section. This section shall not apply to a real estate mortgage 
investment conduit (REMIC) treated as a partnership under subtitle F of 
the Code by reason of section 860F(e). For the reporting requirements 
applicable to REMICs see Sec. 1.6031(b)-2T.
    (2) Special rules applicable to partnership interests held by 
nominees--(i) Statements furnished to nominees. For any partnership 
taxable year beginning after October 22, 1986, a partnership shall 
provide a person that holds (directly or indirectly) an interest in such 
partnership as a nominee on behalf of another person at any time during 
such year with a statement under paragraph (a)(1) of this section with 
respect to such interest if--
    (A) Such nominee has not furnished the statement required under 
Sec. 1.6031(c)-1T(a)(1)(i) to the partnership with respect to such 
other person;

[[Page 136]]

    (B) Such nominee either holds legal title to such partnership 
interest in its own name or is identified in a statement provided to the 
partnership pursuant to Sec. 1.6031(c)-1T(a)(1)(i) by another nominee 
as the person on whose behalf such other nominee holds such interest; 
and
    (C) Such nominee is not a person described in Sec. 1.6031(c)-
1T(a)(2) (relating to the special rule for clearing agencies).


In such case, the partnership shall assume, for purposes of this 
section, that the nominee is the beneficial owner of the partnership 
interest.
    (ii) Statements not required to be furnished to partners holding 
partnership interests through nominees. A partnership shall not be 
required to furnish a statement under paragraph (a)(1) of this section 
to a partner with respect to any portion of such partner's interest in 
the partnership that is owned through a nominee if--
    (A) Such nominee has not furnished (or is not required to furnish 
under Sec. 1.6031(c)-1T(a)(2)), a statement to the partnership under 
Sec. 1.6031(c)-1T(a)(1)(i) with respect to such partner; and
    (B) Such partner has not furnished (or is not required to furnish) a 
statement to the partnership under Sec. 1.6031(c)-1T(a)(3), with 
respect to such interest in the partnership.
    (3) Contents of statement. The statement required under paragraph 
(a)(1) of this section shall include the following information:
    (i) The partner's distributive share of partnership income, gain, 
loss, deduction, or credit required to be shown on the partnership 
return (or, for taxable years beginning before January 1, 1987, the 
partner's distributive share of partnership income, gain, loss, 
deduction, or credit shown on the partnership return); and
    (ii) To the extent provided by form or the accompanying 
instructions, any additional information that may be required to apply 
particular provisions of subtitle A of the Code to the partner with 
respect to items related to the partnership.
    (b) Time for furnishing statement. The statement required to be 
furnished by the partnership under paragraph (a)(1) of this section 
shall be furnished on or before the day on which the partnership return 
for that taxable year is required to be filed (determined with regard to 
extensions). For partnership returns the due date for which (determined 
without regard to extensions) is before January 1, 1987, the statement 
required to be furnished by the partnership under paragraph (a)(1) of 
this section shall be furnished on or before the day on which the 
partnership return is filed.
    (c) Statement may be provided to agent. If a partner designates 
another person, such as an attorney or an investment advisor, as the 
partner's (or nominee's) agent in dealing with the partnership, the 
partnership may provide the statement required under paragraph (a)(1) of 
this section with respect to such partner to such other person instead 
of the partner.
    (d) Penalties. For penalties for failure to comply with the 
requirements of section 6031(b) and paragraph (a) of this section, see 
section 6722(a).
    (e) Effective date. Except as otherwise provided in this section, 
the provisions of this section apply to partnership taxable years 
beginning after September 3, 1982.

[T.D. 8225, 53 FR 34490, Sept. 7, 1988]



Sec. 1.6031(b)-2T  REMIC reporting requirements (temporary). 
[Reserved]



Sec. 1.6031(c)-1T  Nominee reporting of partnership information
(temporary).

    (a) Statements required to be furnished to partnership--(1) 
Statement from nominee--(i) In general. Except as otherwise provided in 
this section, any person who holds, directly or indirectly, an interest 
in a partnership (required under section 6031(a) and the regulations 
thereunder to file a partnership return for a taxable year) as a nominee 
on behalf of another person at any time during the partnership taxable 
year shall furnish to the partnership a written statement (or 
statements) for that taxable year with respect to such other person 
containing the information described in paragraph (a)(1)(ii) of this 
section.
    (ii) Contents of statement. The statement required under paragraph 
(a)(1)(i)

[[Page 137]]

of this section shall, except as otherwise provided in paragraph (a)(4) 
of this section, include the following information:
    (A) The name, address, and taxpayer identification number of the 
nominee;
    (B) The name, address, and taxpayer identification number of such 
other person;
    (C) Whether such other person is--
    (1) A person that is not a United States person;
    (2) A foreign government, an international organization, or any 
wholly-owned agency or instrumentality of either of the foregoing; or
    (3) A tax-exempt entity (within the meaning of section 168(h)(2));
    (D) A description of any interest in the partnership held by the 
nominee on behalf of such other person at the beginning of the 
partnership taxable year;
    (E) A description of any interest in the partnership that the 
nominee acquires (within the meaning of paragraph (g)(1) of this 
section) on behalf of such other person during the partnership taxable 
year, the method of acquisition (e.g., purchase, exchange, acquisition 
at death, gift, or commencement of nominee relationship) and acquisition 
cost (within the meaning of paragraph (g)(2) of this section) of such 
interest, and the date of the acquisition of such interest; and
    (F) A description of any interest in the partnership that the 
nominee transfers (within the meaning of paragraph (g)(5) of this 
section) on behalf of such other person during the partnership taxable 
year, the net proceeds from the transfer (within the meaning of 
paragraph (g)(6) of this section) of such interest, and the date of the 
transfer of such interest.


A description of a partnership interest must include sufficient detail 
to enable the partnership to furnish to such other person the statement 
required under Sec. 1.6031(b)-1T (a).
    (2) Special rule for clearing agencies. A clearing agency registered 
pursuant to the provisions of section 17A of the Securities Exchange Act 
of 1934 (or its nominee) that holds an interest in a partnership as a 
nominee on behalf of another person shall not be required to furnish any 
statement described in paragraph (a)(1)(i) of this section with respect 
to such interest.
    (3) Special rule for brokers and financial institutions--(i) 
Additional statement required. Any broker (within the meaning of 
paragraph (g)(3) of this section) or financial institution (within the 
meaning of paragraph (g)(4) of this section) that holds an interest in a 
partnership indirectly through a nominee described in paragraph (a)(2) 
of this section at any time during a partnership taxable year shall 
furnish (in addition to any statement (or statements) required under 
paragraph (a)(1)(i) of this section) to the partnership a written 
statement (or statements) containing the information described in 
paragraph (a)(3)(ii) of this section with respect to any interest in 
such partnership that it holds (directly or indirectly) for its own 
account at any time during such partnership taxable year.
    (ii) Contents of statement. The statement required under paragraph 
(a)(3)(i) of this section shall, except as otherwise provided in 
paragraph (a)(4) of this section, include the following information:
    (A) The name, address, and taxpayer identification number of the 
broker or financial institution;
    (B) Whether such broker of financial institution is a person that is 
not a United States person;
    (C) A description of any interest in the partnership held by the 
broker or financial institution for its own account at the beginning of 
the partnership taxable year;
    (D) A description of any interest in the partnership that the broker 
or financial institution acquires for its own account during the 
partnership taxable year, the method of acquisition and acquisition cost 
of such interest, and the date of the acquisition of such interest; and
    (E) A description of any interest in the partnership that the broker 
or financial institution transfers for its own account during the 
partnership taxable year, the net proceeds from the transfer of such 
interest, and the date of the transfer of such interest.


A description of a partnership interest held by a broker or financial 
institution for its own account must include

[[Page 138]]

sufficient detail to enable the partnership to furnish to the broker or 
financial institution the statement required under Sec. 1.6031(b)-1T 
(a).
    (4) Exception--(i) In general. Except as otherwise provided in this 
paragraph (a)(4), any statement required under paragraph (a) (1)(i) or 
(3)(i) of this section for a taxable year is not required to include--
    (A) That part of the information described in paragraph (a) 
(1)(ii)(E) and (3)(ii)(D) of this section regarding the method of 
acquisition and acquisition cost; or
    (B) That part of the information described in paragraph 
(a)(1)(ii)(F) and (3)(ii)(E) of this section regarding the net proceeds 
from the transfer;


to the extent that, prior to the beginning of the partnership taxable 
year, the partnership has provided the nominee with a written statement 
that the nominee need not provide such information to the partnership, 
and the partnership has not modified or revoked such statement. For 
purposes of the preceding sentence, the modification or revocation of a 
statement furnished to a nominee is effective for a partnership taxable 
year if and only if the partnership notifies the nominee of such 
modification or revocation by a written statement more than 60 days 
before the beginning of the partnership taxable year. The nominee shall 
retain a copy of any statement that is furnished to it by the 
partnership under this paragraph (a)(4) in the nominee's records so long 
as the contents thereof may become material in the administration of any 
internal revenue law.
    (ii) Effect of election under section 754. Paragraph (a)(4)(i)(A) of 
this section shall not apply to a partnership taxable year if--
    (A) The partnership has an election in effect under section 754 
(relating to optional adjustment to basis of partnership property) for 
such taxable year; and
    (B) The nominee knows or has reason to know of such election more 
than 60 days before the beginning of such taxable year.
    (5) Examples. The following examples illustrate the application of 
this paragraph (a):

    Example 1. B, a broker, holds 50 units of interest in Partnership P, 
a calendar year partnership, in street name for customer A, the 
beneficial owner. B holds the units on behalf of A at all times during 
1989. B must furnish a statement to P for calendar year 1989 under 
paragraph (a)(1)(i) of this section that includes the information 
required under paragraph (a)(1)(ii) (A) through (D) of this section. The 
description of the partnership interest held by B on A's behalf on 
January 1, 1989, must identify the number of units of P held by B on A's 
behalf at that time (50), and the class of the partnership interest 
(including the Committee on Uniform Security Identification Procedures 
(CUSIP) number of the partnership interest, if known).
    Example 2. The facts are the same as in example (1), except that 
pursuant to A's instructions, B sells 25 of A's units of interest in P 
on August 1, 1989, receiving net proceeds from the transfer of $500. In 
addition to the information described in example (1), the statement that 
B must furnish to P must include the class of the partnership interest 
transferred (including the CUSIP number of the partnership interest, if 
known), the number of units transferred (25), the net proceeds from the 
transfer ($500), and the date of the transfer (August 1, 1989.)
    Example 3. The facts are the same as in example (1), except that A 
is not the beneficial owner, but rather holds the units as a nominee on 
behalf of C, the beneficial owner, at all times during 1989. In addition 
to the statement that B must furnish to P (as described in Example (1) 
of this paragraph (a)(5)), A must furnish a statement to P for calendar 
year 1989 under paragraph (a)(1)(i) of this section that includes the 
information required under paragraph (a)(1)(ii) (A) through (D) of this 
section. If both A and B provide P with the statement required under 
paragraph (a)(1)(i) of this section, P must provide C with the statement 
required under Sec. 1.6031(b)-1T (a)(1).

    (b) Time for furnishing statements. A nominee may furnish to the 
partnership any statement required under paragraph (a) of this section 
annually, quarterly, monthly, or on any other basis, provided that all 
statements required to be furnished under paragraph (a) of this section 
for a partnership taxable year shall be furnished on or before the last 
day of the first month following the close of such partnership taxable 
year.
    (c) Use of magnetic media. A nominee required to furnish a written 
statement under paragraph (a) of this section, may, in lieu of 
furnishing such written statement, furnish the required information on 
magnetic tape or by other

[[Page 139]]

media if the partnership and the nominee so agree.
    (d) Use of single document. Any person who holds interests in a 
partnership as a nominee on behalf of more than one other person during 
the partnership taxable year, may, in lieu of furnishing to the 
partnership a separate statement for each such other person, furnish to 
the partnership a single document which includes, for each such other 
person, the information described in paragraph (a)(1)(ii) of this 
section. To the extent that a single document is used, references in 
this section to the statement required under paragraph (a)(1)(i) of this 
section shall be deemed to refer also to the information included in a 
single document under this paragraph (d).
    (e) Retention of information. The nominee shall retain a copy of any 
statement that is furnished to the partnership under this section in the 
nominee's records so long as the contents thereof may become material in 
the administration of any internal revenue law.
    (f) Use of agent. If a partnership has designated another person, 
such as a clearing organization, as the partnership's agent for purposes 
of receiving the statements required under paragraph (a) of this 
section, such statements may be furnished to that other person instead 
of the partnership. If a nominee has designated another person as its 
agent for purposes of furnishing to the partnership (or its agent) the 
statements required under paragraph (a) of this section, that other 
person may furnish such statements to the partnership (or its agent) on 
behalf of the nominee.
    (g) Meaning of terms. For purposes of this section, the following 
terms have the meanings set forth below:
    (1) The term acquires means--
    (i) A purchase or other acquisition of a partnership interest; or
    (ii) The commencement of a nominee relationship, including the 
substitution of one nominee for another.
    (2) The term acquisition cost means the sum of any money paid and 
the fair market value of any property (other than money) transferred to 
acquire a partnership interest increased by any expenses paid or 
incurred with respect to the acquisition (such as broker's fees or 
commissions).
    (3) The term broker shall have the meaning set forth in paragraph 
(a)(1) of Sec. 1.6045ca-1.
    (4) The term financial institution means a financial institution 
such as a bank, mutual savings bank, savings and loan association, 
building and loan association, cooperative bank, homestead association, 
credit union, industrial loan association or bank or other similar 
organization.
    (5) The term transfer means--
    (i) A sale, exchange, or other disposition of a partnership 
interest; or
    (ii) The termination of a nominee relationship, including the 
substitution of one nominee for another.
    (6) The term net proceeds from the transfer means the sum of any 
money and the fair market value of any property (other than money) 
received in connection with a transfer of a partnership interest reduced 
by any expenses paid or incurred with respect to the transfer (such as 
broker's fees or commissions).
    (7) The term person includes the United States, a State, the 
District of Columbia, a foreign government, a political subdivision of a 
State or foreign government, or an international organization.
    (h) Statement required by nominees that do not comply with Sec. 
1.6031(c)-1T (a)--(1) In general. Any person that--
    (i) Holds an interest in a partnership as a nominee (other than a 
nominee described in paragraph (a)(3) of this section) on behalf of 
another person at any time during the partnership taxable year;
    (ii) Does not furnish to such partnership the statement required 
under paragraph (a)(1)(i) of this section for such other person with 
respect to such interest in the partnership; and
    (iii) Receives from such partnership the statement described in 
paragraph (a)(1) of Sec. 1.6031(b)-1T with respect to such interest in 
the partnership;


shall furnish to such other person a written statement containing the 
information described in paragraph (h)(2) of this section with respect 
to such interest in the partnership.
    (2) Contents of statement. The statement required under paragraph 
(h)(1) of

[[Page 140]]

this section shall contain the following information:
    (i) The distributive share of partnership income, gain, loss, 
deduction or credit required to be shown on the partnership return that 
is allocable to such interest in the partnership; and
    (ii) Any additional information that may be required to apply 
particular provisions of subtitle A of the Code to the beneficial owner 
of such interest in the partnership in connection with items related to 
the partnership.
    (3) Time for furnishing statements. A nominee shall furnish the 
statement required under paragraph (h)(1) of this section within 30 days 
after receiving the statement described in paragraph (a) of Sec. 
1.6031(b)-1T.
    (i) REMICs. This section shall not apply with respect to any 
interest in a real estate mortgage investment conduit (REMIC) treated as 
a partnership under subtitle F of the Code by reason of section 860F(e). 
For the nominee reporting requirements with respect to REMICs see Sec. 
1.6031(c)-2T.
    (j) Penalties. [Reserved]
    (k) Effective date--(1) In general. Except as otherwise provided in 
paragraph (k)(2) of this section, the provisions of this section shall 
apply to partnership taxable years beginning after October 22, 1986.
    (2) Transitional rule for taxable years beginning before January 1, 
1989. For partnership taxable years beginning before January 1, 1989,--
    (i) Any statement that a nominee is required to furnish to a 
partnership under paragraph (a)(1) of this section shall not be required 
to include the following information:
    (A) The information described in paragraph (a)(1)(ii)(C) of this 
section;
    (B) That part of the information described in paragraph 
(a)(1)(ii)(E) of this section regarding the method of acquisition and 
acquisition cost of a partnership interest; or
    (C) That part of the information described in paragraph 
(a)(1)(ii)(F) of this section regarding the net proceeds from the 
transfer of a partnership interest.
    (ii) A broker or financial institution shall not be required to 
furnish the additional statement described in paragraph (a)(3)(i) of 
this section.

[T.D. 8225, 53 FR 34491, Sept. 7, 1988]



Sec. 1.6031(c)-2T  Nominee reporting of REMIC information (temporary).
[Reserved]



Sec. 1.6032-1  Returns of banks with respect to common trust funds.

    (a) Every bank (as defined in section 581) maintaining a common 
trust fund shall make a return of income of the common trust fund, 
regardless of the amount of its taxable income. Member banks of an 
affiliated group that serve as co-trustees with respect to a common 
trust fund must act jointly in making a return for the fund. If a bank 
maintains more than one common trust fund, a separate return shall be 
made for each. No particular form is prescribed for making the return 
under this section, but Form 1065 may be used if it is designated by the 
bank as the return of a common trust fund. The return shall be made for 
the taxable year of the common trust fund and shall be filed on or 
before the date prescribed by section 6072(b) with the service center 
prescribed in the relevant Internal Revenue Service revenue procedure, 
publication, form, or instructions to the form (see Sec. 601.601(d)(2) 
of this chapter). Such return shall state specifically with respect to 
the fund the items of gross income and the deductions allowed by 
subtitle A of the Internal Revenue Code, shall include each 
participant's name and address, the participant's proportionate share of 
taxable income or net loss (exclusive of gains and losses from sales or 
exchanges of capital assets), the participant's proportionate share of 
gains and losses from sales or exchanges of capital assets, and the 
participant's share of items which enter into the determination of the 
tax imposed by section 56. See Sec. Sec. 1.584-2 and 1.58-5. If the 
common trust fund is maintained by two or more banks that are members of 
the same affiliated group, the return must also identify the member bank 
in the group that has contributed each participant's property or money 
to the fund. A copy of the plan of the common trust fund must be filed 
with the return. If, however, a copy of such plan

[[Page 141]]

has once been filed with a return, it need not again be filed if the 
return contains a statement showing when and where it was filed. If the 
plan is amended in any way after such copy has been filed, a copy of the 
amendment must be filed with the return for the taxable year in which 
the amendment was made. For the signing of a return of a bank with 
respect to common trust funds, see Sec. 1.6062-1, relating to the 
manner prescribed for the signing of a return of a corporation.
    (b) This section applies to returns filed on or after January 30, 
2020. Section 1.6032-1T (as contained in 26 CFR part 1, revised April 
2019) applies to taxable years beginning before January 30, 2020.

[T.D. 9892, 85 FR 5324, Jan. 30, 2020]



Sec. 1.6033-1  Returns by exempt organizations; taxable years
beginning before January 1, 1970.

    (a) In general. (1) Except as provided in section 6033(a) and 
paragraph (g) of this section, every organization exempt from taxation 
under section 501(a) shall file an annual return of information 
specifically stating its items of gross income, receipts and 
disbursements, and such other information as may be prescribed in the 
instructions issued with respect to the return. Such information return 
shall be filed annually regardless of the amount or source of the income 
or receipts of the organization. Except as provided in paragraph (d) of 
this section, such return shall be filed annually regardless of whether 
such organization is chartered by, or affiliated or associated with, any 
central, parent, or other organization.
    (2)(i) Except as otherwise provided in this subparagraph, every 
organization exempt from taxation under section 501 (a), and required to 
file a return under section 6033 and this section, other than an 
organization described in section 401 (a), 501(c)(3), or 501(d), shall 
file its annual return on Form 990. However, such an exempt 
organization, instead of filing Form 990, may file its annual return on 
Form 990 (SF), a short form, if its gross receipts for the taxable year 
do not exceed $10,000 and its total assets on the last day of its 
taxable year do not exceed $10,000.
    (ii) For purposes of this subparagraph and subparagraph (4) of this 
paragraph, ``gross receipts'' means the gross amount received by the 
organization during its annual accounting period from all sources 
without reduction for any costs or expenses including, for example, cost 
of goods or assets sold, cost of operations, or expenses of earning, 
raising, or collecting such amounts. Thus, ``gross receipts'' includes, 
but is not limited to, (a) the gross amount received as contributions, 
gifts, grants, and similar amounts without reduction for the expenses of 
raising and collecting such amounts, (b) the gross amount received as 
dues or assessments from members or affiliated organizations without 
reduction for expenses attributable to the receipt of such amounts, (c) 
gross sales or receipts from business activities (including business 
activities unrelated to the purpose for which the organization received 
an exemption, the net income or loss from which may be required to be 
reported on Form 990-T), (d) the gross amount received from the sale of 
assets without reduction for cost or other basis and expenses of sale, 
and (e) the gross amount received as investment income such as interest, 
dividends, rents, and royalties.
    (3) Every employees' trust described in section 401 (a) which is 
exempt from taxation under section 501 (a) shall file an annual return 
on Form 990-P. The return shall include the information required by 
paragraph (b)(5)(ii) of Sec. 1.401-1. In addition, the trust must file 
the information required to be filed by the employer pursuant to the 
provisions of Sec. 1.404(a)-2, unless the employer has notified the 
trustee in writing that he has or will timely file such information. If 
the trustee has received such notification from the employer, then such 
notification, or a copy thereof, shall be retained by the trust as a 
part of its records.
    (4) Except as otherwise provided in this subparagraph, every 
organization described in section 501(c)(3), which is required to file a 
return under section 6033 and this section, shall file its annual return 
on Form 990-A. However, such an exempt organization, instead of filing 
Form 990-A, may file its annual return on Form 990-A (SF), a

[[Page 142]]

short form, if its gross receipts for the taxable year do not exceed 
$10,000 and its total assets on the last day of its taxable year do not 
exceed $10,000. For purposes of this subparagraph, ``gross receipts'' 
shall be defined in the manner prescribed in subparagraph (2)(ii) of 
this paragraph. The forms prescribed by this subparagraph shall be as 
follows:
    (i) Form 990-A shall consist of parts I and II. Part I shall 
contain, in addition to information required in part II, such 
information as may be prescribed in the return and instructions which is 
required to be furnished by section 6033(a) or which is necessary to 
show whether or not such organization is exempt from tax under section 
501(a). Part II, which shall be open to public inspection pursuant to 
section 6104 and other applicable sections and the regulations 
thereunder, shall contain principally the information required by 
section 6033(b) and the regulations thereunder. The information 
contained in part II, to be furnished by the organization in duplicate 
in the manner prescribed by the instructions issued with respect to the 
return, is as follows:
    (a) Its gross income for the year. For this purpose, gross income 
includes tax-exempt income, but does not include contributions, gifts, 
grants, and similar amounts received. Whether or not an item constitutes 
a contribution, gift, grant, or similar amount, depends upon all the 
surrounding facts and circumstances.
    (b) Its expenses attributable to such income and incurred within the 
year.
    (c) Its disbursements out of income (including prior years' 
accumulations) made within the year for the purposes for which it is 
exempt. Information shall be included as to the class of activity with a 
separate total for each activity as well as the name, address, and 
amount received by each individual or organization receiving cash, other 
property, or services within the taxable year. If the donee is related 
by blood, marriage, adoption, or employment (including children of 
employees) to any person or corporation having an interest in the exempt 
organization, such as a creator, donor, director, trustee, or officer, 
the relationship of the donee shall be stated. Activities shall be 
classified according to purpose in greater detail than merely 
charitable, educational, religious, or scientific. For example, payments 
for nursing service, for laboratory construction, for fellowships, or 
for assistance to indigent families shall be so identified. Where the 
fair market value of the property at the time of disbursement is used as 
the measure of the disbursement, the book value of such property (and a 
statement of how book value was determined) shall also be furnished, and 
any difference between the fair market value at the time of disbursement 
and the book value should be reflected in the books of account. The 
expenses allocable to making the disbursements shall be set forth in 
such detail as is prescribed by the form or instructions.
    (d) Its accumulation of income within the year. The amount of such 
accumulation is obtained by subtracting from the amount in (a) of this 
subdivision the sum of the amounts determined in (b) and (c) of this 
subdivision and the expenses allocable to carrying out the purposes for 
which it is exempt.
    (e) Its aggregate accumulation of income at the beginning and end of 
the year. The aggregate accumulation of income shall be divided between 
that which is attributable to the gain or loss on the sale of assets 
(excluding inventory items) and that which is attributable to all other 
income. For this purpose expenses and disbursements shall be allocated 
on the basis of accounting records, the governing instrument, or 
applicable local law.
    (f) Its disbursements out of principal in the current and prior 
years for the purposes for which it is exempt. In addition, the same 
type of information shall be required with respect to disbursements out 
of principal made in the current year as is prescribed by (c) of this 
subdivision with respect to disbursements out of income.
    (g) A balance sheet showing its assets, liabilities, and net worth 
as of the beginning and end of such year. Detailed information on the 
assets, liabilities, and net worth shall be furnished on the schedule 
provided for this purpose on the Form 990-A. Such schedule

[[Page 143]]

shall be supplemented by attachments where appropriate.
    (h) The total of the contributions and gifts received by it during 
the year. A statement shall be included showing the gross amount of 
contributions and gifts collected by the organization, the expenses 
incurred by the organization in collecting such amount, and the net 
proceeds.
    (i) In addition to the information required in (a) through (h) of 
this subdivision, the organization shall furnish such specific 
information and answer such specific questions as are required by the 
form or instructions.
    (ii) Form 990-A (SF) is a short form consisting of a single part 
which contains such information as may be prescribed in the return and 
instructions which is required to be furnished by section 6033(a) or 
which is necessary to show whether or not such organization is exempt 
from tax under section 501(a). In addition, Form 990-A (SF) shall 
contain the information required by section 6033(b) which must be 
furnished in the manner prescribed in the instructions issued with 
respect to the return. Form 990-A (SF) shall be open to public 
inspection pursuant to section 6104 and other applicable sections and 
the regulations thereunder.
    (5)(i) Every religious or apostolic association or corporation 
described in section 501 (d) which is exempt from taxation under section 
501(a) shall file a return on Form 1065 for each taxable year, stating 
specifically the items of gross income and deductions, and its taxable 
income. There shall be attached to the return as a part thereof a 
statement showing the name and address of each member of the association 
or corporation and the amount of his distributive share of the taxable 
income of the association or corporation for such year.
    (ii) If the taxable year of any member is different from the taxable 
year of the association or corporation, the distributive share of the 
taxable income of the association or corporation to be included in the 
gross income of the member for his taxable year shall be based upon the 
taxable income of the association or corporation for its taxable year 
ending with or within the taxable year of the member.
    (b) Accounting period for filing return. A return on Form 990, 990-
A, 990 (SF), 990-A (SF), or 990-P shall be on the basis of the 
established annual accounting period of the organization. If the 
organization has no such established accounting period, such return 
shall be on the basis of the calendar year.
    (c) Returns when exempt status not established. An information 
return on Form 990, 990-A, 990 (SF), or 990-A (SF) is not required to be 
filed by an organization claiming an exempt status under section 501(a) 
prior to the establishment by the organization of such exempt status 
under section 501 and Sec. 1.501(a)-1. If the date for filing an income 
tax return and paying the tax occurs before the tax-exempt status of the 
organization has been established, the organization is required to file 
the income tax return and pay the tax. However, see sections 6081 and 
6161 and the regulations thereunder for extensions of time for filing 
the return and paying the tax. Upon establishment of its exempt status, 
the organization may file a claim for a refund of income taxes paid for 
the period for which its exempt status is established.
    (d) Group returns. (1) A central, parent, or like organization 
(referred to in this paragraph as ``central organization''), exempt 
under section 501(a) and described in section 501(c), although required 
to file a separate annual return for itself under section 6033 and 
paragraph (a) of this section, may file annually, in addition to such 
separate annual return, a group return on Form 990 or 990-A, 990 (SF), 
or 990-A (SF), as may be appropriate. Form 990 (SF) or 990-A (SF) may be 
used where each local organization qualifies under paragraph (a) of this 
section. Such group return may be filed for two or more of the local 
organizations, chapters, or the like (referred to in this paragraph as 
``local organizations'') which are (i) affiliated with such central 
organization at the close of its annual accounting period, (ii) subject 
to the general supervision or control of the central organization, and 
(iii) exempt from taxation under the same paragraph of section 501(c) of 
the Code, although the local organizations are not necessarily exempt 
under the paragraph under

[[Page 144]]

which the central organization is exempt.
    (2)(i) The filing of the group return shall be in lieu of the filing 
of a separate return by each of the local organizations included in the 
group return. The group return shall include only those local 
organizations which in writing have authorized the central organization 
to include them in the group return, and which have made and filed, with 
the central organization, their statements, specifically stating their 
items of gross income, receipts, and disbursements, and such other 
information relating to them as is required to be stated in the group 
return. Such an authorization by a local organization shall be made 
annually, under the penalties of perjury, and shall be signed by a duly 
authorized officer of the local organization in his official capacity 
and shall contain the following statement, or a statement of like 
import: ``I hereby declare under the penalties of perjury that this 
authorization (including any accompanying schedules and statements) has 
been examined by me and to the best of my knowledge and belief is true, 
correct and complete and made in good faith for the taxable year 
stated.'' Such authorizations and statements shall be permanently 
retained by the central organization.
    (ii) There shall be attached to the group return and made a part 
thereof a schedule showing the name and address of each of the local 
organizations and the total number thereof included in such return, and 
a schedule showing the name and address of each of the local 
organizations and the total number thereof not included in the group 
return.
    (3) The group return shall be on the basis of the established annual 
accounting period of the central organization. Where such central 
organization has no established annual accounting period, such return 
shall be on the basis of the calendar year. The same income, receipts, 
and disbursements of a local organization shall not be included in more 
than one group return.
    (4) The group return shall be filed in accordance with these 
regulations and the instructions issued with respect to Form 990, 990-A, 
990 (SF), or 990-A (SF), whichever is appropriate, and shall be 
considered the return of each local organization included therein. The 
tax-exempt status of a local organization must be established under a 
group exemption letter issued to the central organization before a group 
return including the local organization will be considered as the return 
of the local organization. See Sec. 1.501(a)-1 for requirements for 
establishing a tax-exempt status.
    (e) Time and place for filing. The annual return of information on 
Form 990, 990-A, 990 (SF), 990-A (SF), or 990-P shall be filed on or 
before the 15th day of the fifth calendar month following the close of 
the period for which the return is required to be filed. The annual 
return on Form 1065 required to be filed by a religious or apostolic 
association or corporation shall be filed on or before the 15th day of 
the fourth month following the close of the taxable year for which the 
return is required to be filed. Each such return shall be filed in 
accordance with the instructions applicable thereto.
    (f) Penalties. For criminal penalties for failure to file a return 
and filing a false or fraudulent return, see sections 7203, 7206, and 
7207.
    (g) Organizations not required to file annual returns. (1)(i) Annual 
returns on Form 990-A or Form 990-A (SF) are not required to be filed by 
an organization described in section 501(c)(3) which has established its 
right to exemption from taxation under section 501 (a) and which is:
    (a) Organized and operated exclusively for religious purposes;
    (b) Operated, supervised, or controlled by or in connection with an 
organization which is organized and operated exclusively for religious 
purposes;
    (c) An educational organization which normally maintains a regular 
faculty and curriculum and normally has a regularly organized body of 
pupils or students in attendance at the place where its educational 
activities are regularly carried on; or
    (d) A charitable organization, or an organization for the prevention 
of cruelty to children or animals, which is supported, in whole or in 
part, by funds contributed by the United States or

[[Page 145]]

any State or political subdivision thereof, or which is primarily 
supported by contributions of the general public.
    (ii) An educational organization which normally maintains and has a 
regular faculty, curriculum, and student body and meets the conditions 
of subdivision (i)(c) of this subparagraph, which relieves it from the 
requirement of filing annual returns, shall not be considered as having 
thereafter failed to continue meeting such conditions if it is 
temporarily compelled to curtail or discontinue its normal and regular 
activities during the existence of abnormal circumstances and 
conditions.
    (iii) An organization organized and operated exclusively for 
charitable purposes or for the prevention of cruelty to children or 
animals is ``primarily supported by contributions of the general 
public'' for any accounting period if more than 50 percent of its income 
and receipts for such period is actually derived from voluntary 
contributions and gifts made by the general public, as distinguished 
from a few contributors or donors or from related or associated persons. 
For purposes of this subdivision, the words ``related or associated 
persons'' refer to persons of a particular group who are connected with 
or are interested in the activities of the organization, such as 
founders, incorporators, shareholders, members, fiduciaries, officers, 
employees, or the like, or who are connected with such persons by family 
or business relationships. An organization claiming an exception from 
the filing of an information return under this subdivision must maintain 
adequate records in order to substantiate such claim. Furthermore, if it 
is doubtful to an organization that it falls within this exception for 
filing annual information returns, it must file the return on Form 990-A 
or Form 990-A (SF).
    (2) The annual return on Form 990 or Form 990 (SF) need not be filed 
by:
    (i) A fraternal beneficiary society, order, or association, 
described in section 501(c)(8), or
    (ii) An organization described in section 501(c)(1) if it is a 
corporation wholly owned by the United States or any agency or 
instrumentality thereof, or is a wholly owned subsidiary of such a 
corporation,


which has established its exemption from tax under section 501(a).
    (3) The provisions of section 6033(a) relieving certain specified 
types of organizations exempt from tax under section 501(a) from filing 
annual returns do not abridge or impair in any way the powers and 
authority of district directors or directors of service centers provided 
for in other provisions of the Code and in the regulations thereunder to 
require the filing of such returns by such organizations. See section 
6001 and Sec. 1.6001-1.
    (h) Records, statements, and other returns of tax-exempt 
organizations. (1) An organization which has established its right to 
exemption from tax under section 501(a) and has also established that it 
is not required to file annually the return of information on Form 990, 
990-A, 990 (SF), or 990-A (SF) shall immediately notify in writing the 
district director for the internal revenue district in which its 
principal office is located of any changes in its character, operations, 
or purpose for which it was originally created.
    (2) Every organization which has established its right to exemption 
from tax, whether or not it is required to file an annual return of 
information, shall submit such additional information as may be required 
by the district director for the purpose of enabling him to inquire 
further into its exempt status and to administer the provisions of 
subchapter F (section 501 and following), chapter 1 of the Code, and of 
section 6033. See section 6001 and Sec. 1.6001-1 with respect to the 
authority of the district director or directors of service centers to 
require such additional information and with respect to the permanent 
books of account or records to be kept by such organizations.
    (3) An organization which has established its right to exemption 
from tax under section 501(a), including an organization which is 
relieved under section 6033 and this section from filing annual returns 
of information, is not, however, relieved from the duty of filing other 
returns of information. See, for example, sections 6041 and 6051 and the 
regulations thereunder.

[[Page 146]]

    (i) Unrelated business tax returns. In addition to the foregoing 
requirements of this section, certain organizations otherwise exempt 
from tax under section 501(a) and described in section 501(c) (2), (3), 
(5), (6), or (17) or section 401(a) which are subject to tax on 
unrelated business taxable income are also required to file returns on 
Form 990-T. See paragraph (e) of Sec. 1.6012-2 and paragraph (a)(5) of 
Sec. 1.6012-3 for requirements with respect to such returns.
    (j) Effective date. The provisions of this section shall apply with 
respect to returns filed for taxable years beginning before January 1, 
1970.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6722, 29 FR 
5075, Apr. 14, 1964; T.D. 6972, 33 FR 12907, Sept. 12, 1968; T.D. 6980, 
33 FR 16446, Nov. 9, 1968; T.D. 7122, 36 FR 11026, June 8, 1971]



Sec. 1.6033-2  Returns by exempt organizations (taxable years 
beginning after December 31, 1969) and returns by certain nonexempt
organizations (taxable years beginning after December 31, 1980).
          

    (a) In general. (1) Except as provided in section 6033(a)(3) and 
paragraph (g) of this section, every organization exempt from taxation 
under section 501(a) shall file an annual information return 
specifically setting forth its items of gross income, gross receipts and 
disbursements, and such other information as may be prescribed in the 
instructions, issued with respect to the return. Except as provided in 
paragraph (d) of this section, such return shall be filed annually 
regardless of whether such organization is chartered by, or affiliated 
or associated with, any central, parent, or other organization.
    (2)(i) Except as otherwise provided in this paragraph and paragraph 
(g) of this section, every organization exempt from taxation under 
section 501(a), and required to file a return under section 6033 and 
this section (including, for taxable years ending before December 31, 
1972, private foundations, as defined in section 509(a)), other than an 
organization described in section 401(a) or 501(d), shall file its 
annual return on Form 990. For taxable years ending on or after December 
31, 1972, every private foundation shall file Form 990-PF as its annual 
information return. For taxable years beginning after December 31, 1977, 
every section 501(c)(21) black lung trust shall file an annual 
information return on Form 990-BL or any other form prescribed by the 
Internal Revenue Service for that purpose.
    (ii) The information generally required to be furnished by an 
organization exempt under section 501(a) is:
    (a) Its gross income for the year. For this purpose, gross income 
includes tax-exempt income, but does not include contributions, gifts, 
grants, and similar amounts received. Whether an item constitutes a 
contribution, gift, grant, or similar amount depends upon all the 
surrounding facts and circumstances. The computation of gross income 
shall be made by subtracting the cost of goods sold from all receipts 
other than gross contributions, gifts, grants, and similar amounts 
received and nonincludible dues and assessments from members and 
affiliates.
    (b) To the extent not included in gross income, its dues and 
assessments from members and affiliates for the year.
    (c) Its expenses incurred within the year attributable to gross 
income.
    (d) Its disbursements (including prior years' accumulations) made 
within the year for the purposes for which it is exempt.
    (e) A balance sheet showing its assets, liabilities, and net worth 
as of the beginning and end of such year. Detailed information relating 
to the assets, liabilities, and net worth shall be furnished on the 
schedule provided for this purpose on the return required by this 
section. Such schedule shall be supplemented by attachments where 
appropriate.
    (f) The total of the contributions, gifts, grants and similar 
amounts received by it during the taxable year, and the names and 
addresses of all persons who contributed, bequeathed, or devised $5,000 
or more (in money or other property) during the taxable year. In the 
case of a private foundation (as defined in section 509(a)), the names 
and addresses of all persons who became substantial contributors (as 
defined in section 507(d)(2)) during the taxable year shall be 
furnished. In addition, for its first taxable year beginning after 
December 31, 1969, each private foundation shall furnish the

[[Page 147]]

names and addresses of all persons who became substantial contributors 
before such taxable year. For special rules with respect to contributors 
and donors, see subdivision (iii) of this subparagraph.
    (g) The names and addresses of all officers, directors, or trustees 
(or any person having responsibilities or powers similar to those of 
officers, directors or trustees) of the organization, and, in the case 
of a private foundation, all persons who are foundation managers, within 
the meaning of section 4946(b)(1). Organizations must also attach a 
schedule showing the names and addresses and/or total numbers of key 
employees, highly compensated employees, and independent contractors as 
prescribed by publication, form, or instructions.
    (h) A schedule showing the compensation and other payments made to 
each person whose name is required to be listed pursuant to paragraph 
(a)(2)(ii)(g) of this section during the calendar year ending within the 
organization's annual accounting period, or during such other period as 
prescribed by publication, form, or instructions.
    (i) For any taxable year ending on or after December 31, 1971, such 
information as is required by Forms 4848 and 4849 and, only with respect 
to any such taxable year ending before December 31, 1972, such 
information as is required by Form 2950. Such forms are required by this 
section to be filed by an organization exempt from tax under section 
501(a) which is an employer who maintains a funded pension or annuity 
plan for its employees. See paragraph (g) of this section for exceptions 
from filing. Form 4849 need not be filed by the organization if the 
fiduciary for the plan has given written notification to the 
organization that such form will be filed as an attachment to Form 990-P 
filed by the fiduciary. Form 4848 (and Form 4849 if required to be filed 
by the organization) shall be filed as a separate return on or before 
the due date for Form 990. For rules relating to the extension of time 
for filing, see section 6081 and the regulations thereunder and the 
instructions for Form 4848. A central organization which files Form 990 
as a group return under paragraph (d) of this section may also file Form 
4848 as a group return. The rules provided by paragraph (d) of this 
section with respect to a group return filed on Form 990 shall apply to 
a group return filed on Form 4848. Unless otherwise expressly provided 
therein, an authorization to include a local organization in a group for 
purposes of filing Form 990 as a group return shall be treated as an 
authorization to include such local organization in a group for purposes 
of filing Form 4848 as a group return. A group return on Form 4848 shall 
be filed in accordance with this section and the instructions to Form 
4848 and shall be considered the return of each local organization 
included therein. In addition to the information required to be 
furnished by Forms 4848 and 4849, the district director may require any 
further information that he considers necessary to determine 
qualification of the plan under section 401 or the taxability under 
section 403(b) of a beneficiary under an annuity purchased by a section 
501(c)(3) organization.
    (j) In the case of a private foundation liable for tax imposed under 
chapter 42, such information as is required by Form 4720.
    (k) Its lobbying expenditures, grass roots expenditures, exempt 
purpose expenditures, lobbying nontaxable amount, and grass roots 
nontaxable amount for the taxable year and for prior taxable years that 
are base years (within the meaning of Sec. 1.501(h)-3(c)(7)), if the 
organization has an election under section 501(h) in effect for the 
taxable year. An organization that is a member of an affiliated group of 
organizations (as defined in Sec. 56.4911-7(e)) but that is not a 
member of a limited affiliated group (as defined in Sec. 56.4911-10(b)) 
shall report this information based on the expenditures of all members 
of the group during the taxable year of the group that ends with or 
within the member's taxable year and for prior taxable years of the 
group that are base years (within the meaning of Sec. 56.4911-9(b)). 
For additional information required to be furnished by members of an 
affiliated group of organizations, and by controlling members in a 
limited affiliated group, see Sec. Sec. 56.4911-9(d) and 56.4911-
10(f)(1), respectively.

[[Page 148]]

    (l) In the case of a hospital organization (as defined in Sec. 
1.501(r)-1(b)(18)) described in section 501(c)(3) during the taxable 
year--
    (1) A copy of its audited financial statements for the taxable year 
(or, in the case of an organization the financial statements of which 
are included in consolidated financial statements with other 
organizations, such consolidated financial statements);
    (2) Either a copy of the most recently adopted implementation 
strategy, within the meaning of Sec. 1.501(r)-3(c), for each hospital 
facility it operates or the URL of each Web page where it has made each 
such implementation strategy widely available on a Web site within the 
meaning of Sec. 1.501(r)-1(b)(29) along with or as part of the report 
documenting the community health needs assessment (CHNA) to which the 
implementation strategy relates;
    (3) For each hospital facility it operates, a description of the 
actions taken during the taxable year to address the significant health 
needs identified through its most recently conducted CHNA, within the 
meaning of Sec. 1.501(r)-3(b), or, if no actions were taken with 
respect to one or more of these health needs, the reason(s) why no 
actions were taken; and
    (4) The amount of the excise tax imposed on the organization under 
section 4959 during the taxable year.
    (iii) Special rules. In providing the names and addresses of 
contributors and donors under subdivision (ii)(f) of this subparagraph:
    (a) An organization described in section 501(c)(3) which meets the 
33\1/3\ percent-of-support test of the regulations under section 
170(b)(1)(A)(vi) (without regard to whether such organization otherwise 
qualifies as an organization described in section 170(b)(1)(A)) is 
required to provide the name and address of a person who contributed, 
bequeathed, or devised $5,000 or more during the year only if his amount 
is in excess of 2 percent of the total contributions, bequests and 
devises received by the organization during the year.
    (b) An organization other than a private foundation is required to 
report only the names and addresses of contributors of whom it has 
actual knowledge. For instance, an organization need not require an 
employer who withholds contributions from the compensation of employees 
and pays over to the organization periodically the total amounts 
withheld, to specify the amounts paid over with respect to a particular 
employee. In such case, unless the organization has actual knowledge 
that a particular employee gave more than $5,000 (and in excess of 2 
percent if (a) of this subdivision is applicable), the organization need 
report only the name and address of the employer, and the total amount 
paid over by him.
    (c) Separate and independent gifts made by one person in a 
particular year need be aggregated to determine if his contributions and 
bequests exceed $5,000 (and in excess of 2 percent if (a) of this 
subdivision is applicable), only if such gifts are of $1,000 or more.
    (d)(1) Organizations described in section 501(c) (8) or (10) (and, 
for taxable years beginning after December 31, 1970, organizations 
described in section 501(c)(7)) that receive contributions or bequests 
to be used exclusively for purposes described in section 170(c)(4), 
2055(a)(3), or 2522(a)(3), must attach a schedule with respect to all 
gifts which aggregate more than $1,000 from any one person showing the 
name of the donor, the amount of the contribution or bequest, the 
specific purpose for which such amount was received, and the specific 
use to which such amount was put. In the case of an amount set aside for 
such purposes, the organization shall indicate the manner in which such 
amount is held (for instance, whether such amount is commingled with 
amounts held for other purposes). If the contribution or bequest was 
transferred to another organization, the schedule must include the name 
of the transferee organization, a description of the nature of such 
organization, and a description of the relationship between the 
transferee and transferor organizations.
    (2) For taxable years beginning after December 31, 1970, such 
organizations must also attach a statement showing the total dollar 
amount of contributions and bequests received for such purposes which 
are $1,000 or less.

[[Page 149]]

    (iv) Listing of States. A private foundation is required to attach 
to its return required by this section a list of all States:
    (a) To which the organization reports in any fashion concerning its 
organization, assets, or activities, or
    (b) With which the organization has registered (or which it has 
otherwise notified in any manner) that it intends to be, or is, a 
charitable organization or a holder of property devoted to a charitable 
purpose.
    (3)(i) For taxable years beginning after December 31, 1969, and 
ending before December 31, 1971, every employee's trust described in 
section 401(a) which is exempt from taxation under section 501(a) shall 
file an annual return on Form 990-P. The return shall include the 
information required by paragraph (b)(5)(ii) of Sec. 1.401-1. For such 
years, in addition, the trust must file the information required to be 
filed by the employer pursuant to the provisions of Sec. 1.404(a)-2, 
unless the employer has notified the trustee in writing that he has 
filed or will timely file such information. If the trustee has received 
such notification from the employer, then such notification, or a copy 
thereof, shall be retained by the trust as a part of its records.
    (ii) For taxable years ending on or after December 31, 1971, and 
before December 31, 1975, every employee's trust described in section 
401(a) which is exempt from taxation under section 501(a) shall file an 
annual return on Form 990-P. The trust shall furnish such information as 
is required by such form and the instructions issued with respect 
thereto.
    (4) For taxable years beginning after December 31, 1980, trusts 
described in section 4947(a)(1) and nonexempt private foundations shall 
comply with the requirements of section 6033 and this section in the 
same manner as organizations described in section 501(c)(3) which are 
exempt from tax under section 501(a). This section shall be applied for 
taxable years beginning after December 31, 1980 as if trusts described 
in section 4947(a)(1) and nonexempt private foundations were described 
in section 501(c)(3). Therefore, for purposes of this section, all 
references to exempt organizations shall include section 4947(a)(1) 
trusts and nonexempt private foundations and all references to private 
foundations shall include section 4947(a)(1) trusts that would be 
private foundations if they were described in section 501(c)(3) and all 
nonexempt private foundations. Similarly, for purposes of paragraph 
(a)(2)(ii)(d), the purposes for which a section 4947(a)(1) trust or a 
nonexempt private foundation is organized shall be treated as the 
purposes for which it is exempt. For purposes of this section, the term 
``nonexempt private foundation'' means a taxable organization (other 
than a section 4947(a)(1) trust) that is a private foundation. See 
section 509(b) and Sec. 1.509(b)-1. See also section 642(c)(6) and 
Sec. 1.642(c)-4.
    (b) Accounting period for filing return. A return required by this 
section shall be on the basis of the established annual accounting 
period of the organization. If the organization has no such established 
accounting period, such return shall be on the basis of the calendar 
year.
    (c) Returns when exempt status not established. An organization 
claiming an exempt status under section 501(a) prior to the 
establishment of such exempt status under section 501 and Sec. 
1.501(a)-1, shall file a return required by this section in accordance 
with the instructions applicable thereto. In such case the organization 
must indicate on such return that it is being filed in the belief that 
the organization is exempt under section 501(a), but that the Internal 
Revenue Service has not yet recognized such exemption.
    (d) Group returns. (1) A central, parent, or like organization 
(referred to in this paragraph as ``central organization''), exempt 
under section 501(a) and described in section 501(c) (other than a 
private foundation), although required to file a separate annual return 
for itself under section 6033 and paragraph (a) of this section, may 
file annually, in addition to such separate annual return, a group 
return on Form 990. Such group return may be filed for two or more of 
the local organizations, chapters, or the like (referred to in this 
paragraph as ``local organizations'') which are (i) affiliated with such 
central organization at the close of its annual accounting period, (ii) 
subject to

[[Page 150]]

the general supervision or control of the central organization, and 
(iii) exempt from taxation under the same paragraph of section 501(c) of 
the Code, although the local organizations are not necessarily exempt 
under the paragraph under which the central organization is exempt. Such 
group return may not be filed for a local organization which is a 
private foundation.
    (2)(i) The filing of the group return shall be in lieu of the filing 
of a separate return by each of the local organizations included in the 
group return. The group return shall include only those local 
organizations which in writing have authorized the central organization 
to include them in the group return, and which have made and filed, with 
the central organization, their statements, specifically stating their 
items of gross income, receipts, and disbursements, and such other 
information relating to them as is required to be stated in the group 
return. Such an authorization and statement by a local organization 
shall be made under the penalties of perjury, shall be signed by a duly 
authorized officer of the local organization in his official capacity, 
and shall contain the following statement, or a statement of like 
import: ``I hereby declare under the penalties of perjury that this 
authorization (including any accompanying schedules and statements) has 
been examined by me and to the best of my knowledge and belief is true, 
correct and complete and made in good faith.'' Such authorization and 
statement with respect to a local organization shall be retained by the 
central organization until the expiration of 6 years after the last 
taxable year for which a group return filed by such central organization 
includes such local organization.
    (ii) There shall be attached to the group return and made a part 
thereof a schedule showing the name, address, and employer 
identification number of each of the local organizations and the total 
number thereof included in such return, and a schedule showing the name, 
address, and employer identification number of each of the local 
organizations and the total number thereof not included in the group 
return.
    (3) The group return shall be on the basis of the established annual 
accounting period of the central organization. Where such central 
organization has no established annual accounting period, such return 
shall be on the basis of the calendar year. The same income, receipts, 
and disbursements of a local organization shall not be included in more 
than one group return.
    (4) The group return shall be filed in accordance with these 
regulations and the instructions issued with respect to Form 990, and 
shall be considered the return of each local organization included 
therein. The tax exempt status of a local organization must be 
established under a group exemption letter issued to the central 
organization before a group return including the local organization will 
be considered as the return of the local organization. See Sec. 
1.501(a)-1 for requirements for establishing a tax-exempt status.
    (5) In providing the information required by paragraph (a)(2)(ii) 
(f), (g), and (h) of this section, such information may be provided:
    (i) With respect to the central or parent organization on its Form 
990, and with respect to the local organizations on separate schedules 
attached to the group return for the year, or
    (ii) On a consolidated basis for all the local organizations and the 
central or parent organization on the group return.


Such information need be provided only with respect to those local 
organizations which are not excepted from filing under the provisions of 
paragraph (g) of this section. A central or parent organization shall 
indicate whether it has provided such information in the manner 
described in subdivision (i) or in subdivision (ii) of this 
subparagraph, and may not change the manner in which it provides such 
information without the consent of the Commissioner.
    (e) Time and place for filing. The annual return required by this 
section shall be filed on or before the 15th day of the fifth month 
following the close of the period for which the return is required to be 
filed. The annual return on

[[Page 151]]

Form 1065 required to be filed by a religious or apostolic association 
or corporation shall be filed on or before the date prescribed by 
section 6072(b). Each such return shall be filed in accordance with the 
instructions applicable thereto.
    (f) Penalties and additions to tax. For penalties and additions to 
tax for failure to file a return and filing a false or fraudulent 
return, see sections 6652, 7203, 7206, and 7207.
    (g) Organizations not required to file annual returns. (1) Annual 
returns required by this section are not required to be filed by an 
organization exempt from taxation under section 501(a) which is:
    (i) A church, an interchurch organization of local units of a 
church, a convention or association of churches, or an integrated 
auxiliary of a church (as defined in paragraph (h) of this section);
    (ii) An exclusively religious activity of any religious order;
    (iii) An organization (other than a private foundation) described in 
section 6033(a)(3)(C), the gross receipts of which in each taxable year 
are normally not more than $5,000 (as described in paragraph (g)(3) of 
this section);
    (iv) A mission society (other than an organization described in 
section 509(a)(3)) sponsored by or affiliated with one or more churches 
or church denominations, more than one-half of the activities of which 
society are conducted in, or directed at persons in foreign countries;
    (v) A State institution, the income of which is excluded from gross 
income under section 115(a);
    (vi) An organization described in section 501(c)(1); or
    (vii) An educational organization (below college level) that is 
described in section 170(b)(1)(A)(ii), that has a program of a general 
academic nature, and that is affiliated (within the meaning of paragraph 
(h)(2) of this section) with a church or operated by a religious order.
    (2) The provisions of section 6033(a) relieving certain specified 
types of organizations exempt from taxation under section 501(a) from 
filing annual returns do not abridge or impair in any way the powers and 
authority of district directors or directors of service centers provided 
for in other provisions of the Code and in regulations thereunder to 
require the filing of returns or notices by such organizations. See 
section 6001 and Sec. 1.6001-1.
    (3) For purposes of subparagraph (1)(iii) of this paragraph, the 
gross receipts (as defined in subparagraph (4) of this paragraph) of an 
organization are normally not more than $5,000 if:
    (i) In the case of an organization which has been in existence for 1 
year or less, the organization has received, or donors have pledged to 
give, gross receipts of $7,500 or less during the first taxable year of 
the organization,
    (ii) In the case of an organization which has been in existence for 
more than one but less than 3 years, the average of the gross receipts 
received by the organization in its first 2 taxable years is $6,000 or 
less, and
    (iii) In the case of an organization which has been in existence for 
3 years or more, the average of the gross receipts received by the 
organization in the immediately preceding 3 taxable years, including the 
year for which the return would be required to be filed, is $5,000 or 
less.
    (4) For purposes of this paragraph and paragraph (a)(2) of this 
section, ``gross receipts'' means the gross amount received by the 
organization during its annual accounting period from all sources 
without reduction for any costs or expenses including, for example, cost 
of goods or assets sold, cost of operations, or expenses of earning, 
raising, or collecting such amounts. Thus ``gross receipts'' includes, 
but is not limited to (i) the gross amount received as contributions, 
gifts, grants, and similar amounts without reduction for the expenses of 
raising and collecting such amounts, (ii) the gross amount received as 
dues or assessments from members or affiliated organizations without 
reduction for expenses attributable to the receipt of such amounts, 
(iii) gross sales or receipts from business activities (including 
business activities unrelated to the purpose for which the organization 
qualifies for exemption, the net income or loss from which may be 
required to be reported on Form 990-T), (iv) the

[[Page 152]]

gross amount received from the sale of assets without reduction for cost 
or other basis and expenses of sale, and (v) the gross amount received 
as investment income, such as interest, dividends, rents, and royalties.
    (5) [Reserved]
    (6) The Commissioner may relieve any organization or class of 
organizations (other than an organization described in section 
509(a)(3)) from filing, in whole or in part the annual return required 
by this section where he determines that such returns are not necessary 
for the efficient administration of the internal revenue laws.
    (h) Integrated auxiliary--(1) In general. For purposes of this 
title, the term integrated auxiliary of a church means an organization 
that is--
    (i) Described both in sections 501(c)(3) and 509(a) (1), (2), or 
(3);
    (ii) Affiliated with a church or a convention or association of 
churches; and
    (iii) Internally supported.
    (2) Affiliation. An organization is affiliated with a church or a 
convention or association of churches, for purposes of paragraph 
(h)(1)(ii) of this section, if--
    (i) The organization is covered by a group exemption letter issued 
under applicable administrative procedures, (such as Rev. Proc. 80-27 
(1980-1 C.B. 677); See Sec. 601.601(a)(2)(ii)(b)), to a church or a 
convention or association of churches;
    (ii) The organization is operated, supervised, or controlled by or 
in connection with (as defined in Sec. 1.509(a)-4) a church or a 
convention or association of churches; or
    (iii) Relevant facts and circumstances show that it is so 
affiliated.
    (3) Facts and circumstances. For purposes of paragraph (h)(2)(iii) 
of this section, relevant facts and circumstances that indicate an 
organization is affiliated with a church or a convention or association 
of churches include the following factors. However, the absence of one 
or more of the following factors does not necessarily preclude 
classification of an organization as being affiliated with a church or a 
convention or association of churches--
    (i) The organization's enabling instrument (corporate charter, trust 
instrument, articles of association, constitution or similar document) 
or by-laws affirm that the organization shares common religious 
doctrines, principles, disciplines, or practices with a church or a 
convention or association of churches;
    (ii) A church or a convention or association of churches has the 
authority to appoint or remove, or to control the appointment or removal 
of, at least one of the organization's officers or directors;
    (iii) The corporate name of the organization indicates an 
institutional relationship with a church or a convention or association 
of churches;
    (iv) The organization reports at least annually on its financial and 
general operations to a church or a convention or association of 
churches;
    (v) An institutional relationship between the organization and a 
church or a convention or association of churches is affirmed by the 
church, or convention or association of churches, or a designee thereof; 
and
    (vi) In the event of dissolution, the organization's assets are 
required to be distributed to a church or a convention or association of 
churches, or to an affiliate thereof within the meaning of this 
paragraph (h).
    (4) Internal support. An organization is internally supported, for 
purposes of paragraph (h)(1)(iii) of this section, unless it both--
    (i) Offers admissions, goods, services or facilities for sale, other 
than on an incidental basis, to the general public (except goods, 
services, or facilities sold at a nominal charge or for an insubstantial 
portion of the cost); and
    (ii) Normally receives more than 50 percent of its support from a 
combination of governmental sources, public solicitation of 
contributions, and receipts from the sale of admissions, goods, 
performance of services, or furnishing of facilities in activities that 
are not unrelated trades or businesses.
    (5) Special rule. Men's and women's organizations, seminaries, 
mission societies, and youth groups that satisfy paragraphs (h)(1) (i) 
and (ii) of this section are integrated auxiliaries of a church 
regardless of whether such an

[[Page 153]]

organization meets the internal support requirement under paragraph 
(h)(1)(iii) of this section.
    (6) Effective date. This paragraph (h) applies for returns filed for 
taxable years beginning after December 31, 1969. For returns filed for 
taxable years beginning after December 31, 1969 but beginning before 
December 20, 1995, the definition for the term integrated auxiliary of a 
church set forth in Sec. 1.6033-2(g)(5) (as contained in the 26 CFR 
edition revised as of April 1, 1995) may be used as an alternative 
definition to such term set forth in this paragraph (h).
    (7) Examples of internal support. The internal support test of this 
paragraph (h) is illustrated by the following examples, in each of which 
it is assumed that the organization's provision of goods and services 
does not constitute an unrelated trade or business:

    Example 1. Organization A is described in sections 501(c)(3) and 
509(a)(2) and is affiliated (within the meaning of this paragraph (h)) 
with a church. Organization A publishes a weekly newspaper as its only 
activity. On an incidental basis, some copies of Organization A's 
publication are sold to nonmembers of the church with which it is 
affiliated. Organization A advertises for subscriptions at places of 
worship of the church. Organization A is internally supported, 
regardless of its sources of financial support, because it does not 
offer admissions, goods, services, or facilities for sale, other than on 
an incidental basis, to the general public. Organization A is an 
integrated auxiliary.
    Example 2. Organization B is a retirement home described in sections 
501(c)(3) and 509(a)(2). Organization B is affiliated (within the 
meaning of this paragraph (h)) with a church. Admission to Organization 
B is open to all members of the community for a fee. Organization B 
advertises in publications of general distribution appealing to the 
elderly and maintains its name on non-denominational listings of 
available retirement homes. Therefore, Organization B offers its 
services for sale to the general public on more than an incidental 
basis. Organization B receives a cash contribution of $50,000 annually 
from the church. Fees received by Organization B from its residents 
total $100,000 annually. Organization B does not receive any government 
support or contributions from the general public. Total support is 
$150,000 ($100,000 + $50,000), and $100,000 of that total is from 
receipts from the performance of services (66\2/3\% of total support). 
Therefore, Organization B receives more than 50 percent of its support 
from receipts from the performance of services. Organization B is not 
internally supported and is not an integrated auxiliary.
    Example 3. Organization C is a hospital that is described in 
sections 501(c)(3) and 509(a)(1). Organization C is affiliated (within 
the meaning of this paragraph (h)) with a church. Organization C is open 
to all persons in need of hospital care in the community, although most 
of Organization C's patients are members of the same denomination as the 
church with which Organization C is affiliated. Organization C maintains 
its name on hospital listings used by the general public, and 
participating doctors are allowed to admit all patients. Therefore, 
Organization C offers its services for sale to the general public on 
more than an incidental basis. Organization C annually receives $250,000 
in support from the church, $1,000,000 in payments from patients and 
third party payors (including Medicare, Medicaid and other insurers) for 
patient care, $100,000 in contributions from the public, $100,000 in 
grants from the federal government (other than Medicare and Medicaid 
payments) and $50,000 in investment income. Total support is $1,500,000 
($250,000 + $1,000,000 + $100,000 + $100,000 + $50,000), and $1,200,000 
($1,000,000 + $100,000 + $100,000) of that total is support from 
receipts from the performance of services, government sources, and 
public contributions (80% of total support). Therefore, Organization C 
receives more than 50 percent of its support from receipts from the 
performance of services, government sources, and public contributions. 
Organization C is not internally supported and is not an integrated 
auxiliary.

    (i) Records, statements, and other returns of tax-exempt 
organizations. (1) An organization that is exempt from taxation under 
section 501(a) and is not required to file annually an information 
return required by this section shall immediately notify in writing 
Exempt Organizations Determinations, at an address prescribed by 
publication (including publication on the Internal Revenue Service Web 
site), of any changes in its character, operations, or purpose for which 
it was originally created.
    (2) Every organization which is exempt from tax, whether or not it 
is required to file an annual information return, shall submit such 
additional information as may be required by the Internal Revenue 
Service for the purpose of inquiring into its exempt status and 
administering the provisions of subchapter F (section 501 and 
following), chapter 1 of subtitle A of the Code, section 6033, and 
chapter 42 of

[[Page 154]]

subtitle D of the Code. See section 6001 and Sec. 1.6001-1 with respect 
to the authority of the district directors or directors of service 
centers to require such additional information and with respect to the 
books of account or records to be kept by such organizations.
    (3) An organization which has established its exemption from 
taxation under section 501(a), including an organization which is 
relieved under section 6033 and this section from filing annual returns 
of information, is not relieved of the duty of filing other returns of 
information. See, for example, sections 6041, 6043, 6051, 6057, and 6058 
and the regulations thereunder.
    (j) Unrelated business tax returns. In addition to the foregoing 
requirements of this section, certain organizations otherwise exempt 
from tax under section 501(a) which are subject to tax on unrelated 
business taxable income are also required to file returns on Form 990-T. 
See paragraph (e) of Sec. 1.6012-2 and paragraph (a)(5) of Sec. 
1.6012-3 for requirements with respect to such returns.
    (k) Applicability date. This section applies to returns filed on or 
after January 30, 2020. Section 1.6033-2T (as contained in 26 CFR part 
1, revised April 2019) applies to returns filed before January 30, 2020.

[T.D. 7122, 36 FR 11026, June 8, 1971]

    Editorial Note: For Federal Register citations affecting Sec. 
1.6033-2, see the List of CFR Sections Affected, which appears in the 
Finding Aids section of the printed volume and at www.govinfo.gov.



Sec. 1.6033-3  Additional provisions relating to private foundations.

    (a) In general. The foundation managers (as defined in section 
4946(b)) of every organization (including a trust described in section 
4947(a)(1)) which is (or is treated as) a private foundation (as defined 
in section 509) the assets of which are at least $5,000 at any time 
during a taxable year shall include the following information on its 
annual return in addition to that information required under Sec. 
1.6033-2(a):
    (1) An itemized statement of its securities and all other assets at 
the close of the year, showing both book and market value,
    (2) An itemized list of all grants and contributions made or 
approved for future payment during the year, showing the amount of each 
such grant or contribution, the name and address of the recipient (other 
than a recipient who is not a disqualified person and who receives, from 
the foundation, grants to indigent or needy persons that, in the 
aggregate, do not exceed $1,000 during the year), any relationship 
between any individual recipient and the foundation's managers or 
substantial contributors, and a concise statement of the purpose of each 
such grant or contribution,
    (3) The address of the principal office of the foundation and (if 
different) of the place where its books and records are maintained,
    (4) The names and addresses of its foundation managers (within the 
meaning of section 4946(b)), that are substantial contributors (within 
the meaning of section 507(d)(2)) or that own 10 percent or more of the 
stock of any corporation of which the foundation owns 10 percent or more 
of the stock, or corresponding interests in partnerships or other 
entities, in which the foundation has a 10 percent or greater interest.


For purposes of subparagraph (2) of this paragraph, the business address 
of an individual grant recipient or foundation manager may be used by 
the foundation in its annual return in lieu of the home address of such 
recipient or manager, and the term ``relationship'' shall include, but 
is not limited to, any case in which an individual recipient of a grant 
or contribution by a private foundation is (i) a member of the family 
(as defined in section 4946(d)) of a substantial contributor or 
foundation manager of such foundation, (ii) a partner of such 
substantial contributor or foundation manager, or (iii) an employee of 
such substantial contributor or foundation manager or of an organization 
which is effectively controlled (within the meaning of section 
4946(a)(1)(H)(i) and the regulations thereunder), directly or 
indirectly, by one or more such substantial contributors or foundation 
managers.
    (b) Notice to public of availability of annual return. A copy of the 
notice required by section 6104(d) (relating to

[[Page 155]]

public inspection of private foundations' annual returns), and proof of 
publication thereof, shall be filed with the annual return required by 
Sec. 1.6033-2(a). A copy of such notice as published, and a statement 
signed by a foundation manager stating that such notice was published, 
setting forth the date of publication and the publication in which it 
appeared, shall be sufficient proof of publication for purposes of this 
paragraph.
    (c) Special rules--(1) Furnishing of copies to State officers. The 
foundation managers of a private foundation shall furnish a copy of the 
annual return required by section 6033 and Sec. 1.6033-2 to the 
Attorney General of:
    (i) Each State which the foundation is required to list on its 
return pursuant to Sec. 1.6033-2(a)(2)(iv),
    (ii) The State in which is located the principal office of the 
foundation, and
    (iii) The State in which the foundation was incorporated or created.


The annual return shall be sent to each Attorney General described in 
paragraphs (c)(1) (i), (ii), or (iii) of this section at the same time 
as it is sent to the Internal Revenue Service. Upon request the 
foundation managers shall also furnish a copy of the annual return to 
the Attorney General or other appropriate State officer (within the 
meaning of section 6104 (c)(2)) of any State. The foundation managers 
shall attach to each copy of the annual return sent to State officers 
under this subparagraph a copy of the Form 4720, if any, filed by the 
foundation for the year.
    (2) Cross-reference. For additional rules with respect to private 
foundations' returns and the public inspection of such returns, see 
section 6104(d) and the regulations thereunder.
    (d) Special rules for certain foreign organizations. The provisions 
of paragraphs (b) and (c) of this section shall not apply with respect 
to an organization described in section 4948(b). The foundation managers 
of such organizations are not required to publish notice of availability 
of the annual return for inspection, to make the annual return available 
at the principal office of the foundation for public inspection under 
section 6104(d), or to send copies of the annual return to State 
officers.
    (e) Effective date. The provisions of this section shall apply with 
respect to returns filed for taxable years beginning after December 31, 
1980.

[T.D. 8026, 50 FR 20756, May 20, 1985]



Sec. 1.6033-4  Required use of magnetic media for returns by 
organizations required to file returns under section 6033.

    The return of an organization that is required to be filed on 
magnetic media under Sec. 301.6033-4 of this chapter must be filed in 
accordance with Internal Revenue Service revenue procedures, 
publications, forms, or instructions, including those posted 
electronically. (See Sec. 601.601(d)(2) of this chapter).

[T.D. 9364, 72 FR 63810, Nov. 13, 2007]



Sec. 1.6033-5  Disclosure by tax-exempt entities that are parties
to certain reportable transactions.

    (a) In general. Every tax-exempt entity (as defined in section 
4965(c)) shall file with the IRS on Form 8886-T, ``Disclosure by Tax-
Exempt Entity Regarding Prohibited Tax Shelter Transaction'' (or a 
successor form), in accordance with this section and the instructions to 
the form, a disclosure of--
    (1) Such entity's being a party (as defined in Sec. 53.4965-4 of 
this chapter) to a prohibited tax shelter transaction (as defined in 
section 4965(e)); and
    (2) The identity of any other party (whether taxable or tax-exempt) 
to such transaction that is known to the tax-exempt entity.
    (b) Frequency of disclosure. A single disclosure is required for 
each prohibited tax shelter transaction.
    (c) By whom disclosure is made--(1) Tax-exempt entities referred to 
in section 4965(c)(1), (2) or (3). In the case of tax-exempt entities 
referred to in section 4965(c)(1), (2) or (3), the disclosure required 
by this section must be made by the entity.
    (2) Tax-exempt entities referred to in section 4965(c)(4), (5), (6) 
or (7). In the case of tax-exempt entities referred to in section 
4965(c)(4), (5), (6) or (7), including a fully self-directed qualified 
plan, IRA, or other savings arrangement, the disclosure required by this 
section must be made by the entity

[[Page 156]]

manager (as defined in section 4965(d)(2)) of the entity.
    (d) Time and place for filing--(1) In general. The disclosure 
required by this section shall be filed on or before May 15 of the 
calendar year following the close of the calendar year during which the 
tax-exempt entity entered into the prohibited tax shelter transaction.
    (2) Subsequently listed transactions. In the case of subsequently 
listed transactions (as defined in section 4965(e)(2)), the disclosure 
required by this section shall be filed on or before May 15 of the 
calendar year following the close of the calendar year during which the 
transaction was identified by the Secretary as a listed transaction.
    (3) Transition rule. If a tax-exempt entity entered into a 
prohibited tax shelter transaction after May 17, 2006, and before 
January 1, 2007, the disclosure required by this section shall be filed 
on or before November 2, 2007.
    (4) No disclosure. Disclosure is not required with respect to any 
prohibited tax shelter transaction entered into by a tax-exempt entity 
on or before May 17, 2006.
    (e) Penalty for failure to provide disclosure statement. See section 
6652(c)(3) for the penalty applicable to the failure to disclose a 
prohibited tax shelter transaction in accordance with this section.
    (f) Effective date/applicability date. This section applies with 
respect to transactions entered into by a tax-exempt entity after May 
17, 2006.

[T.D. 9492, 75 FR 38702, July 6, 2010]



Sec. 1.6033-6  Notification requirement for entities not required
to file an annual information return under section 6033(a)(1)
(taxable years beginning after December 31, 2006).
          

    (a) In general. Except as otherwise provided in this paragraph, 
every organization exempt from taxation under section 501(a) that is not 
required to file a return described in Sec. 1.6033-2(a)(2), other than 
an organization described in section 401(a) or 501(d), shall submit 
annually, in electronic form, a notification setting forth the items 
described in paragraph (c) of this section and such other information as 
may be prescribed in the instructions and publications issued with 
respect to the notification.
    (b) Organizations not required to submit annual electronic 
notification. (1) An organization exempt from taxation under section 
501(a) that is required to file or files an annual information return 
under section 6033(a)(1) shall not submit an annual electronic 
notification under section 6033(i). This includes the following types of 
organizations:
    (i) Any organization included in a group return for that year under 
Sec. 1.6033-2(d).
    (ii) All private foundations required to file under Sec. 1.6033-
2(a)(2)(i) Form 990-PF, ``Return of Private Foundation or Section 
4947(a)(1) Nonexempt Charitable Trust Treated as a Private Foundation.''
    (iii) Section 509(a)(3) supporting organizations required to file 
under Sec. 1.6033-2(a)(2)(i) Form 990, ``Return of Organization Exempt 
From Income Tax,'' or Form 990-EZ, ``Short Form Return of Organization 
Exempt From Income Tax.''
    (iv) A section 501(c)(21) black lung trust required to file under 
Sec. 1.6033-2(a)(2)(i) Form 990-BL, ``Information and Initial Excise 
Tax Return for Black Lung Benefit Trusts and Certain Related Persons.''
    (v) Any organization that is required to file or files an annual 
information return under section 6033(a)(1) on any other form prescribed 
by the Internal Revenue Service for that purpose.
    (2) An organization exempt from taxation under section 501(a) that 
is not required to file a return under section 6033(a)(1) is also not 
required to submit an annual electronic notification under section 
6033(i). This includes the following types of organizations:
    (i) A church, an interchurch organization of local units of a 
church, a convention or association of churches, or an integrated 
auxiliary of a church (as defined in Sec. 1.6033-2(h)).
    (ii) An exclusively religious activity of any religious order.
    (iii) A mission society sponsored by or affiliated with one or more 
churches or church denominations, more than one-half of the activities 
of which society are conducted in, or directed at persons in, foreign 
countries.
    (iv) An educational organization (below college level) described in 
section 170(b)(1)(A)(ii), that has a program

[[Page 157]]

of a general academic nature, and that is affiliated (within the meaning 
of Sec. 1.6033-2(h)(2)) with a church or operated by a religious order.
    (v) A State institution, the income of which is excluded from gross 
income under section 115(a).
    (vi) An organization described in section 501(c)(1).
    (vii) An organization that is a governmental unit or an affiliate of 
a governmental unit exempt from Federal income tax under section 501(a).
    (3) If an organization exempt from taxation under section 501(a) is 
not described in paragraph (b)(1) or (2) of this section, the 
organization must submit an annual electronic notification. Thus, a 
black lung trust that normally has gross receipts of $25,000 or less is 
not required to file Form 990-BL but is required to submit an annual 
electronic notification. A section 509(a)(3) supporting organization of 
a religious organization that normally has gross receipts of $5,000 or 
less is not required to file Form 990 or Form 990-EZ but is required to 
submit an annual electronic notification.
    (c) Additional notification requirements--(1) In general. Any 
organization described in paragraph (a) of this section shall submit an 
annual electronic notification described in section 6033(i)(1). The 
annual electronic notification shall--
    (i) Be in electronic form; and
    (ii) Set forth--
    (A) The legal name of the organization;
    (B) Any name under which the organization operates or does business;
    (C) The organization's mailing address and Internet Web site address 
(if any);
    (D) The organization's taxpayer identification number;
    (E) The name and address of a principal officer;
    (F) Evidence of the continuing basis for the organization's 
exemption from the filing requirements under section 6033(a)(1); and
    (G) Additional information necessary to process the notification.
    (2) The mailing address required by section 6033(i)(1)(C) and 
submitted in the annual electronic notification shall be the 
organization's last known address as provided by Sec. 301.6212-2(a) of 
this chapter. This last known address may be updated as provided under 
Sec. 301.6212-2 of this chapter, or by clear and concise notification. 
The Internal Revenue Service will use this last known address as the 
organization's address of record and will direct all mailings to this 
address.
    (3) By submitting the annual electronic notification described in 
paragraph (c)(1) of this section, an organization acknowledges that it 
is not required to file a return under section 6033(a) because its 
annual gross receipts are not normally in excess of $25,000. In order to 
make this determination, the organization must keep records that enable 
it to calculate its gross receipts. All organizations are required to 
maintain records under section 6001. These records will provide evidence 
of the continuing basis for the organization's exemption from the filing 
requirements under section 6033(a)(1).
    (4) If an organization that is required to submit an annual 
electronic notification files a complete Form 990 or Form 990-EZ, the 
annual electronic notification requirement shall be deemed satisfied. 
The annual electronic notification requirement is not satisfied if the 
Form 990 or Form 990-EZ contains only those items of information that 
would have been required by submitting the notification in electronic 
form. Also, the filing of a complete Form 990 or Form 990-EZ, rather 
than the submission of an annual electronic notification, is the filing 
of a return that starts the period of limitations for assessment under 
section 6501(g)(2).
    (d) No effect on other filing requirements. An organization that is 
relieved from filing an information return under section 6033(a) is 
still subject to the requirements of Sec. Sec. 1.6033-2(i) and (j), 
concerning: notice regarding changes in character, operations, or 
purpose; provision of additional information; duty to file other returns 
of information; and duty to file unrelated business tax returns. If an 
organization is required to file an unrelated business tax return, Form 
990-T, ``Exempt Organization Business Income Tax Return,''

[[Page 158]]

the filing of that return does not relieve the organization from the 
requirement of submitting an annual electronic notification under 
section 6033(i).
    (e) Accounting period for submitting annual electronic notification. 
An annual electronic notification required by this section shall be on 
the basis of the established annual accounting period of the 
organization. If the organization has no established accounting period, 
the annual electronic notification shall be on the basis of the calendar 
year.
    (f) Time and place for submitting annual electronic notification. 
The annual electronic notification required by this section shall be 
submitted on or before the 15th day of the fifth calendar month 
following the close of the period for which the notification is required 
to be submitted. Thus, an organization with an accounting period ending 
December 31, 2007, is required to submit an annual electronic 
notification by May 15, 2008. The notification shall be submitted in 
accordance with instructions and publications, including those provided 
at the Internal Revenue Service Web site for exempt organizations.
    (g) Effective/applicability date. These regulations are applicable 
to annual periods beginning after 2006.

[T.D. 9454, 74 FR 36396, July 23, 2009]



Sec. 1.6034-1  Information returns required of trusts described 
in section 4947(a)(2) or claiming charitable or other deductions
under section 642(c).

    (a) In general. Every trust (other than a trust described in 
paragraph (b) of this section) claiming a charitable or other deduction 
under section 642(c) for the taxable year shall file, with respect to 
such taxable year, a return of information on form 1041-A. In addition, 
for taxable years beginning after December 31, 1969, every trust (other 
than a trust described in paragraph (b) of this section) described in 
section 4947(a)(2) (including trusts described in section 664) shall 
file such return for each taxable year, unless all transfers in trust 
occurred before May 27, 1969. The return shall set forth the name and 
address of the trust and the following information concerning the trust 
in such detail as is prescribed by the form or in the instructions 
issued with respect to such form:
    (1) The amount of the charitable or other deduction taken under 
section 642(c) for the taxable year (and, for taxable years beginning 
prior to January 1, 1970, showing separately for each class of activity 
for which disbursements were made (or amounts were permanently set 
aside) the amounts which, during such year, were paid out (or which were 
permanently set aside) for charitable or other purposes under section 
642(c));
    (2) The amount paid out during the taxable year which represents 
amounts permanently set aside in prior years for which charitable or 
other deductions have been taken under section 642(c), and separately 
listing for each class of activity, for which disbursements were made, 
the total amount paid out;
    (3) The amount for which charitable or other deductions have been 
taken in prior years under section 642(c) and which had not been paid 
out at the beginning of the taxable year;
    (4)(i) The amount paid out of principal in the taxable year for 
charitable, etc., purposes, and separately listing for each such class 
of activity, for which disbursements were made, the total amount paid 
out;
    (ii) The total amount paid out of principal in prior years for 
charitable, etc., purposes;
    (5) The gross income of the trust for the taxable year and the 
expenses attributable thereto, in sufficient detail to show the 
different categories of income and of expense; and
    (6) A balance sheet showing the assets, liabilities, and net worth 
of the trust as of the beginning of the taxable year.
    (b) Exceptions--(1) In general. A trust is not required to file a 
Form 1041-A for any taxable year with respect to which the trustee is 
required by the terms of the governing instrument and applicable local 
law to distribute currently all of the income of the trust. For this 
purpose, the income of the trust shall be determined in accordance with 
section 643(b) and Sec. Sec. 1.643(b)-1 and 1.643(b)-2.
    (2) Trusts described in section 4947(a)(1). For taxable years 
beginning

[[Page 159]]

after December 31, 1980, a trust described in section 4947(a)(1) is not 
required to file a Form 1041-A.
    (c) Time and place for filing return. The return on form 1041-A 
shall be filed on or before the 15th day of the 4th month following the 
close of the taxable year of the trust, with the internal revenue 
officer designated by the instructions applicable to such form. For 
extensions of time for filing returns under this section, see Sec. 
1.6081-1.
    (d) Other provisions. For publicity of information on Form 1041-A, 
see section 6104 and the regulations thereunder in part 301 of this 
chapter. For provisions relating to penalties for failure to file a 
return required by this section, see section 6652(d). For the criminal 
penalties for a willful failure to file a return and filing a false or 
fraudulent return, see sections 7203, 7206, and 7207.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 7563, 43 FR 
40221, Sept. 11, 1978; T.D. 8026, 50 FR 20757, May 20, 1985]



Sec. 1.6035-1  [Reserved]



Sec. 1.6035-2  Transitional relief.

    (a) Statements due before June 30, 2016. Executors and other persons 
required to file or furnish a statement under section 6035(a)(1) or (2) 
after July 31, 2015 and before June 30, 2016, need not have done so 
until June 30, 2016.
    (b) Applicability Date. This section is applicable to executors and 
other persons who file a return required by section 6018(a) or (b) after 
July 31, 2015.

[T.D. 9797, 81 FR 86955, Dec. 2, 2016]



Sec. 1.6036-1  Notice of qualification as executor or receiver.

    For provisions relating to the notice required of fiduciaries, see 
the regulations under section 6036 contained in part 301 of this chapter 
(Regulations on Procedure and Administration).



Sec. 1.6037-1  Return of electing small business corporation.

    (a) In general. Every small business corporation (as defined in 
section 1371(a)) which has made an election under section 1372(a) not to 
be subject to the tax imposed by chapter 1 of the Code shall file, with 
respect to each taxable year for which the election is in effect, a 
return of income on Form 1120-S. The return shall set forth the items of 
gross income and the deductions allowable in computing taxable income as 
required by the return form or in the instructions issued with respect 
thereto and shall be signed in accordance with section 6062 by the 
person authorized to sign a return. The return shall also set forth the 
following information concerning the electing small business 
corporation:
    (1) The names and addresses of all persons owning stock in the 
corporation at any time during the taxable year;
    (2) The number of shares of stock owned by each shareholder at all 
times during the taxable year;
    (3) The amount of money and other property distributed by the 
corporation during the taxable year to each shareholder;
    (4) The date of each distribution of money and other property; and
    (5) Such other information as is required by the form or by the 
instructions issued with respect to such form.
    (b) Time and place for filing return. The return shall be filed on 
or before the 15th day of the third month following the close of the 
taxable year with the internal revenue officer designated in the 
instructions applicable to Form 1120-S. (See section 6072.)
    (c) Other provisions. The return on Form 1120-S will be treated as a 
return filed by the corporation under section 6012, relating to persons 
required to make returns of income, for purposes of the provisions of 
chapter 66 of the Code, relating to limitations. Thus, for example, the 
period of limitation on assessment and collection of any corporate tax 
found to be due upon a subsequent determination that the corporation was 
not entitled to the benefits of subchapter S, chapter 1 of the Code, 
will run from the date of filing the return under section 6037, or from 
the date prescribed for filing such return, whichever is the later. For 
the rules requiring the disclosure of certain transactions, see Sec. 
1.6011-4T.
    (d) Penalties. For criminal penalties for failure to file a return, 
supply information, or pay tax, and for filing a false or fraudulent 
return, statement,

[[Page 160]]

or other document, see sections 7203, 7206, and 7207.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 7012, 34 FR 
7690, May 15, 1969; T.D. 9000, 67 FR 41328, June 18, 2002]



Sec. 1.6037-2  Required use of magnetic media for income tax returns
of electing small business corporations.

    The return of an electing small business corporation that is 
required to be filed on magnetic media under Sec. 301.6037-2 of this 
chapter must be filed in accordance with Internal Revenue Service 
revenue procedures, publications, forms, or instructions, including 
those posted electronically. (See Sec. 601.601(d)(2) of this chapter).

[T.D. 9363, 72 FR 63810, Nov. 13, 2007]



Sec. 1.6038-1  Information returns required of domestic corporations
with respect to annual accounting periods of certain foreign
corporations beginning before January 1, 1963
          .

    (a) Requirement of return. For taxable years beginning after 
December 31, 1960, every domestic corporation shall make a separate 
annual information return on Form 2952, in duplicate, with respect to 
each foreign corporation which it controls, as defined in paragraph (b) 
of this section, and with respect to each foreign subsidiary, as defined 
in paragraph (c) of this section, for each annual accounting period 
(described in paragraph (d) of this section) of each such controlled 
foreign corporation or foreign subsidiary beginning after December 31, 
1960, and before January 1, 1963. Such information shall not be required 
to be furnished, however, with respect to a corporation defined in 
section 1504(d) of the Code which makes a consolidated return for the 
taxable year. For annual accounting periods beginning after December 31, 
1962, see Sec. 1.6038-2.
    (b) Control. A domestic corporation shall be deemed to be in control 
of a foreign corporation if at any time during its taxable year it owns 
more than 50 percent of the voting stock of such foreign corporation.
    (c) Foreign subsidiary. A foreign corporation more than 50 percent 
of the voting stock of which is owned by a controlled foreign 
corporation at any time during the annual accounting period of such 
controlled foreign corporation shall be considered a foreign subsidiary.
    (d) Period covered by return--(1) Controlled foreign corporation. 
The information with respect to a controlled foreign corporation shall 
be furnished for its annual accounting period ending with or within the 
domestic corporation's taxable year.
    (2) Foreign subsidiary. The information with respect to a foreign 
subsidiary shall be furnished for such subsidiary's annual accounting 
period ending with or within the controlled foreign corporation's annual 
accounting period.
    (3) Annual accounting period defined. For purposes of this section, 
the annual accounting period of a controlled foreign corporation or of a 
foreign subsidiary is the annual period on the basis of which the 
controlled foreign corporation or foreign subsidiary regularly computes 
its income in keeping its books. The term ``annual accounting period'' 
may refer to a period of less than 1 year, where for example the foreign 
income, war profits, and excess profits taxes are determined on the 
basis of an accounting period of less than 1 year as described in 
section 902(c)(2).
    (e) Contents of return. The return on Form 2952 shall contain the 
following information with respect to each controlled corporation and 
each foreign subsidiary:
    (1) The name and address of the corporation;
    (2) The principal place of business of the corporation;
    (3) The date of incorporation and the country under whose laws 
incorporated;
    (4) The nature of the corporation's business;
    (5) As regards the outstanding stock of the corporation:
    (i) A description of each class of the corporation's stock, and
    (ii) The number of shares of each class outstanding at the beginning 
and the end of the annual accounting period;
    (6) A list showing the name and address of, and the number of shares 
of

[[Page 161]]

each class of the corporation's stock held by, each citizen or resident 
of the United States, and each domestic corporation, who is a 
shareholder of record owning at any time during the annual accounting 
period 5 percent or more in value of any class of the corporation's 
outstanding stock;
    (7) The amount of the corporation's gross receipts, net profits 
before taxes and provision for foreign income taxes, for the annual 
accounting period, as reflected on the financial statements required 
under paragraph (f) of this section to be filed with the return; and
    (8) A summary showing the total amount of each of the following 
types of transactions of the corporation, which took place during the 
annual accounting period, with the domestic corporation or any 
shareholder of the domestic corporation owning at the time of the 
transaction 10 percent or more of the value of any class of stock 
outstanding of the domestic corporation:
    (i) Sales and purchases of stock in trade;
    (ii) Purchases of property of a character which is subject to the 
allowance for depreciation;
    (iii) Compensation paid and compensation received for the rendition 
of technical, managerial, engineering, construction, scientific, or like 
services;
    (iv) Commissions paid and commissions received;
    (v) Rents and royalties paid and rents and royalties received;
    (vi) Amounts loaned and amounts borrowed (other than open accounts 
which arise and are collected in the ordinary course of business);
    (vii) Dividends paid and dividends received;
    (viii) Interest paid and interest received; and
    (ix) Premiums received for insurance or reinsurance.


If the domestic corporation is a bank, as defined in section 581, or is 
controlled within the meaning of section 368(c) by a bank, the term 
``transactions'' shall not, as to a corporation with respect to which a 
return is filed, include banking transactions entered into on behalf of 
customers; in any event, however, deposits in accounts between a 
controlled foreign corporation or a foreign subsidiary and the domestic 
corporation or a 10-percent shareholder described in this subparagraph 
and withdrawals from such accounts shall be summarized by reporting end-
of-month balances.
    (f) Financial statements. The following information with respect to 
each controlled foreign corporation and each foreign subsidiary shall be 
attached to and filed as part of the return required by this section:
    (1) A statement of the corporation's profit and loss for the annual 
accounting period;
    (2) A balance sheet as of the end of the annual accounting period of 
the corporation showing:
    (i) The corporation's assets,
    (ii) The corporation's liabilities, and
    (iii) The corporation's net worth; and
    (3) An analysis of changes in the corporation's surplus accounts 
during the annual accounting period including both opening and closing 
balances.


The statements listed in subparagraphs (1), (2), and (3) of this 
paragraph shall be prepared in conformity with generally accepted 
accounting principles, and in such form and detail as is customary for 
the corporation's accounting records.
    (g) Method of reporting. All amounts furnished under paragraphs (e) 
and (f) of this section shall be expressed in United States currency 
with a statement of the exchange rates used.
    (h) Time and place for filing return. Returns on Form 2952 required 
under paragraph (a) of this section shall be filed with the domestic 
corporation's income tax return on or before the fifteenth day of the 
third month following the close of such corporation's taxable year.
    (i) Extensions of time for filing. District directors are authorized 
to grant reasonable extensions of time for filing returns on Form 2952 
in accordance with the applicable provisions of Sec. 1.6081-1. An 
application by a domestic corporation for an extension of time for 
filing a return of income shall also be considered as an application for 
an extension of time for filing returns on Form 2952.
    (j) Failure to furnish information--(1) Effect on foreign tax 
credit. (i) Failure by a domestic corporation to furnish,

[[Page 162]]

in accordance with the provisions of this section, any return or any 
information in any return, required to be filed for a taxable year under 
authority of section 6038 on or before the date prescribed in paragraph 
(h) of this section (determined with regard to any extension of time for 
such filing) shall affect the application of section 902 as provided in 
subparagraph (2) of this paragraph. Such failure shall affect the 
application of section 902 to such domestic corporation or to any person 
who acquires from any person any portion (but only to the extent of such 
portion) of the interest of such domestic corporation in any controlled 
foreign corporation or foreign subsidiary.
    (ii) Where the domestic corporation, having filed the return 
required by this section except for an omission of, or error with 
respect to, some of the information referred to in paragraphs (e) and 
(f) of this section, establishes to the satisfaction of the Commissioner 
that such omission or error was inadvertent or for reasonable cause and 
that such domestic corporation has substantially complied with this 
section, such omission or error shall not constitute a failure under 
this section.
    (2) Reduction of foreign taxes. In the application of section 902 to 
the domestic corporation or person referred to in subparagraph (1)(i) of 
this paragraph for any taxable year, the amount of taxes paid or deemed 
paid by each controlled foreign corporation and each foreign subsidiary 
for the accounting period or periods for which the domestic corporation 
was required for the taxable year of the failure to furnish information 
under this section shall be reduced by 10 percent. The 10 percent 
reduction is not limited to the taxes paid or deemed paid by the 
controlled foreign corporation or foreign subsidiary with respect to 
which there is a failure to file information but shall apply to the 
taxes paid or deemed paid by all controlled foreign corporations and 
foreign subsidiaries.
    (3) Reduction for continued failure. (i) If the failure, referred to 
in subparagraph (1)(i) of this paragraph, continues for 90 days or more 
after date of written notice by the district director to the domestic 
corporation, then the amount of the reduction referred to in 
subparagraph (2) of this paragraph shall be 10 percent plus an 
additional 5 percent for each 3-month period, or fraction thereof, 
during which such failure continues after the expiration of such 90-day 
period.
    (ii) Taxes paid by a foreign subsidiary when once reduced for a 
failure shall not be reduced again for the same failure in their status 
as taxes deemed paid by a controlled foreign corporation. Where a 
failure continues, each additional periodic 5 percent reduction, 
referred to in subdivision (i) of this subparagraph, shall be considered 
as part of the one reduction.
    (4) Reasonable cause. (i) For purposes of subsection (b) of section 
6038 and this section the time prescribed for furnishing information 
under this paragraph, and the beginning of the 90-day period after 
notice by the district director, shall be treated as being not earlier 
than the last day on which (as shown to the satisfaction of the district 
director) reasonable cause existed for failure to furnish such 
information.
    (ii) A domestic corporation, which wishes to avoid a reduction in 
foreign tax credit as provided in subparagraphs (2) and (3) of this 
paragraph for failure to furnish information in accordance with this 
section, must make an affirmative showing of all facts alleged as a 
reasonable cause for such failure in the form of a written statement 
containing a declaration that it is made under the penalties of perjury.
    (5) Penalties. The information required by section 6038 of the Code 
must be furnished even though there are no foreign taxes which would be 
reduced under the provisions of subparagraph (2) of this paragraph. For 
criminal penalties for failure to file a return and filing a false or 
fraudulent return, see sections 7203, 7206, and 7207 of the Code.

[T.D. 6506, 25 FR 12241, Nov. 30, 1960, as amended by T.D. 6621, 27 FR 
11878, Dec. 1, 1962]



Sec. 1.6038-2  Information returns required of United States persons
with respect to annual accounting periods of certain foreign
corporations.

    (a) Requirement of return. Every U.S. person shall make a separate 
annual information return with respect to

[[Page 163]]

each annual accounting period (described in paragraph (e) of this 
section) of each foreign corporation which that person controls (as 
defined in paragraph (b) of this section) at any time during such annual 
accounting period.
    (1) Form 2952, ``Information Return with Respect to Controlled 
Foreign Corporations,'' if such taxable year ends before December 31, 
1982;
    (2) Form 5471, ``Information Return of U.S. Persons with Respect to 
Certain Foreign Corporations,'' if such taxable year ends on or after 
December 31, 1983; or
    (3) Either Form 5471 or Form 2952 if such taxable year ends on or 
after December 31, 1982 and before December 31, 1963.
    (b) Control. A person shall be deemed to be in control of a foreign 
corporation if at any time during that person's taxable year it owns 
stock possessing more than 50 percent of the total combined voting power 
of all classes of stock entitled to vote, or more than 50 percent of the 
total value of shares of all classes of stock of the foreign 
corporation. A person in control of a corporation which, in turn, owns 
more than 50 percent of the combined voting power, or of the value, of 
all classes of stock of another corporation is also treated as being in 
control of such other corporation. The provisions of this paragraph may 
be illustrated by the following example:

    Example. Corporation A owns 51 percent of the voting stock in 
Corporation B. Corporation B owns 51 percent of the voting stock in 
Corporation C. Corporation C in turn owns 51 percent of the voting stock 
in Corporation D. Corporation D is controlled by Corporation A.

    (c) Attribution rules. For the purpose of determining control of 
domestic or foreign corporations the constructive ownership rules of 
section 318(a) shall apply except that:
    (1) Stock owned by or for a partner or a beneficiary of an estate or 
trust shall not be considered owned by the partnership, estate, or trust 
when the effect is to consider a United States person as owning stock 
owned by a person who is not a United States person;
    (2) A corporation will not be considered as owning stock owned by or 
for a 50 percent or more shareholder when the effect is to consider a 
United States person as owning stock owned by a person who is not a 
United States person; and
    (3) If 10 percent or more in value of the stock in a corporation is 
owned, directly or indirectly, by or for any person, section 
318(a)(2)(C) shall apply.


The constructive ownership rules of section 318(a) apply only for 
purposes of determining control as defined in paragraph (b) of this 
section.
    (d) U.S. person--(1) In general. For purposes of section 6038 and 
this section, the term United States person has the meaning assigned to 
it by section 7701(a)(30), except as provided in paragraphs (d)(2) and 
(3) of this section.
    (2) Special rule for individuals residing in certain possessions. 
(i) With respect to an individual who is a bona fide resident of Puerto 
Rico, the term United States person has the meaning assigned to it by 
Sec. 1.957-3 except that the rules of Sec. 1.937-2(g)(1) will apply.
    (ii) With respect to an individual who is a bona fide resident of 
any section 931 possession, as defined in Sec. 1.931-1(c)(1), the term 
United States person has the meaning assigned to it by Sec. 1.957-3.
    (3) Special rule for certain nonresident aliens. An individual for 
whom an election under section 6013(g) or (h) is in effect will, subject 
to the exceptions contained in paragraph (d)(2) of this section, be 
considered a United States person for purposes of section 6038 and this 
section.
    (e) Period covered by return. The information required under 
paragraphs (f) and (g) of this section with respect to a foreign 
corporation shall be furnished for the annual accounting period of the 
foreign corporation ending with or within the United States person's 
taxable year. For purposes of this section, the annual accounting period 
of a foreign corporation is the annual period on the basis of which that 
corporation regularly computes its income in keeping its books. In the 
case of a specified foreign corporation (as defined in section 898), the 
taxable year of such corporation shall be treated as its annual 
accounting period. The term annual accounting period may refer to a 
period of less than one year, where, for example,

[[Page 164]]

the foreign income, war profits, and excess profits taxes are determined 
on the basis of an accounting period of less than one year as described 
in section 902(c)(5). If more than one annual accounting period ends 
with or within the United States person's taxable year, separate annual 
information returns shall be submitted for each annual accounting 
period.
    (f) Contents of return. The return on Form 5471 shall contain so 
much of the following information, and in such form or manner, as the 
form shall prescribe with respect to each foreign corporation:
    (1) The name, address, and employer identification number, if any, 
of the corporation;
    (2) The principal place of business of the corporation;
    (3) The date of incorporation and the country under whose laws 
incorporated;
    (4) The name and address of the foreign corporation's statutory or 
resident agent in the country of incorporation;
    (5) The name, address, and identifying number of any branch office 
or agent of the foreign corporation located in the United States;
    (6) The name and address of the person (or persons) having custody 
of the books of account and records of the foreign corporation, and the 
location of such books and records if different from such address;
    (7) The nature of the corporation's business and the principal 
places where conducted;
    (8) As regards the outstanding stock of the corporation--
    (i) A description of each class of the corporation's stock, and
    (ii) The number of shares of each class outstanding at the beginning 
and end of the annual accounting period;
    (9) A list showing the name, address, and identifying number of, and 
the number of shares of each class of the corporation's stock held by, 
each United States person who is a shareholder owning at any time during 
the annual accounting period 5 percent or more in value of any class of 
the corporation's outstanding stock;
    (10) For the annual accounting period, the amount of the 
corporation's:
    (i) Current earnings and profits;
    (ii) Foreign income, war profits, and excess profits taxes paid or 
accrued;
    (iii) Distributions out of current earnings and profits for the 
period;
    (iv) Distributions other than those described in paragraph 
(f)(10)(iii) of this section and the source thereof; and
    (v) For Forms 5471 filed for taxable years ending after December 15, 
1990, such earnings and profits information as the form shall prescribe, 
including post-1986 undistributed earnings described in section 
902(c)(1), pre-1987 amounts, total earnings and profits, and previously 
taxed earnings and profits described in section 959(c); and
    (11) Transactions with certain related parties. (i) A summary 
showing the total amount of each of the following types of transactions 
of the corporation, which took place during the annual accounting 
period, with the person required to file this return, any other 
corporation or partnership controlled by that person, or any United 
States person owning at the time of the transaction 10 percent or more 
in value of any class of stock outstanding of the foreign corporation, 
or of any corporation controlling that foreign corporation--
    (A) Sales and purchases of stock in trade;
    (B) Sales and purchases of tangible property other than stock in 
trade;
    (C) Sales and purchases of patents, inventions, models, or designs 
(whether or not patented), copyrights, trademarks, secret formulas or 
processes, or any other similar property rights;
    (D) Compensation paid and compensation received for the rendition of 
technical, managerial, engineering, construction, scientific, or like 
services;
    (E) Commissions paid and commissions received;
    (F) Rents and royalties paid and rents and royalties received;
    (G) Amounts loaned and amounts borrowed (except open accounts 
resulting from sales and purchases reported under other items listed in 
this paragraph (f)(11) that arise and are collected in full in the 
ordinary course of business);
    (H) Dividends paid and dividends received;

[[Page 165]]

    (I) Interest paid and interest received; and
    (J) Premiums paid and premiums received for insurance or 
reinsurance.
    (ii) Special rule for banks. For purposes of this paragraph (f)(11), 
if the United States person is a bank, as defined in section 581, or is 
controlled within the meaning of section 368(c) by a bank, the term 
transactions shall not, as to a corporation with respect to which a 
return is filed, include banking transactions entered into on behalf of 
customers; in any event, however, deposits in accounts between a foreign 
corporation, controlled (within the meaning of paragraph (b) of this 
section) by a United States person, and a person described in this 
paragraph (f)(11) and withdrawals from such accounts shall be summarized 
by reporting end-of-month balances.
    (12) Accrued payments and receipts. For purposes of the required 
summary under paragraph (f)(11) of this section, a corporation that uses 
an accrual method of accounting shall use accrued payments and accrued 
receipts for purposes of computing the total amount of each of the types 
of transactions listed.
    (g) Financial statements. The following information with respect to 
the foreign corporation shall be attached to and filed as part of the 
return required by this section. Forms 5471 filed after September 30, 
1991, shall contain this information in such form or manner as the form 
shall prescribe with respect to each foreign corporation:
    (1) A statement of the corporation's profit and loss for the annual 
accounting period;
    (2) A balance sheet as of the end of the annual accounting period of 
the corporation showing--
    (i) The corporation's asset;
    (ii) The corporation's liabilities; and
    (iii) The corporation's net worth; and
    (3) An analysis of changes in the corporation's surplus accounts 
during the annual accounting period including both opening and closing 
balances.


The information listed in this paragraph (g) shall be prepared in 
conformity with generally accepted accounting principles, and in such 
detail as is customary for the corporation's accounting records.
    (h) Method of reporting. Except as provided in this paragraph (h), 
all amounts furnished under paragraphs (f) and (g) of this section shall 
be expressed in United States dollars with a statement of the exchange 
rates used. The following rules shall apply for taxable years ending 
after December 31, 1994, with respect to returns filed after December 
31, 1995. All amounts furnished under paragraph (g) of this section 
shall be expressed in United States dollars computed and translated in 
conformity with United States generally accepted accounting principles. 
Amounts furnished under paragraph (g)(1) of this section shall also be 
furnished in the foreign corporation's functional currency as required 
on the form. Earnings and profits amounts furnished under paragraphs 
(f)(10) (i), (iii), (iv), and (v) of this section shall be expressed in 
the foreign corporation's functional currency except to the extent the 
form requires specific items to be translated into United States 
dollars. Tax amounts furnished under paragraph (f)(10)(ii) of this 
section shall be furnished in the foreign currency in which the taxes 
are payable and in United States dollars translated in accordance with 
section 986(a). All amounts furnished under paragraph (f)(11) of this 
section shall be expressed in U.S. dollars translated from functional 
currency at the weighted average exchange rate for the year as defined 
in Sec. 1.989(b)-1. The foreign corporation's functional currency is 
determined under section 985. All statements submitted on or with the 
return required under this section shall be rendered in the English 
language.
    (i) Time and place for filing return. Returns on Form 5471 required 
under paragraph (a) of this section shall be filed with the United 
States person's income tax return on or before the date required by law 
for the filing of that person's income tax return. Directors of Field 
Operations and Field Directors are authorized to grant reasonable 
extensions of time for filing returns on Form 5471 in accordance with 
the applicable provisions of Sec. 1.6081-1 of this

[[Page 166]]

chapter. An application for an extension of time for filing a return of 
income shall also be considered as an application for an extension of 
time for filing returns on Form 5471.
    (j) Two or more persons required to submit the same information--(1) 
Return jointly made. If two or more persons are required to furnish 
information with respect to the same foreign corporation for the same 
period, such persons may, in lieu of making separate returns, jointly 
make one return. Such joint return shall be filed with the income tax 
return of any one of the persons making such joint return.
    (2) Persons excepted from furnishing information--(i) Conditions. 
Any person required to furnish information under this section with 
respect to a foreign corporation need not furnish that information 
provided all of the following conditions are met:
    (A) Such person does not directly own an interest in the foreign 
corporation;
    (B) Such person is required to furnish the information solely by 
reason of attribution of stock ownership from a United States person 
under paragraph (c) of this section; and
    (C) The person from whom the stock ownership is attributed furnishes 
all of the information required under this section of the person to whom 
the stock ownership is attributed. (For a rule regarding attribution 
from a nonresident alien, see paragraph (l) of this section).
    (ii) If an individual who is a United States person required to 
furnish information with respect to a foreign corporation under section 
6038 is entitled under a treaty to be treated as a nonresident of the 
United States, and if the individual claims this treaty benefit, and if 
there are no other United States persons that are required to furnish 
information under section 6038 with respect to the foreign corporation, 
then the individual may satisfy the requirements of paragraphs (f)(10), 
(f)(11), (g), and (h) of this section by filing the audited foreign 
financial statements of the foreign corporation with the individual's 
return required under section 6038.
    (iii) Illustrations. The rule of this paragraph (j)(2) is 
illustrated by the following examples:

    Example 1. A, a U.S. person owns 100 percent of the stock of M, a 
domestic corporation. A also owns 100 percent of the stock of N, a 
foreign corporation organized under the laws of foreign country Y. A, in 
filing the information return required by this section with respect to N 
Corporation, in fact furnishes all of the information required of M 
Corporation with respect to N Corporation. M Corporation need not file 
the information.
    Example 2. X, a domestic corporation owns 100 percent of the stock 
of Y, a domestic corporation, Y Corporation owns 100 percent of the 
stock of Z, a foreign corporation. X Corporation is not excused by this 
paragraph (j)(2) from filing information with respect to Z Corporation 
because X Corporation is deemed to control Z Corporation under the 
provisions of paragraph (b) of this section without recourse to the 
attribution rules in paragraph (c) of this section.

    (3) Statement required. Any United States person required to furnish 
information under this section with his return who does not do so by 
reason of the provisions of paragraph (j)(1) of this section shall file 
a statement with his income tax return indicating that such requirement 
has been (or will be) satisfied and identifying the return with which 
the information was or will be filed and the place of filing.
    (k) Failure to furnish information--(1) Dollar amount penalty--(i) 
In general. If any person required to file Form 5471 under section 6038 
and this section fails to furnish any information described in 
paragraphs (f) and (g) of this section within the time prescribed by 
paragraph (i) of this section, such person shall pay a penalty of 
$10,000 for each annual accounting period of each foreign corporation 
with respect to which such failure occurs.
    (ii) Increase in penalty for continued failure after notification. 
If a failure described in paragraph (k)(1)(i) of this section continues 
for more than 90 days after the date on which the Director of Field 
Operations, Area Director, or Director of Compliance Campus Operations 
mails notice of such failure to the person required to file Form 5471, 
such person shall pay a penalty of $10,000, in addition to the penalty 
imposed by section 6038(b)(1) and paragraph (k)(1)(i) of this section, 
for each 30-day period (or a fraction of) during

[[Page 167]]

which such failure continues after such 90-day period has expired. The 
additional penalty imposed by section 6038(b)(2) and this paragraph 
(k)(1)(ii) shall be limited to a maximum of $50,000 for each failure.
    (2) Penalty of reducing foreign tax credit--(i) Effect on foreign 
tax credit. Failure of a United States person to furnish, in accordance 
with the provisions of this section, any return or any information in 
any return, required to be filed for a taxable year under authority of 
section 6038 on or before the date prescribed in paragraph (i) of this 
section may affect the application of section 901 as provided in 
paragraph (k)(2)(ii) of this section and may affect the application of 
sections 902 and 960 as provided in paragraph (k)(2)(iii) of this 
section. Such failure may affect the application of sections 902 and 960 
to any such United States person which is a corporation or to any person 
who acquires from any other person any portion (but only to the extent 
of such portion) of the interest of such other person in any such 
foreign corporation.
    (ii) Application of section 901. In the application of section 901 
to a United States person referred to in paragraph (k)(2)(i) of this 
section, the amount of taxes paid or deemed paid by such person for any 
taxable year, with or within which the annual accounting period of a 
foreign corporation for which such person failed to furnish information 
required under this section ended, may be reduced by 10 percent. 
However, no tax reduced under paragraph (k)(2)(iii) of this section or 
deemed paid under section 904(c) shall be reduced under the provisions 
of this paragraph (k)(2)(ii).
    (iii) Application of sections 902 and 960. In the application of 
sections 902 and 960 to a United States person referred to in paragraph 
(k)(2)(i) of this section for any taxable year, the amount of taxes paid 
or deemed paid by each foreign corporation for the accounting period or 
periods for which such person was required for the taxable year of the 
failure to furnish information under this section may be reduced by 10 
percent. The 10-percent reduction is not limited to the taxes paid or 
deemed paid by the foreign corporation with respect to which there is a 
failure to file information but may apply to the taxes paid or deemed 
paid by all foreign corporations controlled by that person. In applying 
subsections (a) and (b) of section 902, and in applying subsection (a) 
of section 960, the reduction provided by this paragraph (k)(2) shall 
not apply for purposes of determining the amount of accumulated profits 
in excess of income, war profits, and excess profits taxes.
    (iv) Reduction for continued failure after notice. (A) If the 
failure referred to in paragraph (k)(2)(i) of this section continues for 
more than 90 days after the date on which the Director of Field 
Operations mails notice of such failure to such United States person, 
then the amount of the reduction referred to in paragraphs (k)(2) (ii) 
and (iii) of this section may be 10 percent plus an additional 5 percent 
for each 3-month period, or fraction thereof, during which such failure 
continues after the expiration of such 90-day period.
    (B) No taxes shall be reduced under this paragraph (k)(2) more than 
once for the same failure. Taxes paid by a foreign corporation when once 
reduced for a failure shall not be reduced again for the same failure in 
their status as taxes deemed paid by a corporate shareholder. Where a 
failure continues, each additional periodic 5-percent reduction, 
referred to in paragraph (k)(2)(iv)(A) of this section, shall be 
considered as part of the one reduction.
    (v) Limitation on reduction of foreign tax credit. The amount of the 
reduction under this paragraph (k)(2) for each failure to furnish 
information with respect to a foreign corporation as required under this 
section shall not exceed the greater of:
    (A) $10,000, or
    (B) The income of the foreign corporation for its annual accounting 
period with respect to which the failure occurs. For purposes of this 
section if a person is required to furnish information with respect to 
more than one foreign corporation, controlled (within the meaning of 
paragraph (b) of this section) by that person, each failure to submit 
information for each such corporation constitutes a separate failure.
    (vi) Offset for dollar amount penalty imposed. The total amount of 
the reduction or reductions which, but for this

[[Page 168]]

paragraph (k)(2)(vi), may be made under this paragraph (k)(2) with 
respect to any separate failure, shall not exceed the maximum amount of 
such reductions which may be imposed, reduced (but not below zero) by 
the amount of the dollar amount penalty imposed by paragraph (k)(1) of 
this section with respect to such separate failure.
    (3) Reasonable cause. (i) For purposes of section 6038 (b) and (c) 
and this section, the time prescribed for furnishing information under 
paragraph (i) of this section, and the beginning of the 90-day period 
after mailing of notice by the Director of Field Operations under 
paragraphs (k)(1)(ii) and (2)(iv)(A) of this section, shall be treated 
as being not earlier than the last day on which reasonable cause existed 
for failure to furnish the information.
    (ii) To show that reasonable cause existed for failure to furnish 
information as required by section 6038 and this section, the person 
required to report such information must make an affirmative showing of 
all facts alleged as reasonable cause for such failure in a written 
statement containing a declaration that it is made under the penalties 
of prejury. The statement must be filed with the district director for 
the district or the director of the service center where the return is 
required to be filed. The district director or the director of the 
service center shall determine whether the failure to furnish 
information was due to reasonable cause, and if so, the period of time 
for which such reasonable cause existed. In the case of a return that 
has been filed as required by this section except for an omission of, or 
error with respect to, some of the information required, if the person 
who filed the return establishes to the satisfaction of the district 
director or the director of the service center that the person has 
substantially complied with this section, then the omission or error 
shall not constitute a failure under this section.
    (4) Other penalties. The information required by section 6038 and 
this section must be furnished even though there are no foreign taxes 
which would be reduced under the provisions of this section, and even 
though the information required may not affect the amount of any tax due 
under the Internal Revenue Code. For criminal penalties for failure to 
file a return and filing a false or fraudulent return, see sections 
7203, 7206, and 7207 of the Code.
    (5) Illustrations. The provisions of this paragraph may be 
illustrated by the following examples.

    Example 1. M, a domestic corporation owns 100 percent of the stock 
of N, a foreign corporation. Both M and N use the calendar year as a 
taxable year and annual accounting period, and all of the following 
events occur in or with respect to the 1980 taxable year. The dividend 
from N is the only dividend from a foreign corporation received by M 
during the taxable year, and the foreign taxes listed are the only 
foreign taxes paid or deemed paid by M and N for the taxable year. On 
March 15, 1981, M filed its income tax return and paid its income tax, 
but M did not file Form 2952 with respect to N's 1980 annual accounting 
period. On June 1, 1961, the district director mailed notice to M of M's 
failure to file Form 2952 with respect to N. On November 30, 1981, M 
filed a complete Form 2952 with respect to N's 1980 annual accounting 
period.

(a) Gains, profits, and income of N........................     $100,000
(b) Foreign tax paid by N with respect to such gains,             40,000
 profits, and income.......................................
(c) Reduction of foreign tax paid by N (for purposes of M's        6,000
 section 902 deemed paid credit) resulting from M's failure
 to file information with respect to N as required under
 section 6038(a) and this section: failure to file within
 the time prescribed in paragraph (i) of this section, 10-
 percent reduction; continued failure for one additional 3-
 month period after 90-day period after notice mailed, 5-
 percent reduction; total reduction, 15 percent ($40,000
 times 15 percent).........................................
(d) Foreign tax paid by N after section 6038(c)(1)(B)             34,000
 reduction.................................................
(e) Dividend paid by N to M................................       45,000
(f) Accumulated profits of N as defined in section               100,000
 902(c)(1) (determined without regard to the section
 6038(c)(1)(B) reduction)..................................
(g) Accumulated profits of N as described in section 902(a)       60,000
 (determined without regard to the section 6038(c)(1)(B)
 reduction)................................................
(h) For purposes of the section 902 credit, M is deemed to        25,500
 have paid the same proportion of foreign taxes paid
 (reduced as provided under section 6038(c)) with respect
 to the accumulated profits described in section 902(a)
 (determined without regard to the reduction provided under
 section 6038(c)) as the amount of the dividend (determined
 without regard to section 78) bears to such amount of
 accumulated profits.......................................
 
       (45,000 / 60,000) x 34,000 = 25,500.................
 


[[Page 169]]


M must include $25,500 in gross income as a dividend under the 
provisions of section 78 of the Code. This example illustrates that the 
reductions in foreign taxes paid by the foreign corporation provided 
under section 8038(c) are taken into account in determining the amount 
included in gross income of the domestic corporation under section 78 of 
the Code as foreign taxes deemed paid, but such reductions are not taken 
into account in computing accumulated profits for purposes of 
determining the portion of foreign taxes deemed paid with respect to a 
particular dividend. The dollar amount penalty imposed by section 8038 
(b) and paragraph (k)(1) of this section does not apply with respect to 
information for annual accounting periods ending before September 4, 
1982, and therefore does not apply to M with respect to M's failure to 
file Form 2952 in this example.
    Example 2. The facts are the same as in example (1) except that all 
of the events occur in or with respect to the 1982 taxable year. On 
March 15, 1983. M filed its income tax return and paid its income tax, 
but M did not file Form 2952 or Form 5471 with respect to N's 1982 
annual accounting period. On June 1, 1983, the district director mailed 
notice to M of M's failure to file Form 2952 or Form 5471 with respect 
to N. On November 30, 1983, M filed a complete Form 5471 with respect to 
N's 1982 annual accounting period. Under paragraph (k)(1)(i) of this 
section, M is subject to a penalty of $1,000. Under paragraph (k)(1)(ii) 
of this section, that penalty is increased by $4,000 because the failure 
continued for 92 days (three full 30-day periods and a fraction of a 
fourth 30-day period) after the end of the 90-day period following 
mailing of the notice by the district director, bringing M's dollar 
amount penalty under paragraph (k)(1) of this section to $5,000. For 
purpose of determining the foreign tax credit available to M, there may 
be imposed a reduction of foreign tax paid by N of $6,000, which would 
be the total of reductions under paragraph (k)(2) of this section with 
respect to M's failure to file under section 6038 for N's 1982 annual 
accounting period, before application of paragraph (k)(2)(vi) of this 
section. Under said paragraph (k)(2)(vi), the amount of the foreign tax 
reduction imposed is reduced by the amount of the dollar amount penalty, 
leaving a foreign tax reduction penalty of $1,000 which may be imposed 
in addition to the $5,000 dollar amount penalty. If imposed, the $1,000 
tax reduction would then be applied in the calculation of taxes deemed 
paid by M under section 902 as in example (1), items (c), (d), and (h).
    Example 3. A, a U.S. person, owns 100 percent of the stock of FC. On 
April 15, 2008, A timely filed its 2007 income tax return but did not 
file Form 5471 with respect to FC's 2007 annual accounting period. On 
June 1, 2008, the Director of Field Operations mailed a notice to A of 
A's failure to file Form 5471 for 2007 with respect to FC. On August 1, 
2008, A submits a written statement asserting facts for reasonable cause 
for failure to file the 2007 Form 5471 for FC. Based on A's statement 
and discussions with A, the Director of Field Operations agrees that A 
had reasonable cause for failure to file FC's 2007 Form 5471 and 
determined that it is reasonable for A to file FC's 2007 Form 5471 by 
September 15, 2008. The time prescribed for furnishing information under 
paragraph (i) of this section is September 15, 2008, and the 90-day 
period described under paragraphs (k)(1)(ii) and (k)(2)(iv)(A) of this 
section begins on that same date. Thus, if A files a completed Form 5471 
by September 15, 2008, A is not subject to the penalties under 
paragraphs (k)(1) and (k)(2) of this section. If A does not file a 
completed Form 5471 by December 14, 2008, in addition to the penalties 
under paragraphs (k)(1) and (k)(2) of this section, A will also be 
subject to the penalties for continued failure under paragraphs 
(k)(1)(ii) and (k)(2)(iv)(A) of this section.
    Example 4. The facts are the same as in Example 3 except A submits 
the written statement to the Director before a notice of failure to 
furnish information is mailed to A. The notice is mailed to A on 
September 7, 2008. Under these facts, the time prescribed for furnishing 
information under paragraph (i) of this section is September 15, 2008, 
and the 90-day period after mailing of notice of failure under 
paragraphs (k)(1)(ii) and (k)(2)(iv)(A) of this section begins on that 
same date.

    (l) Other persons excepted from filing. For tax years of foreign 
corporations ending on or after December 29, 1999, any person required 
to furnish information under this section with respect to a foreign 
corporation does not have to furnish that information if the following 
conditions are met--
    (1) Such person does not own a direct or indirect interest in the 
foreign corporation; and
    (2) Such person is required to furnish information solely by reason 
of attribution of stock ownership from a nonresident alien(s) under 
paragraph (c) of this section.
    (m) Applicability dates--(1) In general. This section applies to 
taxable years of foreign corporations beginning on or after October 3, 
2018. See 26 CFR 1.6038-2 (revised as of April 1, 2018) for rules 
applicable to taxable years of foreign corporations beginning before 
such date.

[[Page 170]]

    (2) [Reserved]

[T.D. 8040, 50 FR 30163, July 24, 1985, as amended by T.D. 8573, 59 FR 
64302, Dec. 14, 1994; T.D. 8733, 62 FR 53385, Oct. 14, 1997; T.D. 8850, 
64 FR 72550, Dec. 28, 1999; T.D. 9194, 70 FR 18946, Apr. 11, 2005; T.D. 
9268, 71 FR 35525, June 21, 2006; T.D. 9338, 72 FR 38475, July 13, 2007; 
T.D. 9391, 73 FR 19376, Apr. 9, 2008; T.D. 9650, 78 FR 79611, Dec. 31, 
2013; T.D. 9806, 81 FR 95470, Dec. 28, 2016; T.D. 9866, 84 FR 29369, 
June 21, 2019]



Sec. 1.6038-2T  Information returns required of United States 
persons with respect to annual accounting periods of certain 
foreign corporations beginning after December 31, 1962 (temporary).
          

    (a) through (e) [Reserved].
    (f)(1) through (15) [Reserved].
    (16) Dividends for which section 245A deduction or section 954(c)(6) 
exception is limited--(i) General rule. If for the annual accounting 
period, the corporation distributes or receives a dividend that gives 
rise to an ineligible amount (as defined in Sec. 1.245A-5T((i)(12)), a 
tiered extraordinary disposition amount (as defined in Sec. 1.245A-
5T(i)(25)), or a tiered extraordinary reduction amount (as defined in 
Sec. 1.245A-5T(i)(26)), then Form 5471 (or a successor form) must 
contain such information about the ineligible amount, tiered 
extraordinary disposition amount, or tiered extraordinary reduction 
amount, as applicable, in the form and manner and to the extent 
prescribed by the form, instructions to the form, publication, or other 
guidance published in the Internal Revenue Bulletin.
    (ii) Transition rule. If the corporation (or predecessor 
corporation) distributed or received a dividend that gave rise to an 
ineligible amount, a tiered extraordinary disposition amount, or a 
tiered extraordinary reduction amount in an annual accounting period for 
which the Form 5471 (or successor form) has been filed before the date 
of publication of these Temporary regulations, the corporation must 
provide the information described in paragraph (f)(16)(i) of this 
section on the first Form 5471 (or successor form) filed by the 
corporation after the issuance of guidance setting forth the form and 
manner of reporting such information.
    (g) through (l) [Reserved].
    (m)(1) [Reserved].
    (2) Special rule for paragraph (f)(16). Paragraph (f)(16) of this 
section applies with respect to information for annual accounting 
periods in which a dividend subject to Sec. 1.245A-5T is paid.
    (n) Expiration date. The applicability of paragraphs (f)(16) and (m) 
of this section expires June 14, 2022.

[T.D. 9865, 84 FR 28423, June 18, 2019]



Sec. 1.6038-3  Information returns required of certain United States
persons with respect to controlled foreign partnerships (CFPs).

    (a) Persons required to make return--(1) Controlling fifty-percent 
partners. The term controlling fifty-percent partner means a United 
States person that controlled (as defined in paragraph (b)(1) of this 
section) the foreign partnership at any time during the partnership's 
tax year (as defined in paragraph (b)(8) of this section). Except as 
provided in paragraph (c), (d), or (e) of this section, for each tax 
year of a foreign partnership during which the partnership has one or 
more controlling fifty-percent partners, each controlling fifty-percent 
partner must complete and file Form 8865, ``Return of U.S. Persons With 
Respect to Certain Foreign Partnerships,'' containing the information 
described in paragraph (g) of this section.
    (2) Controlling ten-percent partners. If at any point during a 
foreign partnership's tax year (as defined in paragraph (b)(8) of this 
section) a United States person owned a ten-percent or greater interest 
in the partnership while the partnership was controlled by United States 
persons owning ten-percent or greater interests, such United States 
person is a controlling ten-percent partner. See paragraph (b)(1) of 
this section for the definition of control. However, a United States 
person is not a controlling ten-percent partner with respect to a 
particular foreign partnership for a particular tax year of the foreign 
partnership if at any point during that year the partnership had a 
controlling fifty-percent partner, as defined in paragraph (a)(1) of 
this section. Except as provided in paragraph (c), (d), or (e) of this 
section, for each tax year of a partnership during which the partnership 
has controlling ten-percent partners, each controlling ten-percent

[[Page 171]]

partner must complete and file Form 8865 containing the information 
described in paragraph (g)(1) of this section.
    (3) Separate returns for each partnership. A United States person 
required to report under this paragraph (a) must file a separate Form 
8865 for each foreign partnership with respect to which the person is a 
controlling fifty-percent partner or a controlling ten-percent partner.
    (b) Ownership determinations and definitions--(1) Control. Control 
of a foreign partnership is ownership of more than a fifty-percent 
interest in the partnership.
    (2) Fifty-percent interest. A fifty-percent interest in a 
partnership is an interest equal to fifty percent of the capital 
interest in such partnership, an interest equal to fifty percent of the 
profits interest in such partnership, or an interest to which fifty 
percent of the deductions or losses of such partnership are allocated.
    (3) Ten-percent interest. A ten-percent interest in a partnership is 
an interest equal to ten percent of the capital interest in such 
partnership, an interest equal to ten percent of the profits interest in 
such partnership, or an interest to which ten percent of the deductions 
or losses of such partnership are allocated.
    (4) Constructive ownership rules. For purposes of determining an 
interest in a partnership, the constructive ownership rules of section 
267(c) (other than section 267(c)(3)) apply, taking into account that 
such rules refer to corporations and not to partnerships. However, an 
interest will be attributed from a nonresident alien under the family 
attribution rules of section 267(c)(2) and (4) only if the person to 
whom the interest is attributed owns a direct or indirect (under the 
rules of 267(c)(1) or (5)) interest in the foreign partnership.
    (5) Determination of amount of interest. Whether a person owns a 
fifty-percent interest, or a ten-percent interest, as described in 
paragraphs (b)(2) and (3) of this section, is determined for each tax 
year of the foreign partnership by reference to the agreement of the 
partners relating to such interests during that tax year.
    (6) Definition of United States person. The term United States 
person is defined in section 7701(a)(30).
    (7) Definition of a foreign partnership. A foreign partnership is a 
partnership described in section 7701(a)(5).
    (8) Tax year of a foreign partnership. The tax year of a foreign 
partnership is determined under section 706.
    (9) Examples. The rules of paragraph (a) of this section and this 
paragraph (b) are illustrated by the following examples:

    Example 1. Sole U.S. partner does not own more than a fifty-percent 
interest. No United States person owns any interest (directly or 
constructively) in FPS, a foreign partnership whose tax year under 
section 706 is the calendar year. On January 1, 2001, US, a United 
States person with the calendar year as its tax year, contributes 
property to FPS in exchange for a 40% interest in a section 721 
transaction. No United States persons acquire directly or constructively 
any other interests in FPS during FPS's 2001 tax year. US is not a 
controlling fifty-percent partner during FPS's 2001 tax year. US did not 
own during that tax year, either directly or constructively, more than a 
50% interest in the partnership under paragraphs (b)(2) and (4) of this 
section. Also, US is not a controlling ten-percent partner; although US 
owned a 10% or greater interest, US persons owning at least 10% 
interests did not control FPS. Therefore, US does not have to file with 
its 2001 income tax return a Form 8865 with respect to FPS under section 
6038. (But see section 6038B for the reporting obligations of US with 
respect to its transfer of property to FPS and section 6046A for the 
reporting obligation of US with respect to its acquisition of an 
interest in FPS. See also Sec. 1.6046A-1(f)(1) regarding the overlap 
between sections 6038B and 6046A.
    Example 2. Controlling ten-percent partners. Assume the same facts 
as in Example 1. In addition, on January 1, 2002, US1, a United States 
person unrelated to US and a calendar year taxpayer, purchases a 15% 
interest in FPS from a foreign partner of FPS. Neither US nor US1 is a 
controlling fifty-percent partner during FPS's 2002 tax year because 
neither one owns more than a 50% percent interest in FPS during that 
year. However, US and US1 are controlling ten-percent partners for that 
year because each owns at least a 10% interest (US owns a 40% interest 
and US1 owns a 15% interest) and together they control FPS because 
collectively they own more than a 50% interest in FPS. As controlling 
ten-percent partners, under section 6038, each is required to file a 
Form 8865 with its 2002 income tax return. (US1 must also report its 
acquisition of the 15% interest in

[[Page 172]]

FPS under section 6046A on its Form 8865 filed with its 2002 income tax 
return.)
    Example 3. Constructive ownership rules. Assume the same facts as in 
Example 2. In addition, on January 1, 2003, US2, a United States person 
and the brother of US, purchases 50% of the stock of FC, a foreign 
corporation. FC owns a 20% interest in FPS. Thus, under sections 
6038(e)(3) and 267(c)(1), US2 indirectly owns a 10% interest in FPS (10% 
is US2's proportionate share of FC's 20% interest in FPS), and under 
sections 6038(e)(3) and 267(c)(2), US2 is attributed US's 40% interest. 
Additionally, US directly owns a 40% interest in FPS and is attributed 
US2's 10% interest pursuant to section 6038(e)(3) and section 267(c)(2). 
Therefore, US2 is considered to own a 50% interest (10% indirectly and 
40% from US) in FPS, and US is considered to own a 50% interest in FPS 
(40% directly and 10% from US2). FPS has no controlling fifty-percent 
partners, because neither US, US1, nor US2, owns a greater than 50% 
interest. However, US, US1, and US2 are each controlling ten-percent 
partners and each must file Form 8865 pursuant to section 6038 for FPS's 
2003 tax year ending December 31, 2003. Each must attach Form 8865 to 
its tax return for its 2003 tax year.
    Example 4. Controlling fifty-percent partners. Assume the same facts 
as in Example 3. In addition, on June 1, 2004, US acquires an additional 
1% direct interest in FPS. US is now a controlling fifty-percent partner 
of FPS, because US owns a 41% interest directly and a 10% interest 
constructively from US2. US2 is also a controlling fifty-percent 
partner, because US2 owns 10% indirectly and 41% constructively from US. 
Both US and US2 are required to file Form 8865 containing all the 
information required to be submitted by controlling fifty-percent 
partners. (But see paragraph (c)(1) of this section, which contains 
filing exceptions when there are multiple controlling fifty-percent 
partners). US1 is no longer a controlling ten-percent partner because 
FPS now has at least one controlling fifty-percent partner, and US1 does 
not qualify as a controlling fifty-percent partner. Therefore, US1 is 
not required to file Form 8865 under section 6038.
    Example 5. Constructive ownership from a nonresident alien. US, a 
United States person, does not own directly or constructively an 
interest in FPS, a foreign partnership. The tax year of FPS is the 
calendar year. NRA, a nonresident alien, is the mother of US. In 2002, 
NRA acquires a 55% interest in FPS. Because US owns neither a direct nor 
a constructive interest in FPS under sections 6038(e)(3) and 267(c)(1) 
or (5), NRA's interest is not attributed to US under sections 6038(e)(3) 
and 267(c)(2). If in 2003 NRA becomes a United States person, NRA's 
interest will be attributed to US. However, US is excused from filing 
Form 8865 if US satisfies the requirements of the constructive owners 
exception in paragraph (c)(2) of this section. In 2003, NRA is a 
controlling fifty-percent partner and must file a Form 8865 under 
section 6038 for FPS's 2003 tax year.

    (c) Exceptions when more than one United States person is required 
to file Form 8865 pursuant to section 6038--(1) Multiple controlling 
fifty-percent partners--(i) In general. If, with respect to the same 
foreign partnership for the same tax year, more than one United States 
person is a controlling fifty-percent partner, then in lieu of each 
controlling fifty-percent partner filing a separate Form 8865, only one 
Form 8865 from one of the controlling fifty-percent partners is 
required, provided all of the requirements of paragraph (c)(1)(ii) of 
this section are satisfied. A person that is a controlling fifty-percent 
partner solely because of an interest to which deductions or losses are 
allocated may file the single return only if there is no United States 
person that is a controlling fifty-percent partner by reason of an 
interest in capital or profits.
    (ii) Requirements--(A) The person undertaking the filing obligation 
must file Form 8865 with that person's income tax return in the manner 
provided by Form 8865 and the accompanying instructions. The return must 
contain all of the information that would have been required to be 
reported by this section if each controlling fifty-percent partner had 
filed its own Form 8865.
    (B) Any controlling fifty-percent partner not filing Form 8865 must 
file with its income tax return a statement titled ``Controlled Foreign 
Partnership Reporting'' containing the following information--
    (1) A statement that the person qualified as a controlling fifty-
percent partner, but is not submitting Form 8865 pursuant to the 
multiple controlling fifty-percent partners exception;
    (2) The name, address, and taxpayer identification number (if any) 
of the foreign partnership of which the person qualified as a 
controlling fifty-percent partner;
    (3) A representation that the filing requirement has been or will be 
satisfied;
    (4) The name and address of the person filing the single return;

[[Page 173]]

    (5) The Internal Revenue Service Center where the single return is 
required to be filed; and
    (6) Any additional information that Form 8865 and the accompanying 
instructions require.
    (iii) Penalties. If the requirements listed in paragraph (c)(1)(ii) 
of this section are not satisfied, a United States person that did not 
file a Form 8865 pursuant to this paragraph will be subject to the 
penalties in paragraph (k) of this section, unless the reasonable cause 
provision in paragraph (k)(4) of this section is satisfied.
    (2) Certain constructive owners excepted from furnishing 
information--(i) In general. A United States person that does not own a 
direct interest in the foreign partnership and that is required to file 
Form 8865 under this section solely by reason of constructive ownership 
from a United States person(s) pursuant to paragraph (b)(4) of this 
section (an indirect partner) is not required to file Form 8865 if all 
of the requirements listed in paragraph (c)(2)(ii) of this section are 
met.
    (ii) Requirements--(A) The United States person(s) whose interest 
the indirect partner constructively owns reports all the information 
such person(s) is required to submit under this section, unless such 
person also is required to file solely by reason of constructive 
ownership from a United States person(s) pursuant to paragraph (b)(4) of 
this section, or another person reports the information pursuant to 
paragraph (c)(1) of this section.
    (B) The indirect partner files with its income tax return a 
statement titled ``Controlled Foreign Partnership Reporting'' containing 
the following information--
    (1) A representation that the indirect partner was required to file 
Form 8865, but is not doing so pursuant to the constructive owners 
exception;
    (2) The names and addresses of the United States persons whose 
interests the indirect partner constructively owns;
    (3) The name and address of the foreign partnership with respect to 
which the indirect partner would have had to have filed Form 8865 but 
for this exception; and
    (4) Any additional information that Form 8865 and the accompanying 
instructions require.
    (iii) Penalties. A United States person that pursuant to this 
paragraph (c)(2) does not file a return will be subject to the penalties 
in paragraph (k) of this section if the requirements listed in paragraph 
(c)(2)(ii) of this section are not satisfied, unless such failure is due 
to reasonable cause, as defined in paragraph (k)(4) of this section.
    (iv) Overlap with multiple controlling fifty-percent partners 
exception--(A) If a United States person qualifies for both the 
exception in paragraph (c)(1) of this section and the exception in this 
paragraph (c)(2), such person may only utilize the multiple controlling 
fifty-percent partners exception in paragraph (c)(1) of this section to 
avoid filing Form 8865.
    (B) Example. The following example illustrates the operation of this 
paragraph (c)(2)(iv):

    Example. US is a U.S. citizen. US owns 100% of the stock of DC, a 
domestic corporation. DC owns a 60% direct interest in FPS, a foreign 
partnership. DC and US are the only U.S. persons that own interests 
directly or constructively in FPS. DC owns directly a greater than 50% 
interest in FPS. US constructively owns DC's interest pursuant to 
sections 6038(e)(3) and 267(c)(1). Therefore, both DC and US are 
controlling fifty-percent partners. US qualifies for both the exception 
in paragraph (c)(1) of this section (multiple controlling fifty-percent 
partners) and the exception in paragraph (c)(2) of this section 
(constructive owner exception). US may only utilize the paragraph (c)(1) 
exception to avoid its filing obligation. Accordingly, DC may file a 
single Form 8865 on behalf of US and itself. However, that form must 
contain all the information that would have been submitted had DC and US 
each submitted a separate Form 8865.

    (3) Members of an affiliated group of corporations filing a 
consolidated return. If one or more members of an affiliated group of 
corporations filing a consolidated return are required under section 
6038 to file a Form 8865 for a particular foreign partnership, the 
common parent corporation may file one Form 8865 on behalf of all of the 
members of the group required to report under section 6038. Except with 
respect to group members who also qualify under the exception in 
paragraph (c)(2) of this section, the Form 8865 must contain all

[[Page 174]]

the information that would have been required to be submitted if each 
group member were required to file its own Form 8865.
    (d) Exception for certain trusts. Trusts relating to state and local 
government employee retirement plans are not required to report under 
this section, unless the instructions to Form 8865 provide otherwise.
    (e) Reporting under this section not required with respect to 
partnerships excluded from the application of subchapter K. The 
reporting requirements of this section will not apply to any United 
States person in respect of an eligible partnership as described in 
Sec. 1.761-2(a) if such partnership has validly elected to be excluded 
from all of the provisions of subchapter K of chapter 1 of the Internal 
Revenue Code in the manner specified in Sec. 1.761-2(b)(2)(i), or such 
partnership is deemed to have elected to be excluded from all of the 
provisions of subchapter K of chapter 1 of the Internal Revenue Code in 
accordance with the provisions of Sec. 1.761-2(b)(2)(ii).
    (f) Period covered by return. The information required under this 
section must be furnished for the tax year of the foreign partnership 
ending with or within the United States person's tax year. See section 
706 for rules regarding tax years of partnerships.
    (g) Contents of return--(1) Information required to be submitted by 
controlling fifty-percent partners and controlling ten-percent partners. 
All controlling fifty-percent partners and all controlling ten-percent 
partners must submit the following information on Form 8865 in the form 
and manner and to the extent prescribed by Form 8865 and its 
instructions--
    (i) The name, address, and taxpayer identification number (if any) 
of the foreign partnership of which the person qualified as a 
controlling fifty-percent partner or a controlling ten-percent partner;
    (ii) A statement of the income, gain, losses, deductions and credits 
allocated to the direct interest in the partnership of the person 
reporting under section 6038;
    (iii) A list of all partnerships (foreign or domestic) in which the 
foreign partnership owned a direct interest, or owned a constructive 
interest of ten percent of more under the rules of section 267(c)(1) or 
(5), during the partnership's tax year for which the Form 8865 is being 
filed;
    (iv) Information about all foreign entities that were disregarded as 
entities separate from their owner under Sec. Sec. 301.7701-2 and 
301.7701-3 that were owned by the foreign partnership during the 
partnership's tax year for which the Form 8865 is being filed;
    (v) A summary of the transactions that took place during the 
partnership's tax year between the partnership and the person filing the 
return, between the partnership and any other partnership of which the 
person filing the return is a controlling fifty-percent partner, and 
between the partnership and any corporation controlled (under section 
6038(e)(2) and the regulations thereunder) by the person filing the 
return; and
    (vi) Any other information that Form 8865 or its accompanying 
instructions require to be submitted.
    (2) Additional information required to be submitted by controlling 
fifty-percent partners. In addition to the information required pursuant 
to paragraph (g)(1) of this section, controlling fifty-percent partners 
must also submit the following information in the form and manner and to 
the extent required by Form 8865 and its instructions--
    (i) A list of the names, addresses and tax identification numbers 
(if any) of each United States person that owned a direct interest of 
ten percent or more in the partnership during the partnership's tax 
year, and of each United States and foreign person whose interests in 
the partnership the controlling fifty-percent partner constructively 
owned under paragraph (b)(4) of this section during the partnership's 
tax year;
    (ii) A list of transactions between the partnership and any United 
States person owning at the time of the transaction at least a 10-
percent direct interest (as defined in paragraph (b)(3) of this section) 
in the foreign partnership;
    (iii) A statement of the aggregate of the partners' distributive 
shares of items of income, gain, losses, deductions and credits;

[[Page 175]]

    (iv) A statement of income, gain, losses, deductions and credits 
allocated to each United States person holding a direct interest in the 
foreign partnership of ten percent or more; and
    (v) Any other information Form 8865 or its accompanying instructions 
require controlling fifty-percent partners to submit.
    (h) Method of reporting. Except as otherwise provided on Form 8865 
or the accompanying instructions, all amounts required to be furnished 
on Form 8865 must be expressed in United States dollars. All statements 
required on or with Form 8865 pursuant to this section must be in 
English.
    (i) Time and place for filing return--(1) In general. Form 8865 must 
be filed with the United States person's income tax return on or before 
the due date (including extensions) of that return. If the United States 
person is not required to file an income tax return for its tax year 
with which or within which the foreign partnership's tax year ends, but 
is required to file an information return for that year (for example, 
Form 1065, ``U.S. Partnership Return of Income,'' or Form 990, ``Return 
of Organization Exempt from Income Tax''), the Form 8865 must be filed 
with the United States person's information return filed on or before 
the due date (including extensions) of that return.
    (2) Duplicate return. If required by the instructions to Form 8865, 
a duplicate Form 8865 (including attachments and schedules) must also be 
filed.
    (j) Overlap with section 6031. A partner may be required to file 
Form 8865 under this section and the foreign partnership in which it is 
a partner may also be required to file a Form 1065 or Form 1065-B under 
section 6031(e) for the same partnership tax year. For cases where a 
United States person is a controlling fifty-percent partner or a 
controlling ten-percent partner with respect to a foreign partnership, 
and that foreign partnership completes and files Form 1065 or Form 1065-
B, the instructions for Form 8865 will specify the filing requirements 
that address this overlap in reporting obligations.
    (k) Failure to comply with reporting requirement--(1) In general. 
Any United States person required to file Form 8865 under Section 6038 
and this section that fails to comply (as defined in paragraph (k)(2) of 
this section) with the reporting requirements of this section, will be 
subject to the penalties described in paragraph (k)(3) of this section.
    (2) Failure to comply. A failure to comply is separately determined 
for each foreign partnership for which a United States person has a 
section 6038 reporting obligation. A failure to comply with the 
requirements of section 6038 includes the following--
    (i) The failure to report at the proper time and in the proper 
manner any information required to be reported under the rules of this 
section; or
    (ii) The provision of false or inaccurate information in purported 
compliance with the requirements of this section.
    (3) Penalties. A United States person that fails to comply (as 
defined in paragraph (k)(2) of this section) with the reporting 
requirements of this section must pay the following penalties, subject 
to the reasonable cause exception in paragraph (k)(4) of this section:
    (i) Dollar amount penalty--(A) $10,000 penalty. A penalty of $10,000 
shall be imposed for each tax year of each foreign partnership with 
respect to which a failure to comply occurs.
    (B) Increase in penalty. If a failure to comply with the applicable 
reporting requirements of section 6038 and this section continues for 
more than 90 days after the date on which the Commissioner or the 
Commissioner's delegate mails notice of the failure to the United States 
person required to file Form 8865, the person must pay an additional 
penalty of $10,000 for each 30-day period (or fraction thereof) during 
which the failure continues after the 90-day period has expired.
    (C) Limitation. The additional penalty imposed on any United States 
person by section 6038(b)(2) and paragraph (k)(3)(i)(B) of this section 
is limited to a maximum of $50,000 for each partnership for each tax 
year with respect to which the failure occurs.
    (ii) Penalty of reducing foreign tax credit--(A) Effect on foreign 
tax credit. Failure to comply with the reporting requirements of section 
6038 and this section may cause a reduction of foreign tax credits under 
section 901

[[Page 176]]

(taxes of foreign countries and of possessions of the United States). In 
applying section 901 to a United States person for any tax year with or 
within which its foreign partnership's tax year ended, the amount of 
taxes paid (and deemed paid under sections 902 and 960) by the United 
States person will be reduced by 10 percent if the person fails to 
comply. However, no tax deemed paid under section 904(c) will be reduced 
under the provisions of this paragraph (k)(3)(ii).
    (B) Reduction for continued failure. If a failure to comply with the 
reporting requirements of section 6038 and this section continues for 
more than 90 days after the date on which the Commissioner or the 
Commissioner's delegate mails notice of the failure to the person 
required to file Form 8865, then the amount of the reduction in 
paragraph (k)(3)(ii)(A) of this section will be 10 percent, plus an 
additional 5 percent for each 3-month period (or fraction thereof) 
during which the failure continues after the 90-day period has expired.
    (C) Limitation on reduction. The amount of the reduction under 
paragraphs (k)(3)(ii)(A) and (B) of this section for each failure to 
furnish information required under this section will not exceed the 
greater of $10,000, or the gross income of the foreign partnership for 
its tax year with respect to which the failure occurred.
    (D) Offset for dollar amount penalty imposed. The total amount of 
the reduction which, but for this paragraph (k)(3)(ii)(D), may be made 
under this paragraph (k)(3)(ii) with respect to any separate failure, 
may not exceed the maximum amount of the reductions that may be imposed, 
reduced (but not below zero) by the dollar amount penalty imposed by 
paragraph (k)(3)(i) of this section with respect to the failure.
    (4) Reasonable cause limitation. The time prescribed for filing a 
complete Form 8865, and the beginning of the 90-day period after the 
Commissioner or the Commissioner's delegate mails notice under 
paragraphs (k)(3)(i)(B) and (ii)(B) of this section, will be treated as 
being not earlier than the last day on which reasonable cause existed 
for failure to furnish the information. The United States person may 
show reasonable cause by providing a written statement to the 
Commissioner's delegate having jurisdiction over the person's return to 
which the Form 8865 should have been attached, setting forth the reasons 
for the failure to comply. Whether a failure to comply was due to 
reasonable cause will be determined by the Commissioner, or the 
Commissioner's delegate, under all the facts and circumstances.
    (5) Statute of limitations. For exceptions to the limitations on 
assessment in the event of a failure to provide information under 
section 6038, see section 6501(c)(8).
    (1) Effective date. Except as otherwise provided, this section shall 
apply for tax years of a foreign partnership ending on or after December 
31, 2000. For tax years of a foreign partnership ending before December 
23, 2002, see Sec. 1.6038-3(j) in effect prior to the amendments made 
by T.D. 9033 (see 26 CFR part 1 revised April 1, 2002).

[T.D. 8850, 64 FR 72550, Dec. 28, 1999, as amended by T.D. 9033, 67 FR 
78175, Dec. 23, 2002; T.D. 9065, 68 FR 39012, July 1, 2003]



Sec. 1.6038-4  Information returns required of certain United States
persons with respect to such person's U.S. multinational enterprise 
group.

    (a) Requirement of return. Except as provided in paragraph (h) of 
this section, every ultimate parent entity of a U.S. multinational 
enterprise (MNE) group must make an annual return on Form 8975, Country-
by-Country Report, setting forth the information described in paragraph 
(d) of this section, and any other information required by Form 8975, 
with respect to the reporting period described in paragraph (c) of this 
section.
    (b) Definitions--(1) Ultimate parent entity of a U.S. MNE group. An 
ultimate parent entity of a U.S. MNE group is a U.S. business entity 
that:
    (i) Owns directly or indirectly a sufficient interest in one or more 
other business entities, at least one of which is organized or tax 
resident in a tax jurisdiction other than the United States, such that 
the U.S. business entity is required to consolidate the accounts of the 
other business entities with its own accounts under U.S. generally 
accepted accounting principles,

[[Page 177]]

or would be so required if equity interests in the U.S. business entity 
were publicly traded on a U.S. securities exchange; and
    (ii) Is not owned directly or indirectly by another business entity 
that consolidates the accounts of such U.S. business entity with its own 
accounts under generally accepted accounting principles in the other 
business entity's tax jurisdiction of residence, or would be so required 
if equity interests in the other business entity were traded on a public 
securities exchange in its tax jurisdiction of residence.
    (2) Business entity. For purposes of this section, a business entity 
generally is any entity recognized for federal tax purposes that is not 
properly classified as a trust under Sec. 301.7701-4 of this chapter. 
However, any grantor trust within the meaning of section 671, all or a 
portion of which is owned by a person other an individual, is a business 
entity for purposes of this section. Additionally, the term business 
entity includes any entity with a single owner that may be disregarded 
as an entity separate from its owner under Sec. 301.7701-3 of this 
chapter and a permanent establishment, as defined in paragraph (b)(3) of 
this section, that prepares financial statements separate from those of 
its owner for financial reporting, regulatory, tax reporting, or 
internal management control purposes. A business entity does not include 
a decedent's estate or a bankruptcy estate described in section 1398.
    (3) Permanent establishment. For purposes of this section, the term 
permanent establishment includes:
    (i) A branch or business establishment of a constituent entity in a 
tax jurisdiction that is treated as a permanent establishment under an 
income tax convention to which that tax jurisdiction is a party;
    (ii) A branch or business establishment of a constituent entity that 
is liable to tax in the tax jurisdiction in which it is located pursuant 
to the domestic law of such tax jurisdiction; or
    (iii) A branch or business establishment of a constituent entity 
that is treated in the same manner for tax purposes as an entity 
separate from its owner by the owner's tax jurisdiction of residence.
    (4) U.S. business entity. A U.S. business entity is a business 
entity that is organized or has its tax jurisdiction of residence in the 
United States. For purposes of this section, foreign insurance companies 
that elect to be treated as domestic corporations under section 953(d) 
are U.S. business entities that have their tax jurisdiction of residence 
in the United States.
    (5) U.S. MNE group. A U.S. MNE group comprises the ultimate parent 
entity of a U.S. MNE group as defined in paragraph (b)(1) of this 
section and all of the business entities required to consolidate their 
accounts with the ultimate parent entity's accounts under U.S. generally 
accepted accounting principles, or that would be so required if equity 
interests in the ultimate parent entity were publicly traded on a U.S. 
securities exchange, regardless of whether any such business entities 
could be excluded from consolidation solely on size or materiality 
grounds.
    (6) Constituent entity. With respect to a U.S. MNE group, a 
constituent entity is any separate business entity of such U.S. MNE 
group, except that the term constituent entity does not include a 
foreign corporation or foreign partnership for which the ultimate parent 
entity is not required to furnish information under section 6038(a) 
(determined without regard to Sec. Sec. 1.6038-2(j) and 1.6038-3(c)) or 
any permanent establishment of such foreign corporation or foreign 
partnership.
    (7) Tax jurisdiction. For purposes of this section, a tax 
jurisdiction is a country or a jurisdiction that is not a country but 
that has fiscal autonomy. For purposes of this section, a U.S. territory 
or possession of the United States is considered to have fiscal 
autonomy.
    (8) Tax jurisdiction of residence. A business entity is considered a 
resident in a tax jurisdiction if, under the laws of that tax 
jurisdiction, the business entity is liable to tax therein based on 
place of management, place of organization, or another similar 
criterion. A business entity will not be considered a resident in a tax 
jurisdiction if the business entity is liable to tax in such tax 
jurisdiction only by reason of a tax imposed by reference to gross 
amounts of income without any reduction for

[[Page 178]]

expenses, provided such tax applies only with respect to income from 
sources in such tax jurisdiction or capital situated in such tax 
jurisdiction. If a business entity is resident in more than one tax 
jurisdiction, then the applicable income tax convention rules, if any, 
should be applied to determine the business entity's tax jurisdiction of 
residence. If a business entity is resident in more than one tax 
jurisdiction and no applicable income tax convention exists between 
those tax jurisdictions, or if the applicable income tax convention 
provides that the determination of residence is based on a determination 
by the competent authorities of the relevant tax jurisdictions and no 
such determination has been made, the business entity's tax jurisdiction 
of residence is the tax jurisdiction of the business entity's place of 
effective management determined in accordance with Article 4 of the 
Organisation for Economic Co-operation and Development Model Tax 
Convention on Income and on Capital 2014, or as provided by Form 8975. A 
corporation that is organized or managed in a tax jurisdiction that does 
not impose an income tax on corporations will be treated as resident in 
that tax jurisdiction, unless such corporation is treated as resident in 
another tax jurisdiction under another provision of this section. The 
tax jurisdiction of residence of a permanent establishment is the 
jurisdiction in which the permanent establishment is located. If a 
business entity does not have a tax jurisdiction of residence, then 
solely for purposes of paragraph (b)(1) of this section, the tax 
jurisdiction of residence is the business entity's country of 
organization.
    (9) Applicable financial statements. An applicable financial 
statement is a certified audited financial statement that is accompanied 
by a report of an independent certified public accountant or similarly 
qualified independent professional that is used for purposes of 
reporting to shareholders, partners, or similar persons; for purposes of 
reporting to creditors in connection with securing or maintaining 
financing; or for any other substantial non-tax purpose.
    (10) U.S. territory or possession of the United States. The term 
U.S. territory or possession of the United States means American Samoa, 
Guam, the Northern Mariana Islands, Puerto Rico, or the U.S. Virgin 
Islands.
    (11) U.S. territory ultimate parent entity. A U.S. territory 
ultimate parent entity is a business entity organized in a U.S. 
territory or possession of the United States that controls (as defined 
in section 6038(e)) a U.S. business entity and that is not owned 
directly or indirectly by another business entity that consolidates the 
accounts of the U.S. territory ultimate parent entity with its accounts 
under generally accepted accounting principles in the other business 
entity's tax jurisdiction of residence, or would be so required if 
equity interests in the other business entity were traded on a public 
securities exchange in its tax jurisdiction of residence.
    (c) Reporting period. The reporting period covered by Form 8975 is 
the period of the ultimate parent entity's applicable financial 
statement prepared for the 12-month period (or a 52-53 week period 
described in section 441(f)) that ends with or within the ultimate 
parent entity's taxable year. If the ultimate parent entity does not 
prepare an annual applicable financial statement, then the reporting 
period covered by Form 8975 is the 12-month period (or a 52-53 week 
period described in section 441(f)) that ends on the last day of the 
ultimate parent entity's taxable year.
    (d) Contents of return--(1) Constituent entity information. The 
return on Form 8975 must contain so much of the following information 
with respect to each constituent entity of the U.S. MNE group, and in 
such form or manner, as Form 8975 prescribes:
    (i) The complete legal name of the constituent entity;
    (ii) The tax jurisdiction, if any, in which the constituent entity 
is resident for tax purposes;
    (iii) The tax jurisdiction in which the constituent entity is 
organized or incorporated (if different from the tax jurisdiction of 
residence);
    (iv) The tax identification number, if any, used for the constituent 
entity by the tax administration of the constituent entity's tax 
jurisdiction of residence; and
    (v) The main business activity or activities of the constituent 
entity.

[[Page 179]]

    (2) Tax jurisdiction of residence information. The return on Form 
8975 must contain so much of the following information with respect to 
each tax jurisdiction in which one or more constituent entities of a 
U.S. MNE group is resident, presented as an aggregate of the information 
for the constituent entities resident in each tax jurisdiction, and in 
such form or manner, as Form 8975 prescribes:
    (i) Revenues generated from transactions with other constituent 
entities;
    (ii) Revenues not generated from transactions with other constituent 
entities;
    (iii) Profit or loss before income tax;
    (iv) Total income tax paid on a cash basis to all tax jurisdictions, 
and any taxes withheld on payments received by the constituent entities;
    (v) Total accrued tax expense recorded on taxable profits or losses, 
reflecting only operations in the relevant annual period and excluding 
deferred taxes or provisions for uncertain tax liabilities;
    (vi) Stated capital, except that the stated capital of a permanent 
establishment must be reported in the tax jurisdiction of residence of 
the legal entity of which it is a permanent establishment unless there 
is a defined capital requirement in the permanent establishment tax 
jurisdiction for regulatory purposes;
    (vii) Total accumulated earnings, except that accumulated earnings 
of a permanent establishment must be reported by the legal entity of 
which it is a permanent establishment;
    (viii) Total number of employees on a full-time equivalent basis; 
and
    (ix) Net book value of tangible assets, which, for purposes of this 
section, does not include cash or cash equivalents, intangibles, or 
financial assets.
    (3) Special rules--(i) Constituent entity with no tax jurisdiction 
of residence. The information listed in paragraph (d)(2) of this section 
also must be provided, in the aggregate, for any constituent entity or 
entities that have no tax jurisdiction of residence. In addition, if a 
constituent entity is an owner of a constituent entity that does not 
have a jurisdiction of tax residence, then the owner's share of such 
entity's revenues and profits will be aggregated with the information 
for the owner's tax jurisdiction of residence.
    (ii) Definition of revenue. For purposes of this section, the term 
revenue includes all amounts of revenue, including revenue from sales of 
inventory and property, services, royalties, interest, and premiums. The 
term revenue does not include payments received from other constituent 
entities that are treated as dividends in the payor's tax jurisdiction 
of residence. Distributions and remittances from partnerships and other 
fiscally transparent entities and permanent establishments that are 
constituent entities are not considered revenue of the recipient-owner. 
The term revenue also does not include imputed earnings or deemed 
dividends received from other constituent entities that are taken into 
account solely for tax purposes and that otherwise would be included as 
revenue by a constituent entity. With respect to a constituent entity 
that is an organization exempt from taxation under section 501(a) 
because it is an organization described in section 501(c), 501(d), or 
401(a), a state college or university described in section 511(a)(2)(B), 
a plan described in section 403(b) or 457(b), an individual retirement 
plan or annuity as defined in section 7701(a)(37), a qualified tuition 
program described in section 529, a qualified ABLE program described in 
section 529A, or a Coverdell education savings account described in 
section 530, the term revenue includes only revenue that is reflected in 
unrelated business taxable income as defined in section 512.
    (iii) Number of employees. For purposes of this section, the number 
of employees on a full-time equivalent basis may be reported as of the 
end of the accounting period, on the basis of average employment levels 
for the annual accounting period, or on any other reasonable basis 
consistently applied across tax jurisdictions and from year to year. 
Independent contractors participating in the ordinary operating 
activities of a constituent entity may be reported as employees of such 
constituent entity. Reasonable rounding or approximation of the number 
of employees is permissible, provided that such rounding or 
approximation does

[[Page 180]]

not materially distort the relative distribution of employees across the 
various tax jurisdictions. Consistent approaches should be applied from 
year to year and across entities.
    (iv) Income tax paid and accrued tax expense of permanent 
establishment. In the case of a constituent entity that is a permanent 
establishment, the amount of income tax paid and the amount of accrued 
tax expense referred to in paragraphs (d)(2)(iv) and (v) of this section 
should not include the income tax paid or tax expense accrued by the 
business entity of which the permanent establishment would be a part, 
but for the third sentence of paragraph (b)(2) of this section, in that 
business entity's tax jurisdiction of residence on the income derived by 
the permanent establishment.
    (v) Certain transportation income. If a constituent entity of a U.S. 
MNE group derives income from international transportation or 
transportation in inland waterways that is covered by income tax 
convention provisions that are specific to such income and under which 
the taxing rights on such income are allocated exclusively to one tax 
jurisdiction, then the U.S. MNE group should report the information 
required under paragraph (d)(2) of this section with respect to such 
income for the tax jurisdiction to which the relevant income tax 
convention provisions allocate these taxing rights.
    (e) Reporting of financial amounts--(1) Reporting in U.S. dollars 
required. All amounts furnished under paragraph (d)(2) of this section, 
other than paragraph (d)(2)(viii) of this section, must be expressed in 
U.S. dollars. If an exchange rate is used other than in accordance with 
U.S. generally accepted accounting principles for conversion to U.S. 
dollars, the exchange rate must be indicated.
    (2) Sources of financial amounts. All amounts furnished under 
paragraph (d)(2) of this section, other than paragraph (d)(2)(viii) of 
this section, should be based on applicable financial statements, books 
and records maintained with respect to the constituent entity, 
regulatory financial statements, or records used for tax reporting or 
internal management control purposes for an annual period of each 
constituent entity ending with or within the period described in 
paragraph (c) of this section.
    (f) Time and manner for filing. Returns on Form 8975 required under 
paragraph (a) of this section for a reporting period must be filed with 
the ultimate parent entity's income tax return for the taxable year, in 
or with which the reporting period ends, on or before the due date 
(including extensions) for filing that person's income tax return or as 
otherwise prescribed by Form 8975.
    (g) Maintenance of records. The U.S. person filing Form 8975 as an 
ultimate parent entity of a U.S. MNE group must maintain records to 
support the information provided on Form 8975. However, the U.S. person 
is not required to create and maintain records that reconcile the 
amounts provided on Form 8975 with the tax returns of any tax 
jurisdiction or applicable financial statements.
    (h) Exceptions to furnishing information. An ultimate parent entity 
of a U.S. MNE group is not required to report information under this 
section for the reporting period described in paragraph (c) of this 
section if the annual revenue of the U.S. MNE group for the immediately 
preceding reporting period was less than $850,000,000.
    (i) [Reserved]
    (j) U.S. territories and possessions of the United States. A U.S. 
territory ultimate parent entity may designate a U.S. business entity 
that it controls (as defined in section 6038(e)) to file Form 8975 on 
the U.S. territory ultimate parent entity's behalf with respect to such 
U.S. territory ultimate parent entity and the business entities that 
would be required to consolidate their accounts with such U.S. territory 
ultimate parent entity under U.S. generally accepted accounting 
principles, or would be so required if equity interests in the U.S. 
territory ultimate parent entity were publicly traded on a U.S. 
securities exchange.
    (k) Applicability dates. The rules of this section apply to 
reporting periods of ultimate parent entities of U.S. MNE groups that 
begin on or after the

[[Page 181]]

first day of a taxable year of the ultimate parent entity that begins on 
or after June 30, 2016.

[T.D. 9773, 81 FR 42489, June 30, 2016; 81 FR 64061, Sept. 19, 2016]



Sec. 1.6038-5  Information returns required of certain United States
persons to report amounts determined with respect to certain foreign
corporations for global intangible low-taxed income (GILTI) purposes.
          

    (a) Requirement of return. Except as provided in paragraph (d) of 
this section, each United States person who is a United States 
shareholder (as defined in section 951(b)) of any controlled foreign 
corporation (as defined in section 957) must make an annual return on 
Form 8992, ``U.S. Shareholder Calculation of Global Intangible Low-Taxed 
Income (GILTI),'' (or successor form) for each U.S. shareholder 
inclusion year (as defined in Sec. 1.951A-1(f)(7)) setting forth the 
information with respect to each such controlled foreign corporation, in 
such form and manner, as Form 8992 (or successor form) prescribes.
    (b) Time and manner for filing. Returns on Form 8992 (or successor 
form) required under paragraph (a) of this section for a taxable year 
must be filed with the United States person's income tax return on or 
before the due date (taking into account extensions) for filing that 
person's income tax return.
    (c) Failure to furnish information--(1) Penalties. If any person 
required to file Form 8992 (or successor form) under section 6038 and 
this section fails to furnish the information prescribed on Form 8992 
within the time prescribed by paragraph (b) of this section, the 
penalties imposed by section 6038(b) and (c) apply.
    (2) Increase in penalty. If a failure described in paragraph (c)(1) 
of this section continues for more than 90 days after the date on which 
the Director of Field Operations, Area Director, or Director of 
Compliance Campus Operations mails notice of such failure to the person 
required to file Form 8992, such person shall pay a penalty of $10,000, 
in addition to the penalty imposed by section 6038(b)(1), for each 30-
day period (or a fraction of) during which such failure continues after 
such 90-day period has expired. The additional penalty imposed by 
section 6038(b)(2) and this paragraph (c)(2) shall be limited to a 
maximum of $50,000 for each failure.
    (3) Reasonable cause--(i) For purposes of section 6038(b) and (c) 
and this section, the time prescribed for furnishing information under 
paragraph (b) of this section, and the beginning of the 90-day period 
after mailing of notice by the director under paragraph (c)(2) of this 
section, shall be treated as being not earlier than the last day on 
which reasonable cause existed for failure to furnish the information.
    (ii) To show that reasonable cause existed for failure to furnish 
information as required by section 6038 and this section, the person 
required to report such information must make an affirmative showing of 
all facts alleged as reasonable cause for such failure in a written 
statement containing a declaration that it is made under the penalties 
of perjury. The statement must be filed with the director where the 
return is required to be filed. The director shall determine whether the 
failure to furnish information was due to reasonable cause, and if so, 
the period of time for which such reasonable cause existed. In the case 
of a return that has been filed as required by this section except for 
an omission of, or error with respect to, some of the information 
required, if the person who filed the return establishes to the 
satisfaction of the director that the person has substantially complied 
with this section, then the omission or error shall not constitute a 
failure under this section.
    (d) Exception from filing requirement. Any United States person that 
does not own, within the meaning of section 958(a), stock of a 
controlled foreign corporation in which the United States person is a 
United States shareholder for a taxable year is not required to file 
Form 8992. For this purpose, whether a U.S. person owns, within the 
meaning of section 958(a), stock of a controlled foreign corporation is 
determined under Sec. 1.951A-1(e).
    (e) Applicability date. This section applies to taxable years of 
controlled foreign corporations beginning on or after October 3, 2018.

[T.D. 9866, 84 FR 29369, June 21, 2019]

[[Page 182]]



Sec. 1.6038A-0  Table of contents.

    This section lists the captions that appear in the regulations under 
section 6038A.

          Sec. 1.6038A-1 General requirements and definitions.

    (a) Purpose and scope.
    (b) In general.
    (c) Reporting corporation.
    (1) In general.
    (2) 25-percent foreign-owned.
    (3) 25-percent foreign shareholder.
    (i) In general.
    (ii) Total voting power and value.
    (iii) Direct 25-percent foreign shareholder.
    (iv) Indirect 25-percent foreign shareholder.
    (4) Application to prior open years.
    (5) Exceptions.
    (i) Treaty country residents having no permanent establishment.
    (ii) Qualified exempt shipping income.
    (iii) Status as a foreign related party.
    (d) Related party.
    (e) Attribution rules.
    (1) Attribution under section 318.
    (2) Attribution of transactions with related parties engaged in by a 
partnership.
    (f) Foreign person.
    (g) Foreign related party.
    (h) Small corporation exception.
    (i) Safe harbor for reporting corporations with related party 
transactions of de minimis value.
    (1) In general.
    (2) Aggregate value of gross payments made or received.
    (j) Related reporting corporations.
    (k) Consolidated return groups.
    (1) Required information.
    (2) Maintenance of records and authorization of agent.
    (3) Monetary penalties.
    (l) District Director.
    (m) Examples.
    (n) Effective dates.
    (1) Section 1.6038A-1.
    (2) Section 1.6038A-2.
    (3) Section 1.6038A-3.
    (4) Section 1.6038A-4.
    (5) Section 1.6038A-5.
    (6) Section 1.6038A-6.
    (7) Section 1.6038A-7.

                 Sec. 1.6038A-2 Requirement of return.

    (a) Form 5472 required.
    (1) In general.
    (2) Reportable transaction.
    (b) Contents of return.
    (1) Reporting corporation.
    (2) Related party.
    (3) Foreign related party transactions for which only monetary 
consideration is paid or received by the reporting corporation.
    (4) Foreign related party transactions involving nonmonetary 
consideration or less than full consideration.
    (5) Additional information.
    (6) Reasonable estimate.
    (i) Estimate within 25 percent of actual amount.
    (ii) Other estimates.
    (7) Small amounts.
    (8) Accrued payments and receipts.
    (9) Examples.
    (c) Method of reporting.
    (d) Time and place for filing returns.
    (e) Untimely filed return.
    (f) Exceptions.
    (1) No reportable transactions.
    (2) Transactions solely with a domestic reporting corporation.
    (3) Transactions with a corporation subject to reporting under 
section 6038.
    (4) Transactions with a foreign sales corporation.
    (g) Filing Form 5472 when transactions with related parties engaged 
in by a partnership are attributed to a reporting corporation.
    (h) Effective dates for certain reporting corporations.

                   Sec. 1.6038A-3 Record maintenance.

    (a) General maintenance requirements.
    (1) Section 6001 and section 6038A.
    (2) Safe harbor.
    (3) Examples.
    (b) Other maintenance requirements.
    (1) Indirectly related records.
    (2) Foreign related party or third-party maintenance.
    (3) Translation of records.
    (4) Exception for foreign governments.
    (c) Specific records to be maintained for safe harbor.
    (1) In general.
    (2) Descriptions of categories of documents to be maintained.
    (i) Original entry books and transaction records.
    (ii) Profit and loss statements.
    (iii) Pricing documents.
    (iv) Foreign country and third party filings.
    (v) Ownership and capital structure records.
    (vi) Records of loans, services, and other non-sales transactions.
    (3) Material profit and loss statements.
    (4) Existing records test.
    (5) Significant industry segment test.
    (i) In general.
    (ii) Form of the statements.
    (iii) Special rule for component sales.
    (iv) Level of specificity required.
    (v) Examples.
    (6) High profit test.
    (i) In general.
    (ii) Return on assets test.
    (iii) Additional rules.

[[Page 183]]

    (7) Definitions.
    (i) U.S.-connected products or services.
    (ii) Industry segment.
    (iii) Gross revenue of an industry segment.
    (iv) Identifiable assets of an industry segment.
    (v) Operating profit of an industry segment.
    (vi) Product.
    (vii) Related products or services.
    (viii) Model.
    (ix) Product line.
    (8) Example.
    (i) Facts.
    (ii) Existing records test.
    (iii) Significant industry segments.
    (iv) High profit test.
    (v) Material profit and loss statements.
    (d) Liability for certain partnership record maintenance.
    (e) Agreements with the District Director or the Assistant 
Commissioner (International).
    (1) In general.
    (2) Content of agreement.
    (i) In general.
    (ii) Significant industry segment test.
    (iii) Example.
    (3) Circumstances of agreement.
    (4) Agreement as part of APA process.
    (f) U.S. maintenance.
    (1) General rule.
    (2) Non-U.S. maintenance requirements.
    (3) Prior taxable years.
    (4) Scheduled production for high volume or other reasons.
    (5) Required U.S. maintenance.
    (g) Period of retention.
    (h) Application of record maintenance rules to banks and other 
financial institutions. [Reserved]
    (i) Effective dates.

                    Sec. 1.6038A-4 Monetary penalty.

    (a) Imposition of monetary penalty.
    (1) In general.
    (2) Liability for certain partnership transactions.
    (3) Calculation of monetary penalty.
    (b) Reasonable cause.
    (1) In general.
    (2) Affirmative showing required.
    (i) In general.
    (ii) Small corporations.
    (iii) Facts and circumstances taken into account.
    (c) Failure to maintain records or to cause another to maintain 
records.
    (d) Increase in penalty where failure continues after notification.
    (1) In general.
    (2) Additional penalty for another failure.
    (3) Cessation of accrual.
    (4) Continued failures.
    (e) Other penalties.
    (f) Examples.
    Example (1)--Failure to file Form 5472.
    Example (2)--Failure to maintain records.
    (g) Effective dates.

                 Sec. 1.6038A-5 Authorization of agent.

    (a) Failure to authorize.
    (b) Authorization by related party.
    (1) In general.
    (2) Authorization for prior years.
    (c) Foreign affiliated groups.
    (1) In general.
    (2) Application of noncompliance penalty adjustment.
    (d) Legal effect of authorization of agent.
    (1) Agent for purposes of commencing judicial proceedings.
    (2) Foreign related party found where reporting corporation found.
    (e) Successors in interest.
    (f) Deemed compliance.
    (1) In general.
    (2) Reason to know.
    (3) Effect of deemed compliance.
    (g) Effective dates.

             Sec. 1.6038A-6 Failure to furnish information.

    (a) In general.
    (b) Coordination with treaties.
    (c) Enforcement proceeding not required.
    (d) De minimis failure.
    (e) Suspension of statute of limitations.
    (f) Effective dates.

                     Sec. 1.6038A-7 Noncompliance.

    (a) In general.
    (b) Determination of the amount.
    (c) Separate application.
    (d) Effective dates.

[T.D. 8353, 56 FR 28060, June 19, 1991, as amended by T.D. 9796, 81 FR 
89850, Dec. 13, 2016]



Sec. 1.6038A-1  General requirements and definitions.

    (a) Purpose and scope. This section and Sec. Sec. 1.6038A-2 through 
1.6038A-7 provide rules for certain foreign-owned U.S. corporations and 
foreign corporations engaged in trade or business within the United 
States (reporting corporations) relating to information that must be 
furnished, records that must be maintained, and the authorization of the 
reporting corporation to act as agent for related foreign persons for 
purposes of sections 7602, 7603, and 7604 that must be executed. Section 
6038A(a) and this section require that a reporting corporation furnish 
certain information annually and maintain certain records relating to 
transactions between the reporting corporation and certain related 
parties. This section also provides definitions of terms used

[[Page 184]]

in section 6038A. Section 1.6038A-2 provides guidance concerning the 
information to be submitted and the filing of the required return. 
Section 1.6038A-3 provides guidance concerning the maintenance of 
records. Section 1.6038A-4 provides guidance concerning the application 
of the monetary penalty for the failure either to furnish information or 
to maintain records. Section 1.6038A-5 provides guidance concerning the 
authorization of an agent for purposes of sections 7602, 7603, and 7604. 
Section 1.6038A-6 provides guidance concerning the failure to furnish 
information requested by a summons. Finally, Sec. 1.6038A-7 provides 
guidance concerning the application of the noncompliance penalty for 
failure by the related party to authorize an agent or by the reporting 
corporation to substantially comply with a summons.
    (b) In general. A reporting corporation must furnish the information 
described in Sec. 1.6038A-2 by filing an annual information return 
(Form 5472 or any successor), and must maintain records as described in 
Sec. 1.6038A-3.
    (c) Reporting corporation--(1) In general. For purposes of section 
6038A, a reporting corporation is either a domestic corporation that is 
25-percent foreign-owned as defined in paragraph (c)(2) of this section, 
or a foreign corporation that is 25-percent foreign-owned and engaged in 
trade or business within the United States. After November 4, 1990, a 
foreign corporation engaged in a trade or business within the United 
States at any time during a taxable year is a reporting corporation. See 
section 6038C. A domestic business entity that is wholly owned by one 
foreign person and that is otherwise classified under Sec. 301.7701-
3(b)(1)(ii) of this chapter as disregarded as an entity separate from 
its owner is treated as an entity separate from its owner and classified 
as a domestic corporation for purposes of section 6038A. See Sec. 
301.7701-2(c)(2)(vi) of this chapter.
    (2) 25-percent foreign-owned. A corporation is 25-percent foreign-
owned if it has at least one direct or indirect 25-percent foreign 
shareholder at any time during the taxable year.
    (3) 25-percent foreign shareholder--(i) In general. A foreign person 
is a 25-percent foreign shareholder of a corporation if the person owns 
at least 25 percent of--
    (A) The total voting power of all classes of stock of the 
corporation entitled to vote, or
    (B) The total value of all classes of stock of the corporation.
    (ii) Total voting power and value. In determining whether one 
foreign person owns 25 percent of the total voting power of all classes 
of stock of a corporation entitled to vote or 25 percent of the total 
value of all classes of stock of a corporation, consideration will be 
given to all the facts and circumstances of each case, under principles 
similar to Sec. 1.957-1(b)(2) (consideration of arrangements to shift 
formal voting power away from a foreign person).
    (iii) Direct 25-percent foreign shareholder. A foreign person is a 
direct 25-percent foreign shareholder if it owns directly at least 25 
percent of the stock of the reporting corporation, either by vote or by 
value.
    (iv) Indirect 25-percent foreign shareholder. A foreign person is an 
indirect 25-percent foreign shareholder if it owns indirectly (or under 
the attribution rules of section 318 is considered to own indirectly) at 
least 25 percent of the stock of the reporting corporation, either by 
vote or by value.
    (4) Application to prior open years. For taxable years beginning 
before July 11, 1989, the definition of a reporting corporation under 
this paragraph applies in determining whether a foreign-owned 
corporation is a reporting corporation. An examination may be reopened 
if the statute of limitations period for that taxable year has not 
expired. A taxable year may not be reopened under section 6038A for 
examination purposes if the taxable year is open under section 6511 only 
for purposes of the carryback of net operating losses or net capital 
losses.
    (5) Exceptions--(i) Treaty country residents having no permanent 
establishment. A foreign corporation that has no permanent establishment 
in the United States under an applicable income tax convention is not a 
reporting corporation for purposes of section 6038A and this section. 
Accordingly, such a foreign corporation is not subject to Sec. Sec. 
1.6038A-2, 1.6038A-3, and 1.6038A-5. It

[[Page 185]]

must timely and fully provide the required notice to the Commissioner 
under section 6114. See section 6114 and the regulations thereunder for 
the notice that such a corporation must file and the applicable 
penalties for failure to file such notice.
    (ii) Qualified exempt shipping income. A foreign corporation whose 
gross income is exempt from U.S. taxation under section 883 is not a 
reporting corporation provided that it timely and fully complies with 
the reporting requirements required to claim such exemption. In the 
event that such a corporation does not timely and fully comply with the 
reporting requirements under sections 887 and 883, it will be a 
reporting corporation subject to section 6038A, including the 
application of the monetary penalty for failure to file required 
information.
    (iii) Status as foreign related party. Nothing in this paragraph 
affects the determination of whether a person is a foreign related party 
as defined in paragraph (g) of this section.
    (d) Related party. The term ``related party'' means--
    (1) Any direct or indirect 25-percent foreign shareholder of the 
reporting corporation,
    (2) Any person who is related within the meaning of sections 267(b) 
or 707(b)(1) to the reporting corporation or to a 25-percent foreign 
shareholder of the reporting corporation, or
    (3) Any other person who is related to the reporting corporation 
within the meaning of section 482 and the regulations thereunder. 
However, the term ``related party'' does not include any corporation 
filing a consolidated federal income tax return with the reporting 
corporation.
    (e) Attribution rules--(1) Attribution under section 318. For 
purposes of determining whether a corporation is 25-percent foreign-
owned and whether a person is a related party under section 6038A, the 
constructive ownership rules of section 318 shall apply, and the 
attribution rules of section 267(c) also shall apply to the extent they 
attribute ownership to persons to whom section 318 does not attribute 
ownership. However, ``10 percent'' shall be substituted for ``50 
percent'' in section 318(a)(2)(C), and section 318(a)(3) (A), (B), and 
(C) shall not be applied so as to consider a U.S. person as owning stock 
that is owned by a person who is not a U.S. person. Additionally, 
section 318(a)(3)(C) and Sec. 1.318-1(b) shall not be applied so as to 
consider a U.S. corporation as being a reporting corporation if, but for 
the application of such sections, the U.S. corporation would not be 25-
percent foreign owned.
    (2) Attribution of transactions with related parties engaged in by a 
partnership. The transactions in which a domestic or foreign partnership 
engages shall be attributed to any reporting corporation whose interest 
in the capital or profits of the partnership, either directly or 
indirectly, combined with the interests of all related parties of the 
reporting corporation partner, equals 25 percent or more of the total 
partnership interests. Attribution of such transactions shall be made 
only to the extent of the partnership interest held by that reporting 
corporation partner. See sections 875 and 702(a) and the regulations 
thereunder. (Attribution shall not be made however, of transactions 
directly between the partnership and a reporting corporation.) 
Accordingly, a reporting corporation partner that is deemed to engage in 
transactions with related parties under this rule is subject to the 
information reporting requirements of Sec. 1.6038A-2, to the record 
maintenance requirements of Sec. 1.6038A-3, to the monetary penalty 
under Sec. 1.6038A-4, to the requirement of authorization of agent 
under Sec. 1.6038A-5, to the rules of Sec. 1.6038A-6 relating to the 
requirement to produce records, and to the noncompliance penalty 
adjustment under Sec. 1.6038A-7.
    (f) Foreign person. For purposes of section 6038A, a foreign person 
is--
    (1) Any individual who is not a citizen or resident of the United 
States, but not including any individual for whom an election under 
section 6013 (g) or (h) (relating to an election to file a joint return) 
is in effect;
    (2) Any individual who is a citizen of any possession of the United 
States and who is not otherwise a citizen or resident of the United 
States;
    (3) Any partnership, association, company, or corporation that is 
not created or organized in the United

[[Page 186]]

States or under the law of the United States or any State thereof;
    (4) Any foreign trust or foreign estate, as defined in section 
7701(a)(31); or
    (5) Any foreign government (or agency or instrumentality thereof). 
To the extent that a foreign government is engaged in the conduct of 
commercial activity as defined under section 892 and the regulations 
thereunder, it will be treated as a foreign person under section 6038A 
and this section only for purposes of the information reporting 
requirements of Sec. 1.6038A-2. A foreign government will not be 
treated as a foreign related party for purposes of Sec. Sec. 1.6038A-3 
and 1.6038A-5.


For purposes of section 6038A, a possession of the United States shall 
be considered to be a foreign country.
    (g) Foreign related party. A foreign related party is a foreign 
person as defined under paragraph (f) of this section that is also a 
related party as defined under paragraph (d) of this section.
    (h) Small corporation exception. A reporting corporation (other than 
an entity that is a reporting corporation as a result of being treated 
as a corporation under Sec. 301.7701-2(c)(2)(vi) of this chapter) that 
has less than $10,000,000 in U.S. gross receipts for a taxable year is 
not subject to Sec. Sec. 1.6038A-3 and 1.6038A-5 for that taxable year. 
Such a corporation, however, remains subject to the information 
reporting requirements of Sec. 1.6038A-2 and the general record 
maintenance requirements of section 6001. For purposes of this 
paragraph, U.S. gross receipts includes all amounts received or accrued 
to the extent that such amounts are taken into account for the 
determination and computation of the gross income of the corporation. 
For purposes of this test, the U.S. gross receipts of all related 
reporting corporations shall be aggregated.
    (i) Safe harbor for reporting corporations with related party 
transactions of de minimis value--(1) In general. A reporting 
corporation (other than an entity that is a reporting corporation as a 
result of being treated as a corporation under Sec. 301.7701-
2(c)(2)(vi) of this chapter) is not subject to Sec. Sec. 1.6038A-3 and 
1.6038A-5 for any taxable year in which the aggregate value of all gross 
payments it makes to and receives from foreign related parties with 
respect to related party transactions (including monetary consideration, 
nonmonetary consideration, and the value of transactions involving less 
than full consideration) is not more than $5,000,000 and is less than 10 
percent of its U.S. gross income. Such a corporation, however, remains 
subject to the information reporting requirements of Sec. 1.6038A-2 and 
the general record maintenance requirements of section 6001. For 
purposes of this paragraph, U.S. gross income means the gross income 
reportable by the reporting corporation (or the aggregate gross income 
reportable by all related reporting corporations) for U.S. income tax 
purposes. Gross payments made to or received from foreign related 
parties cannot be netted; rather, the gross payments made to and 
received from foreign related parties are to be aggregated. Thus, for 
example, if a reporting corporation receives $4,700,000 of gross 
payments from a related party and makes $500,000 of gross payments to 
the same related party, it has aggregate gross payments of $5,200,000, 
and, therefore, does not qualify for the safe harbor under this 
paragraph.
    (2) Aggregate value of gross payments made or received. The 
aggregate value of gross payments made to (or received from) a foreign 
related party with respect to foreign related party transactions is 
determined by totaling the dollar amounts of foreign related party 
transactions as described in Sec. 1.6038A-2(b) (3) and (4) on all Forms 
5472 filed by the reporting corporation or related reporting 
corporations.
    (j) Related reporting corporations. A reporting corporation is 
related to another reporting corporation if it is related to that other 
reporting corporation under the principles described in paragraphs (d) 
and (e) of this section.
    (k) Consolidated return groups--(1) Required information. If a 
reporting corporation is a member of an affiliated group for which a 
U.S. consolidated income tax return is filed, the return requirement of 
Sec. 1.6038A-2 may be satisfied by filing a consolidated Form 5472. The 
common parent, as identified on Form 851, must attach a schedule to the 
consolidated Form 5472 stating

[[Page 187]]

which members of the U.S. affiliated group are reporting corporations 
under section 6038A, and which of those are joining in the consolidated 
Form 5472. The schedule must provide the name, address, and taxpayer 
identification number of each member whose transactions are included on 
the consolidated Form 5472. A member is not required to join in filing a 
consolidated Form 5472 merely because other members of the group choose 
to file one or more Forms 5472 on a consolidated basis.
    (2) Maintenance of records and authorization of agent. Either the 
common parent or the principal operating company of an affiliated group 
filing a consolidated income tax return may be authorized under Sec. 
1.6038A-5 to act as the agent for foreign related persons engaged in 
transactions with members of the group solely for purposes of section 
7602, 7603, and 7604 under section 6038A(e)(1) and Sec. 1.6038A-5. Each 
member of the group, however, must maintain the records required under 
section 6038A (a) and Sec. 1.6038A-3 relating to its related party 
transactions.
    (3) Monetary penalties. The common parent (or principal operating 
company) and all reporting corporations that join in the filing of a 
consolidated Form 5472 are liable jointly and severally for penalties 
for failure to file Form 5472 and for failure to mantain records under 
section 6038A(d) and Sec. 1.6038A-4(e). See Sec. 1.1502-77(a) 
regarding the scope of agency of the common parent corporation.
    (l) District Director. For purposes of the regulations under section 
6038A, the term ``District Director'' means any District Director, or 
the Assistant Commissioner (International) when performing duties 
similar to those of a District Director with respect to any person over 
which the Assistant Commissioner (International) has appropriate 
jurisdiction.
    (m) Examples. The following examples illustrate the rules of this 
section.

    Example 1. P, a U.S. partnership that is engaged in a U.S. trade or 
business, is 75 percent owned by FC1, a foreign corporation that, in 
turn, is wholly owned by another foreign corporation, FC2. The remaining 
25 percent of P is owned by Corp, a domestic corporation, that is wholly 
owned by FC3. P engages in transactions solely with FC2 and FC3. These 
transactions are attributed to FC1 and Corp. Under section 875, FC1 is 
considered as being engaged in a U.S. trade or business. For purposes of 
section 6038A and this section, FC1 and Corp are reporting corporations 
and must report their pro rata shares of the value of the transactions 
with FC2 and FC3. Thus, Corp must report 25 percent of P's transactions 
with FC3 and FC1 must report 75 percent of P's transactions with FC2.
    Example 2. FC2 and FC3 are both foreign corporations that are wholly 
owned by FC1, also a foreign corporation. FC2 engages in a trade or 
business in the United States through a branch. The branch engages in 
related party transactions with FC1. FC2 is a reporting corporation. FC3 
is a foreign related party. FC1 is a direct 25-percent foreign 
shareholder of both FC2 and FC3. Neither FC1 nor FC3 is a reporting 
corporation.
    Example 3. FC1 owns 25 percent of total voting power in each of FC2 
and FC3. FC2 and FC3 each own 20 percent of the total voting power of 
Corp, a domestic corporation. The remaining stock of Corp is owned by an 
unrelated domestic corporation. Neither FC2 nor FC3 is engaged in a U.S. 
trade or business. Under section 318(a)(2)(C) and paragraph (e) of this 
section, FC1 constructively owns its proportionate share of the stock of 
Corp owned directly by FC2 and FC3. Thus, FCl is treated as 
constructively owning five percent of Corp through each of FC2 and FC3 
or a total of 10 percent of the Corp stock. Consequently, Corp is not a 
reporting corporation because no 25 percent shareholder exists.
    Example 4. FP owns 100 percent of FCl which, in turn, owns 100 
percent of FC2. FC2 owns 100 percent of FC3 which owns 100 percent of 
RC. FP, FC1, and FC2 are indirect 25-percent foreign shareholders of RC, 
and FC3 is a direct 25-percent foreign shareholder.
    Example 5. FP owns 100 percent of USS, a U.S. corporation, and 25 
percent of FS, a foreign corporation. The remaining 75 percent of FS is 
publicly owned by numerous small shareholders. Sales transactions occur 
between USS and FS. Applying the rules of this section, USS is a 
reporting corporation. It is determined that USS and FS are each 
controlled by FP under section 482 and the regulations thereunder. 
Therefore, FS is related to USS within the meaning of section 482 and is 
a related party to USS. Accordingly, the sales transactions between USS 
and FS are subject to section 6038A.
    Example 6. The facts are the same as in Example 5, except that the 
remaining 75 percent of FS is owned by one shareholder that is unrelated 
to the FP group and it is determined that FS is not controlled by FP for 
purposes of section 482. Under these facts, FS is not a related party of 
either FP or USS. Accordingly, section 6038A does not apply to the sales 
transactions between FS and USS.

[[Page 188]]

    Example 7. P, a U.S. multinational, is a holding company that wholly 
owns X, a U.S. operating company, which in turn wholly owns FS, a 
controlled foreign corporation. Applying the rule of section 
318(a)(3)(C), FS is deemed to own the stock of X that is actually held 
by P. However, under the rules of paragraph (e) of this section, X will 
not be a reporting corporation by reason of section 318.

    (n) Effective dates--(1) Section 1.6038A-1. Paragraphs (c) (relating 
to the definition of a reporting corporation), (d) (relating to the 
definition of a related party), (e)(1) (relating to the application of 
section 318), and (f) (relating to the definition of a foreign person) 
of this section are effective for taxable Years beginning after July 10, 
1989. The remaining paragraphs of this section are effective December 
10, 1990, without regard to when the taxable year began. However, Sec. 
1.6038A-1 as it applies to entities that are reporting corporations as a 
result of being treated as a corporation under Sec. 301.7701-
2(c)(2)(vi) of this chapter applies to taxable years of such reporting 
corporations beginning after December 31, 2016, and ending on or after 
December 13, 2017.
    (2)(Section 1.6038A-2--(i) In general. Section 1.6038A-2 (relating 
to the requirement to file Form 5472) generally applies for taxable 
years beginning after July 10, 1989. However, Sec. 1.6038A-2 as it 
applies to reporting corporations whose sole trade or business in the 
United States is a banking, financing, or similar business as defined in 
Sec. 1.864-4(c)(5)(i) applies for taxable years beginning after 
December 10, 1990. Section 1.6038A-2(d) applies for taxable years ending 
on or after June 10, 2011. For taxable years ending on or after June 10, 
2011, but before December 24, 2014, see Sec. 1.6038A-2(e) as contained 
in 26 CFR part 1 revised as of April 1, 2014. For taxable years ending 
before June 10, 2011, see Sec. 1.6038A-2(d) and (e) as contained in 26 
CFR part 1 revised as of April 1, 2011. Section 1.6038A-2 as it applies 
to entities that are reporting corporations as a result of being treated 
as a corporation under Sec. 301.7701-2(c)(2)(vi) of this chapter 
applies to taxable years of such reporting corporations beginning after 
December 31, 2016, and ending on or after December 13, 2017. Section 
1.6038A-2(a)(3), (b)(6), and (b)(7) apply to taxable years ending on or 
after December 17, 2018. However, taxpayers may apply these final 
regulations in their entirety for taxable years ending before December 
17, 2018.
    (ii) Transition rule. No penalty under sections 6038A(d) or 6038C(c) 
will apply to a failure solely under Sec. 1.6038A-2(a)(3), (b)(6), or 
(b)(7) that is corrected by March 6, 2020.
    (3) Section 1.6038A-4. Section 1.6038A-4 (relating to the monetary 
penalty) is generally effective for taxable years beginning after July 
10, 1989, for the failure to file Form 5472. For the failure to maintain 
records or the failure to produce documents under Sec. 1.6038A-4(f)(2), 
the section is effective December 10, 1990, without regard to when the 
taxable year to which the records relate began. For taxable years ending 
on or before December 31, 2017, see Sec. 1.6038A-4 as contained in 26 
CFR part 1 revised as of April 1, 2018.
    (4) Section 1.6038A-5. Section 1.6038A-5 (relating to the 
authorization of agent requirement) is effective December 10, 1990, 
without regard to when the taxable year to which the records relate 
began.
    (5) Section 1.6038A-6. Section 1.6038A-6 (relating to the failure to 
furnish information under a summons) is effective November 6, 1990, 
without regard to when the taxable year to which the summons relates 
began.
    (6) Section 1.6038A-7. Section 1.6038A-7 (relating to the 
noncompliance penalty adjustment) is effective December 10, 1990, 
without regard to when the taxable year began.

[T.D. 8353, 56 FR 28061, June 19, 1991; T.D. 8353, 56 FR 41792, Aug. 23, 
1991, as amended by T.D. 9161, 69 FR 55500, Sept. 15, 2004; T.D. 9456, 
74 FR 38875, Aug. 4, 2009; T.D. 9529, 76 FR 33999, June 10, 2011; T.D. 
9667, 78 FR 32644, June 6, 2014; T.D. 9707, 79 FR 77388, Dec. 24, 2014; 
T.D. 9796, 81 FR 89850, Dec. 13, 2016; T.D. 9885, 84 FR 67044, Dec. 6, 
2019]



Sec. 1.6038A-2  Requirement of return.

    (a) Forms required--(1) Form 5472. Each reporting corporation as 
defined in Sec. 1.6038A-1(c) (or members of an affiliated group filing 
together as described in Sec. 1.6038A-1(k)) shall make a separate 
annual information return on Form 5472 with respect to each related 
party as defined in Sec. 1.6038A-1(d) with which the reporting 
corporation (or any

[[Page 189]]

group member joining in a consolidated Form 5472) has had any reportable 
transaction during the taxable year. The information required by section 
6038A and this section must be furnished even though it may not affect 
the amount of any tax due under the Code.
    (2) Reportable transaction. A reportable transaction is any 
transaction of the types listed in paragraphs (b)(3) and (4) of this 
section, and, in the case of a reporting corporation that is an 
applicable taxpayer, as defined under Sec. 1.59A-2(b), any other 
arrangement that, to prevent avoidance of the purposes of section 59A, 
is identified on Form 5472 as a reportable transaction. However, except 
as the Secretary may prescribe otherwise for an applicable taxpayer, the 
transaction is not a reportable transaction if neither party to the 
transaction is a United States person as defined in section 7701(a)(30) 
(which, for purposes of section 6038A, includes an entity that is a 
reporting corporation as a result of being treated as a corporation 
under Sec. 301.7701-2(c)(2)(vi) of this chapter) and the transaction--
    (i) Will not generate in any taxable year gross income from sources 
within the United States or income effectively connected, or treated as 
effectively connected, with the conduct of a trade or business within 
the United States, and
    (ii) Will not generate in any taxable year any expense, loss, or 
other deduction that is allocable or apportionable to such income.
    (3) Form 8991. Each reporting corporation that is an applicable 
taxpayer, as defined under Sec. 1.59A-2(b), must make an annual 
information return on Form 8991. The obligation of an applicable 
taxpayer to report on Form 8991 does not depend on applicability of tax 
under section 59A or obligation to file Form 5472.
    (b) Contents of return--(1) Reporting corporation. Form 5472 must 
provide the following information in the manner the form prescribes with 
respect to each reporting corporation:
    (i) Its name, address (including mailing code), and U.S. taxpayer 
identification number; each country in which the reporting corporation 
files an income tax return as a resident under the tax laws of that 
country; its country or countries of organization, and incorporation; 
its total assets for U.S. reporting corporation; the places where it 
conducts its business; and its principal business activity.
    (ii) The name, address, and U.S. taxpayer identification number, if 
applicable, of all its direct and indirect foreign shareholders (for an 
indirect 25-percent foreign shareholder, explain the attribution of 
ownership); whether any 25-percent foreign shareholder is a surrogate 
foreign corporation under section 7874(a)(2)(B) or a member of an 
expanded affiliated group as defined in section 7874(c)(1); each country 
in which each 25-percent foreign shareholder files an income tax return 
as a resident under the tax laws of that country; the places where each 
25-percent shareholder conducts its business; and the country or 
countries of organization, citizenship, and incorporation of each 25-
percent foreign shareholder.
    (iii) The number of Forms 5472 filed for the taxable year and the 
aggregate value in U.S. dollars of gross payments as defined in Sec. 
1.6038A-1(h)(2) made with respect to all foreign related party 
transactions reported on all Forms 5472.
    (2) Related party. The reporting corporation must provide 
information on Form 5472, set forth in the manner the form prescribes, 
about each related party, whether foreign or domestic, with which the 
reporting corporation had a transaction of the types described in 
paragraphs (b) (3) and (4) of this section during its taxable year, 
including the following information:
    (i) The name, U.S. taxpayer identification number, if applicable, 
and address of the related party.
    (ii) The nature of the reated party's business and the principal 
place or places where it conducts its business.
    (iii) Each country in which the related party files an income tax 
return as a resident under the tax laws of that country.
    (iv) The relationship of the reporting corporation to the related 
party (including, to the extent the form may prescribe, any intermediate 
relationships).

[[Page 190]]

    (3) Foreign related party transactions for which only monetary 
consideration is paid or received by the reporting corporation. If the 
related party is a foreign person, the reporting corporation must set 
forth on Form 5472 the dollar amounts of all reportable transactions for 
which monetary consideration (including U.S. and foreign currency) was 
the sole consideration paid or received during the taxable year of the 
reporting corporation. The total amount of such transactions, as well as 
the separate amounts for each type of transaction described below, and, 
to the extent the form may prescribe, any further description, 
categorization, or listing of transactions within these types, must be 
reported on Form 5472, in the manner the form or its instructions may 
prescribe. Where actual amounts are not determinable, a reasonable 
estimate (as described in paragraph (b)(6) of this section) is 
permitted. The types of transactions described in this paragraph are:
    (i) Sales and purchases of stock in trade (inventory);
    (ii) Sales and purchases of tangible property other than stock in 
trade;
    (iii) Rents and royalties paid and received (other than amounts 
reported under paragraph (b)(3)(iv) of this section);
    (iv) Sales, purchases, and amounts paid and received as 
consideration for the use of all intangible property, including (but not 
limited to) copyrights, designs, formulas, inventions, models, patents, 
processes, trademarks, and other similar intangible property rights;
    (v) Consideration paid and received for technical, managerial, 
engineering, construction, scientific, or other services;
    (vi) Commissions paid and received;
    (vii) Amounts loaned and borrowed (except open accounts resulting 
from sales and purchases reported under other items listed in this 
paragraph (b)(3) that arise and are collected in full in the ordinary 
course of business), to be reported as monthly averages or outstanding 
balances at the beginning and end of the taxable year, as the form shall 
prescribe;
    (viii) Interest paid and received;
    (ix) Premiums paid and received for insurance and reinsurance;
    (x) Other amounts paid or received not specifically identified in 
this paragraph (b)(3) to the extent that such amounts are taken into 
account for the determination and computation of the taxable income of 
the reporting corporation; and
    (xi) With respect to an entity that is a reporting corporation as a 
result of being treated as a corporation under Sec. 301.7701-
2(c)(2)(vi) of this chapter, any other transaction as defined by Sec. 
1.482-1(i)(7), such as amounts paid or received in connection with the 
formation, dissolution, acquisition and disposition of the entity, 
including contributions to and distributions from the entity.
    (4) Foreign related party transactions involving nonmonetary 
consideration or less than full consideration. If the related party is a 
foreign person, the reporting corporation must provide on Form 5472 a 
description of any reportable transaction, or group of reportable 
transactions, listed in paragraph (b)(3) of this section, for which any 
part of the consideration paid or received was not monetary 
consideration, or for which less than full consideration was paid or 
received. A description required under paragraph (b)(4) of this section 
shall include sufficient information from which to determine the nature 
and approximate monetary value of the transaction or group of 
transactions, and shall include:
    (i) A description of all property (including monetary 
consideration), rights, or obligations transferred from the reporting 
corporation to the foreign related party and from the foreign related 
party to the reporting corporation;
    (ii) A description of all services performed by the reporting 
corporation for the foreign related party and by the foreign related 
party for the reporting corporation; and
    (iii) A reasonable estimate of the fair market value of all 
properties and services exchanged, if possible, or some other reasonable 
indicator of value.


If, for any transaction, the entire consideration received includes both 
tangible and intangible property and the consideration paid is solely 
monetary

[[Page 191]]

consideration, the transaction should be reported under paragraph (b)(3) 
of this section if the intangible property was related and incidental to 
the transfer of the tangible property (for example, a right to warranty 
services.)
    (5) Additional information. In addition to the information required 
under paragraphs (b) (3) and (4) of this section, a reporting 
corporation must provide on Form 5472, in the manner the form 
prescribes, the following information:
    (i) If the reporting corporation imports goods from a foreign 
related party, whether the costs taken into account in computing the 
basis or inventory cost of such goods are greater than the costs taken 
into account in computing the valuation of the goods for customs 
purposes, adjusted pursuant to section 1059A and the regulations 
thereunder, and if so, the reasons for the difference.
    (ii) If the costs taken into account in computing the basis or 
inventory cost of such goods are greater than the costs taken into 
account in computing the valuation of the goods for customs purposes, 
whether the documents supporting the reporting corporation's treatment 
of the items set forth in paragraph (b)(5)(i) of this section are in 
existence and available in the United States at the time Form 5472 is 
filed.
    (6) Compilation of reportable transactions across multiple related 
parties. A reporting corporation must, to the extent and in the manner 
Form 5472 or its instructions may prescribe, include a schedule 
tabulating information with respect to related parties for which the 
reporting corporation is required to file Forms 5472. The schedule will 
not require information (beyond totaling) that is not required for the 
individual Forms 5472. The schedule may include the following:
    (i) The identity and status of the related parties;
    (ii) The reporting corporation's relationship to the related 
parties;
    (iii) The reporting corporation's reportable transactions with the 
related parties; and
    (iv) Other items required to be reported on Form 5472.
    (7) Information on Form 5472 and Form 8991 regarding base erosion 
payments. If any reporting corporation is an applicable taxpayer, as 
defined under Sec. 1.59A-2(b), it must report the information required 
by Form 8991 and by any Form 5472 it is required to file (including the 
information required by their accompanying instructions), regarding:
    (i) Determination of whether a taxpayer is an applicable taxpayer;
    (ii) Computation of base erosion minimum tax amount, including 
computation of regular tax liability as adjusted for purposes of 
computing base erosion minimum tax amount;
    (iii) Computation of modified taxable income;
    (iv) Base erosion tax benefits;
    (v) Base erosion percentage calculation;
    (vi) Base erosion payments;
    (vii) Amounts with respect to services as described in Sec. 1.59A-
3(b)(3)(i), including a breakdown of the amount of the total services 
cost and any mark-up component;
    (viii) Arrangements or transactions described in Sec. 1.59A-9;
    (ix) Any qualified derivative payment, including:
    (A) The aggregate amount of qualified derivative payments for the 
taxable year; and
    (B) A representation that all payments satisfy the requirements of 
Sec. 1.59A-6(b)(2); and
    (x) Any other information necessary to carry out section 59A.
    (8) Reasonable estimate--(i) Estimate within 25 percent of actual 
amount. Any amount reported under this section is considered to be a 
reasonable estimate if it is at least 75 percent and not more than 125 
percent of the actual amount.
    (ii) Other estimates. If any amount reported under this paragraph 
(b) of this section fails to meet the reasonable estimate test of 
paragraph (b)(6)(i) of this section, the reporting corporation 
nevertheless may show that such amount is a reasonable estimate by 
making an affirmative showing of relevant facts and circumstances in a 
written statement containing a declaration that it is made under the 
penalties of perjury. The District Director shall determine whether the 
amount reported was a reasonable estimate.
    (9) Small amounts. If any actual amount required under this section

[[Page 192]]

does not exceed $50,000, the amount may be reported as ``$50,000 or 
less.''
    (10) Accrued payments and receipts. For purposes of this section, a 
reporting corporation that uses an accrual method of accounting shall 
use accrued payments and accrued receipts for purposes of computing the 
total amount of each of the types of transactions listed in this 
section.
    (11) Examples. The following examples illustrate the application of 
paragraph (b)(3) of this section:

    Example 1. (i) In year 1, W, a foreign corporation, forms and 
contributes assets to X, a domestic limited liability company that does 
not elect to be treated as a corporation under Sec. 301.7701-3(c) of 
this chapter. In year 2, W contributes funds to X. In year 3, X makes a 
payment to W. In year 4, X, in liquidation, distributes its assets to W.
    (ii) In accordance with Sec. 301.7701-3(b)(1)(ii) of this chapter, 
X is disregarded as an entity separate from W. In accordance with Sec. 
301.7701-2(c)(2)(vi) of this chapter, X is treated as an entity separate 
from W and classified as a domestic corporation for purposes of section 
6038A. In accordance with paragraphs (a)(2) and (b)(3) of this section, 
each of the transactions in years 1 through 4 is a reportable 
transaction with respect to X. Therefore, X has a section 6038A 
reporting and record maintenance requirement for each of those years.
    Example 2. (i) The facts are the same as in Example 1 of this 
paragraph (b)(9) except that, in year 1, W also forms and contributes 
assets to Y, another domestic limited liability company that does not 
elect to be treated as a corporation under Sec. 301.7701-3(c) of this 
chapter. In year 1, X and Y form and contribute assets to Z, another 
domestic limited liability company that does not elect to be treated as 
a corporation under Sec. 301.7701-3(c) of this chapter. In year 2, X 
transfers funds to Z. In year 3, Z makes a payment to Y. In year 4, Z 
distributes its assets to X and Y in liquidation.
    (ii) In accordance with Sec. 301.7701-3(b)(1)(ii) of this chapter, 
Y and Z are disregarded as entities separate from each other, W, and X. 
In accordance with Sec. 301.7701-2(c)(2)(vi) of this chapter, Y, Z and 
X are treated as entities separate from each other and W, and are 
classified as domestic corporations for purposes of section 6038A. In 
accordance with paragraph (b)(3) of this section, each of the 
transactions in years 1 through 4 involving Z is a reportable 
transaction with respect to Z. Similarly, W's contribution to Y and Y's 
contribution to Z in year 1, the payment to Y in year 3, and the 
distribution to Y in year 4 are reportable transactions with respect to 
Y. Moreover, X's contribution to Z in Year 1, X's funds transfer to Z in 
year 2, and the distribution to X in year 4 are reportable transactions 
with respect to X. Therefore, Z has a section 6038A reporting and record 
maintenance requirement for years 1 through 4; Y has a section 6038A 
reporting and record maintenance requirement for years 1, 3, and 4; and 
X has a section 6038A reporting and record maintenance requirement in 
years 1, 2, and 4 in addition to its section 6038A reporting and record 
maintenance described in Example 1 of this paragraph (b)(9).

    (c) Method of reporting. All statements required on or with the Form 
5472 or Form 8991 under this section and Sec. 1.6038A-5 must be in the 
English language. All amounts required to be reported under paragraph 
(b) of this section must be expressed in United States currency, with a 
statement of the exchange rates used, and, to the extent the forms may 
require, must indicate the method by which the amount of a reportable 
transaction or item was determined.
    (d) Time for filing returns.A Form 5472 and Form 8991 required under 
this section must be filed with the reporting corporation's income tax 
return for the taxable year by the due date (including extensions) of 
that return. In the case of an entity that is a reporting corporation as 
a result of being treated as a corporation under Sec. 301.7701-
2(c)(2)(vi) of this chapter, Form 5472 must be filed at such time and in 
such manner as the Commissioner may prescribe in forms or instructions.
    (e) Exceptions--(1) No reportable transactions. A reporting 
corporation is not required to file Form 5472 if it has no transactions 
of the types listed in paragraphs (b) (3) and (4) of this section during 
the taxable year with any related party.
    (2) Transactions solely with a domestic reporting corporation. If 
all of a foreign reporting corporation's reportable transactions are 
with one or more related domestic reporting corporations that are not 
members of the same affiliated group, the foreign reporting corporation 
shall furnish on Form 5472 only the information required under 
paragraphs (b) (1) and (2) of this section, if the domestic reporting 
corporations provide the information required under paragraphs (b) (3) 
through (5) of this section. Such a foreign reporting corporation 
nonetheless is subject to the record maintenance requirements

[[Page 193]]

of Sec. 1.6038A-3 and the requirements of Sec. Sec. 1.6038A-5 and 
1.6038A-6. The name, address, and taxpayer identification number of each 
domestic reporting corporation that provided such information must be 
indicated on Form 5472 in the space provided for the information under 
paragraphs (b) (1) and (2) of this section.
    (3) Transactions with a corporation subject to reporting under 
section 6038. A reporting corporation (other than an entity that is a 
reporting corporation as a result of being treated as a corporation 
under Sec. 301.7701-2(c)(2)(vi) of this chapter) is not required to 
make a return of information on Form 5472 with respect to a related 
foreign corporation for a taxable year for which a U.S. person that 
controls the foreign related corporation makes a return of information 
on Form 5471 that is required under section 6038 and this section, if 
that return contains information required under Sec. 1.6038-2(f)(11) 
with respect to the reportable transactions between the reporting 
corporation and the related corporation for that taxable year. Such a 
reporting corporation also is not subject to Sec. Sec. 1.6038A-3 and 
1.6038A-5. It remains subject to the general record maintenance 
requirements of section 6001.
    (4) Transactions with a foreign sales corporation. A reporting 
corporation (other than an entity that is a reporting corporation as a 
result of being treated as a corporation under Sec. 301.7701-
2(c)(2)(vi) of this chapter) is not required to make a return of 
information on Form 5472 with respect to a related corporation that 
qualifies as a foreign sales corporation for a taxable year for which 
the foreign sales corporation files Form 1120-FSC.
    (f) Filing Form 5472 when transactions with related parties engaged 
in by a partnership are attributed to a reporting corporation. If 
transactions engaged in by a partnership are attributed under Sec. 
1.6038A-1(e)(2) to a reporting corporation, the reporting corporation 
need report on Form 5472 only the percentage of the value of the 
transaction or transactions equal to the percentage of its partnership 
interest. Thus, for example, if a partnership buys $1000 of widgets from 
the foreign parent of a reporting corporation whose partnership interest 
in the partnership equals 50 percent of the partnership interests (and 
the remaining 50 percent is held by unrelated parties), the reporting 
corporation must report $500 of purchases from a foreign related party 
on Form 5472.
    (g) Effective/applicability date. Except as otherwise provided, for 
applicability dates for this section for certain reporting corporations, 
see Sec. 1.6038A-1(n). Paragraph (b)(10) of this section applies with 
respect to information for annual accounting periods beginning on or 
after June 21, 2006. Paragraph (b)(7)(ix) of this section applies to 
taxable years beginning on or after June 7, 2021. Before these final 
regulations are applicable, a taxpayer will be treated as satisfying the 
reporting requirement described in Sec. 1.59A-6(b)(2) only to the 
extent that it reports the aggregate amount of qualified derivative 
payments on Form 8991. See Sec. 1.59A-6(b)(2)(iv) (transition period 
for qualified derivative payment reporting).

[T.D. 8353, 56 FR 28063, June 19, 1991, as amended by T.D. 9113, 69 FR 
5932, Feb. 9, 2004; T.D. 9161, 69 FR 55500, Sept. 15, 2004; T.D. 9268, 
71 FR 35526, June 21, 2006; T.D. 9338, 72 FR 38476, July 13, 2007; T.D. 
9529, 76 FR 33999, June 10, 2011; T.D. 9667, 78 FR 32645, June 6, 2014; 
T.D. 9707, 79 FR 77389, Dec. 24, 2014; T.D. 9796, 81 FR 89851, Dec. 13, 
2016; T.D. 9885, 84 FR 67044, Dec. 6, 2019; T.D. 9885, 85 FR 9370, Feb. 
19, 2020]



Sec. 1.6038A-3  Record maintenance.

    (a) General maintenance requirements--(1) Section 6001 and section 
6038A. A reporting corporation must keep the permanent books of account 
or records as required by section 6001 that are sufficient to establish 
the correctness of the federal income tax return of the corporation, 
including information, documents, or records (``records'') to the extent 
they may be relevant to determine the correct U.S. tax treatment of 
transactions with related parties. Under section 6001, the District 
Director may require any person to make such returns, render such 
statements, or keep such specific records as will enable the District 
Director to determine whether or not that person is liable for any of 
the taxes to which the regulations under part I have application. See

[[Page 194]]

section 6001 and the regulations thereunder. Such records must be 
permanent, accurate, and complete, and must clearly establish income, 
deductions, and credits. Additionally, in appropriate cases, such 
records include sufficient relevant cost data from which a profit and 
loss statement may be prepared for products or services transferred 
between a reporting corporation and its foreign related parties. This 
requirement includes records of the reporting corporation itself, as 
well as to records of any foreign related party that may be relevant to 
determine the correct U.S. tax treatment of transactions between the 
reporting corporation and foreign related parties. The relevance of such 
records with respect to related party transactions shall be determined 
upon the basis of all the facts and circumstances. Section 6038A and 
this section provide detailed guidance regarding the required 
maintenance of records with respect to such transactions and specify 
penalties for noncompliance. Banks and other financial institutions 
shall follow the specific record maintenance rules described in 
paragraph (h) of this section.
    (2) Safe harbor. A safe harbor for record maintenance is provided 
under paragraph (c) of this section, which sets forth detailed guidance 
concerning the types of records to be maintained with respect to related 
party transactions. The safe harbor consists of an all-inclusive list of 
record types that could be relevant to different taxpayers under a 
variety of facts and circumstances. It does not constitute a checklist 
of records that every reporting corporation must maintain or that 
generally should be requested by the Service. A specific reporting 
corporation is required to maintain, and the Service will request, only 
those records enumerated in the safe harbor (including material profit 
and loss statements) that may be relevant to its business or industry 
and to the correct U.S. tax treatment of its transactions with its 
foreign related parties. Accordingly, not every item listed in the safe 
harbor must be maintained by every reporting corporation. A corporation 
that maintains or causes another person to maintain the records listed 
in paragraph (c)(2) of this section that may be relevant to its foreign 
related party transactions and to its business or industry will be 
deemed to have met the record maintenance requirements of section 6038A.
    (3) Examples. The following examples illustrate the rules of this 
paragraph.

    Example 1. RC, a U.S. reporting corporation, is owned by two 
shareholders, F and P. F is a foreign corporation that owns 30 percent 
of the stock of RC. P is a domestic corporation that owns the remaining 
70 percent. RC purchases tangible property from F; however, the only 
potential audit issue with respect to these transactions is their 
treatment under section 482. It is determined that F does not in fact 
control RC and the two corporations do not constitute a group of 
``controlled taxpayers'' for purposes of section 482 and the regulations 
thereunder. There are no other reportable transactions between RC and F. 
Under Sec. 1.6038A-1(g), F is a foreign related party with respect to 
RC. Accordingly, RC is required to report its purchases of property from 
F under the reporting requirements of Sec. 1.6038A-2. Nevertheless, 
because section 482 is not applicable to the transactions between RC and 
F, the records created by F with respect to its sales to RC are not 
relevant for purposes of determining the correct tax treatment of these 
transactions. RC is required to maintain its own records of these 
transactions under the requirements of section 6001, but the 
transactions are not subject to the record maintenance requirements of 
this section. If, however, on audit it is determined that F does control 
RC, all records relevant to determining the arm's length consideration 
for the tangible property under section 482 will be subject to these 
requirements.
    Example 2. FP, a foreign person, owns 30 percent of the stock of RC, 
a reporting corporation. The remaining 70 percent of RC stock is held by 
persons that are not 25-percent foreign shareholders. It is determined 
that FP is related to RC within the meaning of section 482 and the 
regulations thereunder. The only transactions between FP and RC are FP's 
capital contributions, dividends paid from RC to FP, and loans from FP 
to RC. Under section 6001, RC is required to maintain all documentation 
necessary to establish the U.S. tax treatment of the capital 
contributions, dividends, and loans. RC is not required to maintain 
records in other categories listed in paragraph (c)(3) of this section 
because they are not relevant to the transactions between FP and RC. 
Records of FP not related to these transactions are not subject to the 
record maintenance requirements under section 6038A(a) and this section.

[[Page 195]]

    Example 3. G, a foreign multinational group, creates Sub, a wholly-
owned U.S. subsidiary, in order to purchase tangible property from 
unrelated parties in the United States and resell such property to G. 
The property purchased by Sub is either used in G's business or resold 
to other unrelated parties by G. Sub's sole function is to act as a 
buyer for G and these purchases are the only transactions that G has 
with any U.S. affiliates. Under all the facts and circumstances of this 
case, it is determined that an analysis of the group's worldwide profit 
attributable to the property it purchases from Sub is not relevant for 
purposes of determining the tax treatment of the sales from Sub to G. 
Therefore, the records with respect to the profitability of G are not 
subject to the record maintenance requirements of this section. However, 
all records related to the appropriate method under section 482 for 
determining an arm's-length consideration for the property sold by Sub 
to G are subject to the record maintenance requirements of this section.
    Example 4. S, a U.S. reporting corporation, provides computer 
consulting services for its foreign parent, X. Based on the application 
of section 482 and the regulations, it is determined that the cost of 
services plus method, as described in Sec. 1.482-9(e), will provide the 
most reliable measure of an arm's length result, based on the facts and 
circumstances of the controlled transaction between S and X. S is 
required to maintain records to permit verification upon audit of the 
comparable transactional costs (as described in Sec. 1.482-
9(e)(2)(iii)) used to calculate the arm's length price. Based on the 
facts and circumstances, if it is determined that X's records are 
relevant to determine the correct U.S. tax treatment of the controlled 
transaction between S and X, the record maintenance requirements under 
section 6038A(a) and this section will be applicable to the records of 
X.

    (b) Other maintenance requirements--(1) Indirectly related records. 
This section applies to records that are directly or indirectly related 
to transactions between the reporting corporation and any foreign 
related parties. An example of records that are indirectly related to 
such transactions is records possessed by a foreign subsidiary of a 
foreign related party that document the raw material or component costs 
of a product that is manufactured or assembled by the subsdiary and sold 
as a finished product by the foreign related party to the reporting 
corporation.
    (2) Foreign related party or third-party maintenance. If records 
that are required to be maintained under this section are in the control 
of a foreign related party, the records may be obtained or compiled (if 
not already in the possession of the foreign related party or already 
compiled) under the direction of the reporting corporation and then 
maintained by the reporting corporation, the foreign related party, or a 
third party. Thus, for example, a foreign related party may either 
itself maintain such records outside the United States or permit a third 
party to maintain such records outside the United States, provided that 
the conditions described in paragraph (f) of this section are met. Upon 
a request for such records by the Service, a foreign related party or 
third party may make arrangements with the District Director to furnish 
the records directly, rather than through the reporting corporation.
    (3) Translation of records. When records are provided to the Service 
under a request for production, any portion of such records must be 
translated into the English language within 30 days of a request for 
translation of that portion by the District Director. To the extent that 
any requested documents are identical to documents that have already 
been translated, an explanation of how such documents are identical 
instead may be provided. An extension of this time period may be 
requested under paragraph (f)(4) of this section. Appropriate extensions 
will be liberally granted for translation requests where circumstances 
warrant. If a good faith effort is made to translate accurately the 
requested documents within the specified time period, the reporting 
corporation will not be subject to the penalties in Sec. Sec. 1.6038A-4 
and 1.6038A-7.
    (4) Exception for foreign governments. A foreign government is not 
subject to the obligation to maintain records under this section.
    (5) Records relating to conduit financing arrangements. See Sec. 
1.881-4 relating to conduit financing arrangements.
    (c) Specific records to be maintained for safe harbor--(1) In 
general. A reporting corporation that maintains or causes another person 
to maintain the records specified in this paragraph (c) that are 
relevant to its business or industry and to the correct U.S. tax 
treatment of its transactions with its foreign related

[[Page 196]]

parties will deemed to have met the record maintenance requirements of 
this section. This paragraph provides general descriptions of the 
categories of records to be maintained; the particular title or label 
applied by a reporting corporation or related party does not control. 
Functional equivalents of the specified documents are acceptable. Record 
maintenance in accordance with this safe harbor, however, requires only 
the maintenance of types of documents described in paragraph (c)(2) of 
this section that are directly or indirectly related to transactions 
between the reporting corporation and any foreign related party. 
Additionally, to the extent the reporting corporation establishes that 
records in a particular category are not applicable to the industry or 
business of the reporting corporation and any foreign related party, 
maintenance of such records is not required under this paragraph. Record 
maintenance in accordance with this paragraph (c) generally does not 
require the original creation of records that are ordinarily not created 
by the reporting corporation or its related parties. (If, however, a 
document that is actually created is described in this paragraph (c), it 
is to be maintained even if the document is not of the type ordinarily 
created by the reporting corporation or its related parties.) There are 
two exceptions to the rule. First, basic accounting records that are 
sufficient to document the U.S. tax effects of transactions between 
related parties must be created and retained, if they do not otherwise 
exist. Second, records sufficient to produce material profit and loss 
statements as described in paragraphs (c)(2)(ii) and (3) of this section 
that are relevant for determining the U.S. tax treatment of transactions 
between the reporting corporation and foreign related parties must be 
created if such records are not ordinarily maintained. All internal 
records storage and retrieval systems used for each taxable year must be 
retained.
    (2) Descriptions of categories of documents to be maintained. The 
following records must be maintained in order to satisfy this paragraph 
(c) to the extent they may be relevant to determine the correct U.S. tax 
treatment of transactions between the reporting corporation and any 
foreign related party.
    (i) Original entry books and transaction records. This category 
includes books and records of original entry or their functional 
equivalents, however designated or labelled, that are relevant to 
transactions between any foreign related party and the reporting 
corporation. Examples include, but are not limited to, general ledgers, 
sales journals, purchase order books, cash receipts books, cash 
disbursement books, canceled checks and bank statements, workpapers, 
sales contracts, and purchase invoices. Descriptive material to 
explicate entries in the foregoing types of records, such as a chart of 
accounts or an accounting policy manual, is included in this category.
    (ii) Profit and loss statements. This category includes records from 
which the reporting corporation can compile and supply, within a 
reasonable time, material profit and loss statements of the reporting 
corporation and all related parties as defined in Sec. 1.6038A-1 (d) 
(the ``related party group'') that reflect profit or loss of the related 
party group attributable to U.S.-connected products or services as 
defined in paragraph (c)(7)(i) of this section. The determination of 
whether a profit and loss statement is material is made under the rules 
provided in paragraph (c)(3) of this section. The material profit and 
loss statements described in this paragraph (c)(2)(ii) must reflect the 
consolidated revenue and expenses of all members of the related party 
group. Thus, records in this category include the documentation of the 
cost of raw materials used by a related party to manufacture finished 
goods that are then sold by another related party to the reporting 
corporation. The records should be kept under U.S. generally accepted 
accounting principles if they are ordinarily maintained in such manner; 
if not, an explanation of the material differences between the 
accounting principles used and U.S. generally accepted accounting 
principles must be made available. The statements need not reflect 
tracing of the actual costs borne by the group with respect to its U.S.-
connected products or services; rather, any reasonable method may be 
used to allocate the group's worldwide

[[Page 197]]

costs to the revenues generated by the sales of those products or 
services. An explanation of the methods used to allocate specific items 
to a particular profit and loss statement must be made available. The 
explanation of material differences between accounting principles and 
the explanation of allocation methods must be sufficient to permit a 
comparison of the profitability of the group to that of the reporting 
corporation attributable to the provision of U.S.-connected products or 
services.
    (iii) Pricing documents. This category includes all documents 
relevant to establishing the appropriate price or rate for transactions 
between the reporting corporation and any foreign related party. 
Examples include, but are not limited to, documents related to 
transactions involving the same or similar products or services entered 
into by the reporting corporation or a foreign related party with 
related and unrelated parties; shipping and export documents; commission 
agreements; documents relating to production or assembly facilities; 
third-party and intercompany purchase invoices; manuals, specifications, 
and similar documents relating to or describing the performance of 
functions conducted at particular locations; intercompany correspondence 
discussing any instructions or assistance relating to such transactions 
provided to the reporting corporations by the related foreign person (or 
vice versa); intercompany and intracompany correspondence concerning the 
price or the negotiation of the price used in such transactions; 
documents related to the value and ownership of intangibles used or 
developed by the reporting corporation or the foreign related party; 
documents related to cost of goods sold and other expenses; and 
documents related to direct and indirect selling, and general and 
administrative expenses (for example, relating to advertising, sales 
promotions, or warranties).
    (iv) Foreign country and third party filings. This category includes 
financial and other documents relevant to transactions between a 
reporting corporation and any foreign related party filed with or 
prepared for any foreign government entity, any independent commission, 
or any financial institution.
    (v) Ownership and capital structure records. This category includes 
records or charts showing the relationship between the reporting 
corporation and the foreign related party; the location, ownership, and 
status (for example, joint venture, partnership, branch, or division) of 
all entities and offices directly or indirectly involved in the 
transactions between the reporting corporation and any foreign related 
party; a worldwide organization chart; records showing the management 
structure of all foreign affiliates; and loan documents, agreements, and 
other documents relating to any transfer of the stock of the reporting 
corporation that results in the change of the status of a foreign person 
as a foreign related party.
    (vi) Records of loans, services, and other non-sales transactions. 
This category includes relevant documents relating to loans (including 
all deposits by one foreign related party or reporting corporation with 
an unrelated party and a subsequent loan by that unrelated party to a 
foreign related party or reporting corporation that is in substance a 
direct loan between a reporting corporation and a foreign related 
party); guarantees of a foreign related party of debts of the reporting 
corporation, and vice versa; hedging arrangements or other risk shifting 
or currency risk shifting arrangements involving the reporting 
corporation and any foreign related party; security agreements between 
the reporting corporation and any foreign related party; research and 
development expense allocations between any foreign related party and 
the reporting corporation; service transactions between any foreign 
related party and the reporting corporation, including, for example, a 
description of the allocation of charges for management services, time 
or travel records, or allocation studies; import and export transactions 
between a reporting corporation and any foreign related party; the 
registration of patents and copyrights with respect to transactions 
between the reporting corporation and any foreign related party: and 
documents regarding lawsuits in foreign countries that relate to such 
transactions between a reporting corporation and any foreign related 
party

[[Page 198]]

(for example, product liability suits for U.S. products).
    (vii) Records relating to conduit financing arrangements. See Sec. 
1.881-4 relating to conduit financing arrangements.
    (3) Material profit and loss statements. For purposes of paragraph 
(c)(2)(ii) of this section, the determination of whether a profit and 
loss statement is material will be made according to the following 
rules. An agreement between the reporting corporation and the District 
Director as described in paragraph (e) of this section may identify 
material profit and loss statements of the related party group and 
describe the items to be included in any profit and loss statements for 
which records are to be maintained to satisfy the requirements of 
paragraph (c)(2)(ii) of this section. In the absence of such an 
agreement, a profit and loss statement will be material if it meets any 
of the following tests: the existing records test described in paragraph 
(c)(4) of this section, the significant industry segment test described 
in paragraph (c)(5) of this section, or the high profit test described 
in paragraph (c)(6) of this section.
    (4) Existing records test. A profit and loss statement is material 
under the existing records test described in this paragraph (c)(4) if 
any member of the related party group creates or compiles such statement 
in the course of its business operations and the statement reflects the 
profit or loss of the related party group attributable to the provision 
of U.S.-connected products or services (regardless of whether the profit 
and loss attributable to U.S.-connected products or services is shown 
separately or included within the calculation of aggregate figures on 
the statement). For example, a profit and loss statement is described in 
this paragraph if it was produced for internal accounting or management 
purposes, or for disclosure to shareholders, financial institutions, 
government agencies, or any other persons. Such existing statements and 
the records from which they were complied (to the extent such records 
relate to profit and loss attributable to U.S.-connected products or 
services) are subject to the record maintenance requirements described 
in paragraph (c)(2)(ii) of this section.
    (5) Significant industry segment test--(i) In general. A profit and 
loss statement is material under the significant industry segment test 
described in this paragraph (c)(5) if--
    (A) The statement reflects the profit or loss of the related party 
group attributable to the group's provision of U.S.-connected products 
or services within a single industry segment (as defined in paragraph 
(c)(7)(ii) of this section);
    (B) The worldwide gross revenue attributable to such industry 
segment is 10 percent or more of the worldwide gross revenue 
attributable to the group's combined industry segments; and
    (C) The amount of gross revenue earned by the group from the 
provision of U.S.-connected products or services within such industry 
segment is $25 million or more in the taxable year.
    (ii) Form of the statements. Profit and loss statements compiled for 
the group's provision of U.S.-connected products or services in each 
significant industry segment must reflect revenues and expenses 
attributable to the operations in such segment by all members of the 
related party group. Statements may show each related party's revenues 
and expenses separately, or may be prepared in a consolidated format. 
Any reasonable method may be used to allocate the group's worldwide 
costs within the industry segment to the U.S.-connected products or 
services within that segment. An explanation of the methods used to 
prepare consolidated statements and to allocate specific items to a 
particular profit and loss statement must be made available, and the 
records from which the consolidations and allocations were prepared must 
be maintained.
    (iii) Special rule for component sales. Where the U.S.-connected 
products or services consist of components that are incorporated into 
other products or services before sale to customers, the portion of the 
total gross revenue derived from sales of the finished products or 
services attributable to the components may be determined on the basis 
of relative costs of production. Thus, where relevant for determining

[[Page 199]]

whether the $25 million threshold in paragraph (c)(5)(i)(C) of this 
section has been met, the amount of gross revenue derived by the related 
party group from the provision of the finished products or services may 
be reduced by multiplying it by a fraction, the numerator of which is 
the costs of production of the related party group attributable to the 
component products or services that constitute U.S.-connected products 
or services and the denominator of which is the costs of production of 
the related party group attributable to the finished products in which 
such components are incorporated.
    (iv) Level of specificity required. In applying the significant 
industry segment test of this paragraph (c)(5), groups of related 
products and services must be chosen to provide a reasonable level of 
specificity that results in the greatest number of separate significant 
industry segments in comparison to other possible classifications. This 
determination must be made on the basis of the particular facts 
presented by the operations of the related party group. The following 
rules, however, provide general guidelines for making such 
classifications. First, the related party group's operations that 
involve the provision of U.S.-connected products should be grouped into 
product lines. The rules of this paragraph (c)(5) should then be applied 
to determine if any such product line would, standing alone, constitute 
a significant industry segment when compared to the related party 
group's operations as a whole. Any significant industry segments 
determined at the level of product lines should be further segregated, 
and tested for significant industry segments, at the level of separate 
products. Finally, any significant industry segments determined at the 
level of separate products should be segregated, and tested for 
significant industry segments, at the level of separate models. Similar 
principles should be applied in classifying and testing types of 
services. A profit and loss statement reflecting the related party 
group's provision of any product or service (or group of products or 
services as classified under these rules) that constitutes a significant 
industry segment will be considered material for purposes of this 
paragraph (c)(5). For definitions of the terms ``product'', ``related 
products or services'', ``model'', and ''product line'', see paragraph 
(c)(7) of this section.
    (v) Examples. The rules for determining reasonable levels of 
specificity for significant industry segments may be illustrated by the 
following examples.

    Example 1. A related party group is engaged in the manufacture and 
worldwide sales of automobiles and aftermarket parts. The group's 
operations within the categories of ``automobiles'' and ``aftermarket 
parts''. are each sufficient to constitute significant industry segments 
for the group under the rules of this paragraph (c)(5). No narrower 
classification of aftermarket parts results in any significant industry 
segments. Automobiles produced by the group are generally classified for 
marketing purposes by trade names; aggregating groups of automobiles by 
these trade names results in three significant industry segments, those 
for trade names A, B, and C. Finally, two car models sold under the 
trade name A (``A1'' and ``A2'') and one car model sold under the trade 
name B (``B3''), produce sufficient revenue to constitute significant 
industry segments. Such classifications into trade names and car models 
are generally used in the related party group's industry; moreover, 
different types of classifications would produce fewer significant 
industry segments. Accordingly, a reasonable level of specificity for 
this related party group's industry segments would be eight categories 
of products consisting of ``automobiles'', ``aftermarket parts'', ``A'', 
``B'', ``C'', ``A1'', ``A2'', and ``B3''.
    Example 2. A related party group is engaged in manufacturing 
electronic goods that are distributed at retail in the United States by 
the reporting corporation. The group sells three types of products in 
the United States: televisions, radios, and video cassette recorders 
(VCRs). Each of these three broad product areas constitutes a 
significant industry segment for the group as a whole. VCRs can be 
further segregated by price into high-end and low-end models, and the 
provision of each constitutes a significant industry segment for the 
group. Revenues from only one VCR model, model number VCRX-10, are 
sufficiently large to make the provision of that model a significant 
industry segment. With respect to televisions, the group normally 
accounts for these products by size. Using this classification, portable 
televisions, medium-sized televisions, and consoles each constitute 
significant industry segments. Narrower classifications by television 
model numbers result in no additional

[[Page 200]]

significant industry segments. Finally, a single radio product line, 
those sold under the trade name R, produces sufficient revenue to 
constitute a significant industry segment, but no other radio models or 
product groups are large enough to constitute a significant industry 
segment. In each case, these classifications conform to normal business 
practices in the industry and result in the greatest possible number of 
significant industry segments for this related party group. Accordingly, 
a reasonable level of specificity for this related party group's 
industry segments would include the ten categories consisting of 
``VCRs'', ``high-end VCRs'', ``low-end VCRs'', ``model number VCRX-10'', 
``televisions'', ``portable televisions'', ``medium-sized televisions'', 
``console televisions'', ``radios'', and ``radio trade name R''.

    (6) High profit test--(i) In general. A profit and loss statement is 
material under the high profit test described in this paragraph (c)(6) 
if--
    (A) The statement reflects the profit or loss of the related party 
group attributable to the group's provision of U.S.-connected products 
or services within a single industry segment (as defined in paragraph 
(c)(7)(ii) of this section);
    (B) The amount of gross revenue earned by the group from the 
provision of U.S.-connected products or services within such industry 
segment is $100 million or more in the taxable year; and
    (C) The return on assets test described in paragraph (c)(6)(ii) of 
this section is satisfied with respect to the products and services 
attributable to such segment.


Accordingly, a significant industry segment (as determined under 
paragraph (c)(5) of this section) must be divided into any narrower 
industry segments that meet the high profit test of this paragraph 
(c)(6), even if such narrower segments would not, standing alone, meet 
the significant industry segment test of paragraph (c)(5) of this 
section.
    (ii) Return on assets test. An industry segment meets the return on 
assets test if the rate of return on assets earned by the related party 
group on its worldwide operations within this industry segment exceeds 
15 percent, and is at least 200 percent of the return on assets earned 
by the group in all industry segments combined. For purposes of this 
paragraph, the rate of return on assets earned by an industry segment is 
determined by dividing that segment's operating profit (as defined in 
paragraph (c)(7)(v) of this section) by its identifiable assets (as 
defined in paragraph (c)(7)(iv) of this section).
    (iii) Additional rules. The rules in paragraphs (c)(5)(ii) through 
(iv) of this section describing the application of the significant 
industry segment test shall apply in a similar manner for purposes of 
the high profit test.
    (7) Definitions. The following definitions apply for purposes of 
paragraphs (c)(2)(ii), (c)(5), and (c)(6) of this section.
    (i) U.S.-connected products or services. The term U.S.-connected 
products or services means products or services that are imported to or 
exported from the United States by transfers between the reporting 
corporation and any of its foreign related parties.
    (ii) Industry segment. An industry segment is a segment of the 
related party group's combined operations that is engaged in providing a 
product or service or a group of related products or services (as 
defined in paragraph (c)(7)(vii) of this section) primarily to customers 
that are not members of the related party group.
    (iii) Gross revenue of an industry segment. Gross revenue of an 
industry segment includes receipts (prior to reduction for cost of goods 
sold) both from sales to customers outside of the related party group 
and from sales or transfers to other industry segments within the 
related party group (but does not include sales or transfers between 
members of the related party group within the same industry segment). 
Interest from sources outside the related party group and interest 
earned on trade receivables between industry segments is included in 
gross revenue if the asset on which the interest is earned is included 
among the industry segment's identifiable assets, but interest earned on 
advances or loans to other industry segments is not included.
    (iv) Identifiable assets of an industry segment. The identifiable 
assets of an industry segment are those tangible and intangible assets 
of the related party group that are used by the industry segment, 
including assets that are

[[Page 201]]

used exclusively by that industry segment and an allocated portion of 
assets used jointly by two or more industry segments. The value of an 
identifiable asset may be determined using any reasonable method (such 
as book value or fair market value) applied consistently. Any allocation 
of assets among industry segments must be made on a reasonable basis, 
and a description of such basis must be provided. Assets of an industry 
segment that transfers products or services to another industry segment 
shall not be allocated to the receiving segment. Assets that represent 
part of the related party group's investment in an industry segment, 
such as goodwill, shall be included in the industry segment's 
identifiable assets. Assets maintained for general corporate purposes 
(that is, those not used in the operations of any industry segment) 
shall not be allocated to industry segments.
    (v) Operating profit of an industry segment. The operating profit of 
an industry segment is its gross revenue (as defined in paragraph 
(c)(7)(iii) of this section) minus all operating expenses. None of the 
following shall be added or deducted in computing the operating profit 
of an industry segment: revenue earned at the corporate level and not 
derived from the operations of any industry segment; general corporate 
expenses; interest expense; domestic and foreign income taxes; and other 
extraordinary items not reflecting the ongoing business operations of 
the industry segment.
    (vi) Product. The term product means an item of property (or 
combination of component parts) that is the result of a production 
process, is primarily sold to unrelated parties (or incorporated by the 
related party group into other products sold to unrelated parties), and 
performs a specific function.
    (vii) Related products or services. The term related products or 
services means groupings of products and types of services that reflect 
reasonable accounting, marketing, or other business practices within the 
industries in which the related party group operates.
    (viii) Model. The term model means a classification of products that 
incorporate particular components, options, styles, and any other unique 
features resulting in product differentiation. Examples of models are 
electronic products that are sold or accounted for under a single model 
number and automobiles sold under a single model name.
    (ix) Product line. The term product line means a group of products 
that are aggregated into a single classification for accounting, 
marketing, or other business purposes. Examples of product lines are 
groups of products that perform similar functions; products that are 
marketed under the same trade names, brand names, or trademarks; and 
products that are related economically (that is, having similar rates of 
profitability, similar degrees of risk, and similar opportunities for 
growth).
    (8) Example. The application of the rules for determining material 
profit and loss statements under paragraphs (c)(4) through (7) of this 
section is illustrated by the following example.

    Example. (i) Facts. A multinational enterprise manufactures 50 
different agricultural and chemical products that are sold through Subl, 
its wholly owned U.S. subsidiary, and other subsidiaries located in 
foreign countries. The parent company of the enterprise, P, is a foreign 
corporation. The corporations participating in the enterprise form a 
related party group, and Subl is a reporting corporation for purposes of 
section 6038A. Under the facts and circumstances of this case, an 
analysis of the group's worldwide profit attributable to its products 
sold in the U.S. is relevant for determining an arm's length 
consideration under section 482 for the transfers of goods between Subl 
and its foreign affiliates.
    (ii) Existing records test. For management purposes, the group 
prepares profit and loss statements that are segmented by sales in 
different geographic markets. One of these statements shows the combined 
worldwide profitability of the group. Another statement shows the 
profitability of the group attributable to its North American sales. 
Both of these profit and loss statements reflect aggregate figures that 
include sales to unrelated parties of products that have been 
transferred from P and other group members to Subl (that is, the group's 
``U.S.-connected products''). The two statements meet the existing 
records test described in paragraph (c)(4) of this section.
    (iii) Significant industry segments. The group's worldwide gross 
revenue in all industry segments is $2 billion. An analysis of the 
group's 50 products demonstrates that they are reasonably grouped into 
eight industry segments (each of which earns roughly $250

[[Page 202]]

million in worldwide gross revenue). Segments 1 through 6 relate to 
agricultural products and Segments 7 and 8 relate to other chemical 
products. More specific categories would result in groupings that 
generate less than 10 percent of the group's worldwide gross revenue 
(that is, less than $200 million each); these narrower categories would 
thus fail the gross revenue percentage test of paragraph (c)(5)(i)(B) of 
this section. The gross revenue in each of the eight segments from the 
sale to unrelated parties of U.S.-connected products is as follows: $180 
million for Segment 1; $30 million for Segment 2; and less than $25 
million for each of Segments 3 through 8. Under the $25 million 
threshold test of paragraph (c)(5)(i)(C) of this section, the group's 
significant industry segments are thus limited to Segments 1 and 2. In 
addition, the combined operations of the group related to agricultural 
products (encompassing Segments 1 through 6 on an aggregated basis), 
constitute a single significant industry segment.
    (iv) High profit test. One highly profitable product line within 
Segment 1, HPPL, accounts for $120 million gross revenue from Sub1's 
domestic sales of U.S.-connected products (and thus exceeds the $100 
million gross revenue threshold in paragraph (c)(6)(i)(B) of this 
section). The return on the identifiable assets attributable to the HPPL 
product line is 85 percent, which is more than 15 percent and more than 
twice the return on assets earned by the group from its worldwide 
operations in its combined industry segments. The group's industry 
segment for HPPL thus meets the high profit test described in paragraph 
(c)(6) of this section.
    (v) Material Profit and Loss Statements. The group's material profit 
and loss statements consist of statements for combined worldwide sales 
and North American sales (under the existing records test); Segment 1, 
Segment 2, and aggregated Segments 1-6 (under the significant industry 
segment test); and HPPL (under the high profit test). Under paragraph 
(c) of this section, Subl is required to retain the combined worldwide 
sales and North American sales profit and loss statements and to 
maintain sufficient records so that it can compile and supply upon 
request statements of the group's profitability from sales of its U.S.-
connected products within Segment l, Segment 2, aggregated Segments 1-6, 
and HPPL. These records need not be in the possession of Subl and may be 
kept under the control of and produced by P or any third party. The 
statements for Segment l, Segment 2, aggregated Segments 1-6, and HPPL 
do not require tracing of actual costs to the U.S.-connected products; 
rather, these statements may be prepared by using any reasonable method 
to allocate a portion of the industry segment's overall operating costs 
to the sales of U.S.-connected products within that segment.

    (d) Liability for certain partnership record maintenance. A 
reporting corporation to which transactions engaged in by a partnership 
are attributed under Sec. 1.6038A-1 (e)(2) is subject to the record 
maintenance requirements of this section to the extent of the 
transactions so attributed.
    (e) Agreements with the District Director--(1) In general. The 
District Director who has audit jurisdiction over the reporting 
corporation may negotiate and enter into an agreement with a reporting 
corporation that establishes the records the reporting corporation must 
maintain or cause another to maintain, how the records must be 
maintained, the period of retention for the records, and by whom the 
records must be maintained in order to satisfy the reporting 
corporation's obligations under this section.
    (2) Content of agreement--(i) In general. The agreement may include 
provisions relating to the authorization of agent requirement, the 
record maintenance requirement, and the production and translation time 
periods that vary the rules contained in these regulations under section 
6038A. The District Director will generally require a reporting 
corporation to maintain only those records specified under the safe 
harbor provisions of paragraph (c) of this section that permit an 
adequate audit of the income tax return of the reporting corporation and 
to provide such authorizations of agent that permit adequate access to 
such records. In most instances, required record maintenance for a 
particular reporting corporation under a negotiated agreement will be 
less than the broad range of records described under the safe harbor 
provisions. Additionally, a provision specifying the effective date and 
the expiration date of the agreement that may vary the effective date of 
the regulations may be included.
    (ii) Significant industry segment test. A District Director may 
determine which industry segment profit and loss statements are material 
for purposes of requiring the maintenance of records (under either 
paragraph (a)(1) of this section or the safe harbor described in 
paragraph (a)(2) of this section). The industry segments that the 
District Director determines are material need

[[Page 203]]

not be the industry segments that meet the significant industry segment 
test under paragraph (c)(5) of this section or the high profit test 
under paragraph (c)(6) of this section. For this purpose, a reporting 
corporation will be required to maintain only those records from which 
profit and loss statements for the related party group may be 
constructed with respect to industry segments identified by the District 
Director. To the extent that existing profit and loss statements are 
similar in scope and level of detail to statements for industry segments 
that would otherwise be described under the tests of paragraphs (c)(5) 
and (6) of this section, the District Director shall accept the existing 
statements instead of the statements that would otherwise be required 
under paragraphs (c)(5) and (6) of this section.
    (iii) Example. The following example illustrates the rules of 
paragraph (e)(2)(ii) of this section.

    Example. The District Director determines that RC, a reporting 
corporation that is a manufacturer of related chemical products, has two 
industry segments, Segment 1 and Segment 2. While both industry segments 
meet the significant industry segment test of paragraph (c)(5) of this 
section, Segment 1 has a relatively low volume of sales to foreign 
related parties. Additionally, Segment 1 consists of products that 
produce only a small profit margin because the product is generic and 
other companies also sell the product. The District Director enters into 
an agreement with RC that requires only records from which a profit and 
loss statement for the related party group can be constructed for 
Segment 2. Therefore, RC is not required to maintain records for Segment 
1 from which a profit and loss statement for the related party group can 
be constructed. The other record maintenance requirements under this 
section apply, however.

    (3) Circumstances of agreement. The District Director generally will 
enter into an agreement under this paragraph (e) upon request by the 
reporting corporation when the District Director believes that the 
District has or can obtain sufficient knowledge of the business or 
industry of the reporting corporation to limit the record maintenance 
requirement to particular documents.
    (4) Agreement as part of APA process. An agreement with a reporting 
corporation under this paragraph (e) may be entered into as a part of 
the Advance Pricing Agreement (APA) process at any time during the APA 
process, insofar as the agreement relates to the subject matter of the 
APA.
    (f) U.S. maintenance--(1) General rule. Records that must be 
maintained under this section must be maintained within the United 
States, unless the conditions described in paragraph (f)(2) of this 
section are met.
    (2) Non-U.S. maintenance requirements. A reporting corporation may 
maintain outside the United States records not ordinarily maintained in 
the United States but required to be maintained in the United States 
under this section. However, the reporting corporation must either:
    (i) Deliver to the Service the original documents (or duplicates) 
requested within 60 days of the request by the Service for such records 
and provide translations of such documents within 30 days of a request 
for translations of specific documents; or
    (ii) Move the original documents (or duplicates) requested to the 
United States within 60 days of the request of the Service for such 
records; provide the Service with an index to the requested records, the 
name and address of a custodian located within the United States having 
control over the records, and the address where the records are located 
within 60 days of the Service's request for the records; and continue to 
maintain the records within the United States throughout the period of 
retention described in paragraph (g) of this section. For summons 
procedures with respect to records that have been moved to the United 
States, see sections 6038A(e), 7602, 7603, and 7604.


With respect to any material profit and loss statements required to be 
created (either under paragraph (c) of this section or under an 
agreement with the District Director), unless otherwise specified, ``120 
days'' shall be substituted for ``60 days'' in this paragraph (f)(2), 
and labels and text with respect to such statements must be in the 
English language.
    (3) Prior taxable years. The non-U.S. maintenance requirements 
described in paragraph (f)(2) of this section apply to records located 
outside the United

[[Page 204]]

States that were in existence on or after March 20, 1990, without regard 
to the taxable year to which such records relate.
    (4) Scheduled production for high volume or other reasons. Upon a 
written request, for good cause shown, the District Director may grant 
an extension of the time for the production or translation of the 
requested documents. Such requests should be made within 30 days of the 
request for records by the Service. If an extension is needed because of 
the volume of records requested or the amount of translation requested, 
the District Director may allow production or translation to be 
scheduled over a period of time so that not all records need be produced 
or translated at the same time.
    (5) Required U.S. maintenance. The District Director (with the 
concurrence of the Assistant Commissioner (International)), may require, 
for cause, the maintenance within the United States of any records 
specified in paragraph (f)(1) of this section. Such a requirement will 
be imposed only if there exists a clear pattern of failure to maintain 
or timely produce the required records. The assessment of a monetary 
penalty under section 6038A(d) and Sec. 1.6038A-4 for failure to 
maintain records is not necessarily sufficient to require the 
maintenance of records within the United States.
    (g) Period of retention. Records required to be maintained by 
section 6038A(a) and this section shall be kept as long as they may be 
relevant or material to determining the correct tax treatment of any 
transaction between the reporting corporation and a related party, but 
in no case less than the applicable statute of limitations on assessment 
and collection with respect to the taxable year in which the transaction 
or item to which the records relate affects the U.S. tax liability of 
the reporting corporation. See section 6001 and the regulations 
thereunder.
    (h) Application of record maintenance rules to banks and other 
financial institutions. [Reserved]
    (i) Effective/applicability date--(1) In general. This section is 
generally applicable on December 10, 1990. However, records described in 
this section in existence on or after March 20, 1990, must be 
maintained, without regard to when the taxable year to which the records 
relate began. Paragraph (a)(3) Example 4 of this section is generally 
applicable for taxable years beginning after July 31, 2009.
    (2) Election to apply regulation to earlier taxable years. A person 
may elect to apply the provisions of paragraph (a)(3) Example 4 of this 
section to earlier taxable years in accordance with the rules set forth 
in Sec. 1.482-9(n)(2).

[T.D. 8353, 56 FR 28065, June 19, 1991; T.D. 8353, 56 FR 41792, Aug. 23, 
1991, as amended by T.D. 8611, 60 FR 41015, Aug. 11, 1995; T.D. 9278, 71 
FR 44518, Aug. 4, 2006; T.D. 9456, 74 FR 38875, Aug. 4, 2009]



Sec. 1.6038A-4  Monetary penalty.

    (a) Imposition of monetary penalty--(1) In general. If a reporting 
corporation fails to furnish the information described in Sec. 1.6038A-
2 within the time and manner prescribed in Sec. 1.6038A-2(d), fails to 
maintain or cause another to maintain records as required by Sec. 
1.6038A-3, or (in the case of records maintained outside the United 
States) fails to meet the non-U.S. record maintenance requirements 
within the applicable time prescribed in Sec. 1.6038A-3(f), a penalty 
of $25,000 shall be assessed for each taxable year with respect to which 
such failure occurs. The filing of a substantially incomplete Form 5472 
constitutes a failure to file Form 5472. Where, however, the information 
described in Sec. 1.6038A-2(b)(3) through (5) is not required to be 
reported, a Form 5472 filed without such information is not a 
substantially incomplete Form 5472.
    (2) Liability for certain partnership transactions. A reporting 
corporation to which transactions engaged in by a partnership are 
attributed under Sec. 1.6038A-1(e)(2) is subject to the rules of this 
section to the extent failures occur with respect to the partnership 
transactions so attributed.
    (3) Calculation of monetary penalty. If a reporting corporation 
fails to maintain records as required by Sec. 1.6038A-3 of transactions 
with multiple related parties, the monetary penalty may be assessed for 
each failure to maintain records with respect to each related party. The 
monetary penalty, however,

[[Page 205]]

shall be imposed on a reporting corporation only once for a taxable year 
with respect to each related party for a failure to furnish the 
information required on Form 5472, for a failure to maintain or cause 
another to maintain records, or for a failure to comply with the non-
U.S. maintenance requirements described in Sec. 1.6038A-3(f). An 
additional penalty for another failure may be imposed, however, under 
the rules of paragraph (d)(2) of this section. Thus, unless such 
failures continue after notification as described in paragraph (d) of 
this section, the maximum penalty under this paragraph with respect to 
each related party for all such failures in a taxable year is$25,000. 
The members of a group of corporations filing a consolidated return are 
jointly and severally liable for any monetary penalty that may be 
imposed under this section.
    (b) Reasonable cause--(1) In general. Certain failures may be 
excused for reasonable cause, including not timely filing Form 5472, not 
maintaining or causing another to maintain records as required by Sec. 
1.6038A-3, and not complying with the non-U.S. maintenance requirements 
described in Sec. 1.6038A-3(f). If an affirmative showing is made that 
the taxpayer acted in good faith and there is reasonable cause for a 
failure that results in the assessment of the monetary penalty, the 
period during which reasonable cause exists shall be treated as 
beginning on the day reasonable cause is established and ending not 
earlier than the last day on which reasonable cause existed for any such 
failure. Additionally, the beginning of the 90-day period after mailing 
of a notice by the District Director or the Director of an Internal 
Revenue Service Center of a failure described in paragraph (d) of this 
section shall be treated as not earlier than the last day on which 
reasonable cause existed.
    (2) Affirmative showing required--(i) In general. To show that 
reasonable cause exists for purposes of paragraph (b)(1) of this 
section, the reporting corporation must make an affirmative showing of 
all the facts alleged as reasonable cause for the failure in a written 
statement containing a declaration that it is made under penalties of 
perjury. The statement must be filed with the District Director (in the 
case of failure to maintain or furnish requested information permitted 
to be maintained outside the United States within the time required 
under Sec. 1.6038A-3(f) or a failure to file Form 5472) or the Director 
of the Internal Revenue Service Center where the Form 5472 is required 
to be filed (in the case of failure to file Form 5472). The District 
Director or the Director of the Internal Revenue Service Center where 
the Form 5472 is required to be filed, as appropriate, shall determine 
whether the failure was due to reasonable cause, and if so, the period 
of time for which reasonable cause existed. If a return has been filed 
as required by Sec. 1.6038A-2 or records have been maintained as 
required by Sec. 1.6038A-3, except for an omission of, or error with 
respect to, some of the information required or a record to be 
maintained, the omission or error shall not constitute a failure for 
purposes of section 6038A(d) if the reporting corporation that filed the 
return establishes to the satisfaction of the District Director or the 
Director of the Internal Revenue Service Center that it has 
substantially complied with the filing of Form 5472 or the requirement 
to maintain records.
    (ii) Small corporations. The District Director shall apply the 
reasonable cause exception liberally in the case of a small corporation 
that had no knowledge of the requirements imposed by section 6038A; has 
limited presence in and contact with the United States; and promptly and 
fully complies with all requests by the District Director to file Form 
5472, and to furnish books, records, or other materials relevant to the 
reportable transaction. A small corporation is a corporation whose gross 
receipts for a taxable year are $20,000,000 or less.
    (iii) Facts and circumstances taken into account. The determination 
of whether a taxpayer acted with reasonable cause and in good faith is 
made on a case-by-case basis, taking into account all pertinent facts 
and circumstances. Circumstances that may indicate reasonable cause and 
good faith include an honest misunderstanding of fact or law that is 
reasonable in light of the experience and knowledge of the taxpayer. 
Isolated computational or

[[Page 206]]

transcriptional errors generally are not inconsistent with reasonable 
cause and good faith. Reliance upon an information return or on the 
advice of a professional (such as an attorney or accountant) does not 
necessarily demonstrate reasonable cause and good faith. Similarly, 
reasonable cause and good faith is not necessarily indicated by reliance 
on facts that, unknown to the taxpayer, are incorrect. Reliance on an 
information return, professional advice or other facts, however, 
constitutes reasonable cause and good faith if, under all the 
circumstances, the reliance was reasonable. A taxpayer, for example, may 
have reasonable cause for not filing a Form 5472 or for not maintaining 
records under section 6038A if the taxpayer has a reasonable belief that 
it is not owned by a 25-percent foreign shareholder. A reasonable belief 
means that the taxpayer does not know or has no reason to know that it 
is owned by a 25-percent foreign shareholder. For example, a reporting 
corporation would not know or have reason to know that it is owned by a 
25-percent foreign shareholder if its belief that it is not so owned is 
consistent with other information reported or otherwise furnished to or 
known by the reporting corporation. A taxpayer may have reasonable cause 
for not treating a foreign corporation as a related party for purposes 
of section 6038A where the foreign corporation is a related party solely 
by reason of Sec. 1.6038A-1(d)(3) (under the principles of section 
482), and the taxpayer had a reasonable belief that its relationship 
with the foreign corporation did not meet the standards for related 
parties under section 482.
    (c) Failure to maintain records or to cause another to maintain 
records. A failure to maintain records or to cause another to maintain 
records is determined by the District Director upon the basis of the 
reporting corporation's overall compliance (including compliance with 
the non-U.S. maintenance requirements under Sec. 1.6038A-3(f)(2)) with 
the record maintenance requirements. It is not an item-by-item 
determination. Thus, for example, a failure to maintain a single or 
small number of items may not constitute a failure for purposes of 
section 6038A(d), unless the item or items are essential to the correct 
determination of transactions between the reporting corporation and any 
foreign related parties. The District Director shall notify the 
reporting corporation in writing of any determination that it has failed 
to comply with the record maintenance requirement.
    (d) Increase in penalty where failure continues after notification--
(1) In general. If any failure described in this section continues for 
more than 90 days after the day on which the District Director or the 
Director of the Internal Revenue Service Center where the Form 5472 is 
required to be filed mails notice of the failure to the reporting 
corporation, the reporting corporation shall pay a penalty (in addition 
to the penalty described in paragraph (a) of this section) of $25,000 
with respect to each related party for which a failure occurs for each 
30-day period during which the failure continues after the expiration of 
the 90-day period. Any uncompleted fraction of a 30-day period shall 
count as a 30-day period for purposes of this paragraph (d).
    (2) Additional penalty for another failure. An additional penalty 
for a taxable year may be imposed, however, if at a time subsequent to 
the time of the imposition of the monetary penalty described in 
paragraph (a) of this section, a second failure is determined and the 
second failure continues after notification under paragraph (d)(1) of 
this section. Thus, if a taxpayer fails to file Form 5472 and is 
assessed a monetary penalty and later, upon audit, is determined to have 
failed to maintain records, an additional penalty for the failure to 
maintain records may be assessed under the rules of this paragraph if 
the failure to maintain records continues after notification under this 
paragraph.
    (3) Cessation of accrual. The monetary penalty will cease to accrue 
if the reporting corporation either files Form 5472 (in the case of a 
failure to file Form 5472), furnishes information to substantially 
complete Form 5472, or demonstrates compliance with respect to the 
maintenance of records (in the case of a failure to maintain records) 
for the taxable year in which the examination occurs and subsequent 
years to

[[Page 207]]

the satisfaction of the District Director. The monetary penalty also 
will cease to accrue if requested information, documents, or records, 
kept outside the United States under the requirements of Sec. 1.6038A-
3(f) and not produced within the time specified are produced or moved to 
the United States under the rules of paragraph (f)(2)(ii) of this 
section.
    (4) Continued failures. If a failure under this section relating to 
a taxable year beginning before July 11, 1989 occurs, and if the failure 
continues following 90 days after the notice of failure under this 
paragraph is sent, the amount of the additional penalty to be assessed 
under this paragraph is $25,000 for each 30-day period beginning after 
November 5, 1990, during which the failure continues. There is no 
limitation on the amount of the monetary penalty that may be assessed 
after November 5, 1990.
    (e) Other penalties. For criminal penalties for failure to file a 
return and filing a false or fraudulent return, see sections 7203 and 
7206 of the Code. For the penalty relating to an underpayment of tax, 
see section 6662.
    (f) Examples. The following examples illustrate the rules of this 
section.
    (1) Failure to file Form 5472. Corp X, a U.S. reporting corporation, 
engages in related party transactions with FC. Corp X does not timely 
file a Form 5472 or maintain records relating to the transactions with 
FC for Year 1 or subsequent years. The Service Center with which Corp X 
files its income tax return imposes a $25,000 penalty for each of Years 
1, 2, and 3 under section 6038A (d) and this section for failure to 
provide information as required on Form 5472 and mails a notice of 
failure to provide inrormation. Corp X does not file Form 5472. Ninety 
days following the mailing of the notice of failure to Corp X an 
additional penaly of $25,000 is imposed. On the 135th day following the 
mailing of the notice of failure, Corp X files Form 5472 for Years 1, 2, 
and 3. The total penalty owed by Corp X for Year 1 is $75,000. ($25,000 
for not timely filing Form 5472, $25,000 for the first 30-day period 
following the expiration of the 90-day period, and $25,000 for the 
fraction of the second 30-day period). The penalty for Years 2 and 3 for 
the failure to file Form 5472 is also $75,000 for each year, calculated 
in the same manner as for Year 1. The total penalty for failure to file 
Form 5472 for Years 1, 2, and 3 is $225,000.
     (2) Failure to maintain records.
    Assume the same facts as in Example 1. In Year 5, Corp X is audited 
for Years 1 through 3. Corp X has not been maintaining records relating 
to the transactions with FC. The District Director issues a notice of 
failure to maintain records. Corp X has already been subject to the 
monetary penalty of $25,000 for each of Years 1, 2, and 3 for failure to 
file Form 5472 and, therefore, a monetary penalty under paragraph (a) of 
this section for failure to maintain records is not assessed. However, 
an additional penalty is assessed after the 90th day following the 
mailing of the notice of failure to maintain records. Corp X develops a 
record maintenance system as required by section 6038A and Sec. 
1.6038A-3. On the 180th day following the mailing of the notice of 
failure to maintain records, Corp X demonstrates to the satisfaction of 
the District Director that the newly developed record maintenance system 
will comply with the requirements of Sec. 1.6038A-3 and the increase in 
the monetary penalty after notification ceases to accrue. The additional 
penalty for failure to maintain records is $75,000. An additional 
penalty of $75,000 per year is assessed for each of years 2 and 3 for 
the failure to maintain records for a total of $225,000.

    (g) Effective dates. For effective dates for this section, see Sec. 
1.6038A-1(n).

[T.D. 8353, 56 FR 28072, June 19, 1991, as amended by T.D. 9707, 79 FR 
77389, Dec. 24, 2014; T.D. 9885, 84 FR 67045, Dec. 6, 2019]



Sec. 1.6038A-5  Authorization of agent.

    (a) Failure to authorize. The rules of Sec. 1.6038A-7 shall apply 
to any transaction between a foreign related party and a reporting 
corporation (including any transaction engaged in by a partnership that 
is attributed to the reporting corporation under Sec. 1.6038A-1(e)(2)), 
unless the foreign related party authorizes (in the manner described in

[[Page 208]]

paragraph (b) of this section) the reporting corporation to act as its 
limited agent solely for purposes of sections 7602, 7603, and 7604 with 
respect to any request by the Service to examine records or produce 
testimony that may be relevant to the tax treatment of such a 
transaction or with respect to any summons by the Service for such 
records or testimony. The fact that a reporting corporation is 
authorized to act as an agent for a foreign related party is to be 
disregarded for purposes of determining whether the foreign related 
party either has a trade or business in the United States for purposes 
of the Code or a permanent establishment or fixed base in the United 
States for purposes of an income tax treaty.
    (b) Authorization by related party--(1) In general. Upon request by 
the Service, a foreign related party shall authorize as its agent 
(solely for purposes of sections 7602, 7603, and 7604) the reporting 
corporation with which it engages in transactions. The authorization 
must be signed by the foreign related party or an officer of the foreign 
related party possessing the authority to authorize an agent for 
purposes of Rule 4 of the Federal Rules of Civil Procedure. The 
reporting corporation will accept this appointment by providing a 
statement to that effect, signed by an officer of the reporting 
corporation possessing the authority to accept such an appointment. The 
agency shall be effective at all times. For taxable years beginning 
after July 10, 1989, the authorization and acceptance must be provided 
to the Service within 30 days of a request by the Service to the 
reporting corporation for such an authorization. The authorization must 
contain a heading and statement as set forth below. A foreign government 
is not subject to the authorization of agent requirement.

                         AUTHORIZATION OF AGENT

    ``[Name of foreign related party] hereby expressly authorizes [name 
of reporting corporation] to act as its agent solely for purposes of 
sections 7602, 7603, and 7604 of the Internal Revenue Code with respect 
to any request to examine records or produce testimony that may be 
relevant to the U.S. income tax treatment of any transaction between 
[name of the above-named foreign related party] and [name of reporting 
corporation] or with respect to any summons for such records or 
testimony.
________________________________________________________________________
Signature of or for [name of foreign related party]
________________________________________________________________________
(Title)
________________________________________________________________________
(Date)
    (If signed by a corporate officer, partner, or fiduciary on behalf 
of a foreign related party: I certify that I have the authority to 
execute this authorization of agent to act on behalf of [name of foreign 
related party]).
________________________________________________________________________
    Type or print your name below if signing for a foreign related party 
that is not an individual.
________________________________________________________________________
    [Name of reporting corporation] accepts this appointment to act as 
agent for [name of foreign related party] for the above purpose.
________________________________________________________________________
Signature for (Name of Reporting Corporation]
________________________________________________________________________
(Title)
________________________________________________________________________
(Date)
    I certify that I have the authority to accept this appointment to 
act as agent on behalf of (name of foreign related party] and agree to 
accept service of process for the above purposes.
    Type or print your name below.
________________________________________________________________________

    (2) Authorization for prior years. A foreign related party shall 
authorize a reporting corporation to act as its agent with respect to 
taxable years for which a Form 5472 is required to be filed prior to the 
date on which the final regulations under section 6038A are published by 
providing the above executed authorization of agent within 30 days of a 
request by the Service for such an authorization.
    (c) Foreign affiliated groups--(1) In general. A foreign corporation 
that has effective legal authority to make the authorization of agent 
under paragraph (b) of this section on behalf of any group of foreign 
related parties may execute such an authorization for any members of the 
group. A single authorization may be made on a consolidated basis. In 
such a case, the common parent must attach a schedule to the 
authorization of agent stating which members of the group would 
otherwise be required to separately authorize the reporting corporation 
as agent. The

[[Page 209]]

schedule must provide the name, address, relationship to the reporting 
corporation, and U.S. taxpayer identification number, if applicable, of 
each member.
    (2) Application of noncompliance penalty adjustment. In 
circumstances where a consolidated authorization of agent has been 
executed, if the agency authorization for any member of the group is not 
legally effective for purposes of sections 7602, 7603, and 7604, the 
noncompliance penalty adjustment under section 6038A(e) and Sec. 
1.6038A-7 shall apply.
    (d) Legal effect of authorization of agent. The legal consequences 
of a foreign related party authorizing a reporting corporation to act as 
its agent for purposes of sections 7602, 7603, and 7604 of the Code are 
as follows.
    (1) Agent for purposes of commencing judicial proceedings. A 
reporting corporation that is authorized by a foreign related party to 
act as its agent for purposes of sections 7602, 7603, and 7604 
(including service of process) is also the agent of the foreign related 
party for purposes of--
    (i) The filing of a petition to quash under section 6038A(e)(4)(A) 
or a petition to review an Internal Revenue Service determination of 
noncompliance under section 6038A(e)(4)(B), and
    (ii) The commencement of a judicial proceeding to enforce a summons 
under section 7604, whether commenced in conjunction with a petition to 
quash under section 6038A(e)(4)(A) or commenced as a separate proceeding 
in the federal district court for the district in which the person to 
whom the summons is issued resides or is found.
    (2) Foreign related party found where reporting corporation found. 
For any purposes relating to sections 7602, 7603, or 7604 (including 
service of process), a foreign related party that authorizes a reporting 
corporation to act on its behalf under section 6038A(e)(1) and this 
section may be found anywhere where the reporting corporation has 
residence or is found.
    (e) Successors in interest. A successor in interest to a related 
party must execute the authorization of agent as described in paragraph 
(b) of this section.
    (f) Deemed compliance--(1) In general. In exceptional circumstances, 
the District Director may treat a reporting corporation as authorized to 
act as agent for a related party for purposes of sections 7602, 7603, 
and 7604 in the absence of an actual agency appointment by the foreign 
related party, in circumstances where the actual absence of an 
appointment is reasonable. Factors to be considered include--
    (i) If neither the reporting corporation nor the other party to the 
transaction knew or had reason to know that the two parties were related 
at the time of the transaction, and
    (ii) The extent to which the taxpayer establishes to the 
satisfaction of the District Director that all transactions between the 
reporting corporation and the related party were on arm's length terms 
and did not involve the participation of any known related party.
    (2) Reason to know. Whether the reporting corporation or other party 
had reason to know that the two parties were related at the time of the 
transaction will be determined by all the facts and circumstances.
    (3) Effect of deemed compliance. If a reporting corporation is 
deemed under this paragraph (f) to have been authorized to act as an 
agent for a foreign related party for purposes of sections 7602, 7603, 
and 7604, such deemed compliance is applicable only for that particular 
transaction and other reportable transactions entered into prior to the 
time when the reporting corporation knew or had reason to know that the 
related party, in fact, was related. The noncompliance rule of Sec. 
1.6038A-7 shall apply to any transaction subsequent to that time with 
the same related party, unless the related party actually authorizes the 
reporting corporation to act as its agent under paragraph (a) of this 
section. In addition, the record maintenance requirements of Sec. 
1.6038A-3 will apply to all subsequent transactions and, with respect to 
prior transactions, will apply to relevant records in existence at the 
time the relationship was discovered.
    (g) Effective dates. For effective dates for this section, see Sec. 
1.6038A-1(n).

[T.D. 8353, 56 FR 28073, June 19, 1991; T.D. 8353, 56 FR 41792, Aug. 23, 
1991]

[[Page 210]]



Sec. 1.6038A-6  Failure to furnish information.

    (a) In general. The rules of Sec. 1.6038A-7 may be applied with 
respect to a transaction between a foreign related party and the 
reporting corporation (including any transaction engaged in by a 
partnership that is attributed to the reporting corporation under Sec. 
1.6038A-1(e)(2)) if a summons is issued to the reporting corporation to 
produce any records or testimony, either directly or as agent for such 
related party, to determine the correct treatment under title 1 of the 
Code of such a transaction between the reporting corporation and the 
related party; and if--
    (1)(i) The summons is not quashed in a proceeding, if any, begun 
under section 6038A(e)(4) and is not determined to be invalid in a 
proceeding, if any, begun under section 7604 to enforce such summons; 
and
    (ii) The reporting corporation does not substantially and timely 
comply with the summons, and the District Director has sent by certified 
or registered mail a notice under section 6038A(e)(2)(C) to the 
reporting corporation that it has not so complied; or
    (2) The reporting corporation fails to maintain or to cause another 
to maintain records as required by Sec. 1.6038A-3, and by reason of 
that failure, the summons is quashed in a proceeding under section 
6038A(e)(4) or in a proceeding begun under section 7604 to enforce the 
summons, or the reporting corporation is not able to provide the records 
requested in the summons.
    (b) Coordination with treaties. Where records of a related party are 
obtainable on a timely and efficient basis under information exchange 
procedures provided under a tax treaty or tax information exchange 
agreement (TIEA), the Service generally will make use of such procedures 
before issuing a summons. The absence or pendency of a treaty or TIEA 
request may not be asserted as grounds for refusing to comply with a 
summons or as a defense against the assertion of the noncompliance 
penalty adjustment under Sec. 1.6038A-7. For purposes of this 
paragraph, information is available on a timely and efficient basis if 
it can be obtained within 180 days of the request.
    (c) Enforcement proceeding not required. The District Director is 
not required to begin an enforcement proceeding to enforce the summons 
in order to apply the rules of Sec. 1.6038A-7.
    (d) De minimis failure. Where a reporting corporation's failure to 
comply with the requirement to furnish information under this section is 
de minimis, the District Director, in the exercise of discretion, may 
choose not to apply the noncompliance penalty. Thus, for example, in 
cases where a particular document or group of documents is not furnished 
upon request or summons, the District Director (in the District 
Director's sole discretion), may choose not to apply the noncompliance 
penalty if the District Director deems the document or documents not to 
have significant or sufficient value in the determination of the 
correctness of the tax treatment of the related party transaction.
    (e) Suspension of statute of limitations. If the reporting 
corporation brings an action under section 6038A(e)(4)(A) (proceeding to 
quash) or (e)(4)(B) (review of secretarial determination of 
noncompliance), the running of any period of limitation under section 
6501 (relating to assessment and collection of tax) or under section 
6531 (relating to criminal prosecutions) for the taxable year or years 
to which the summons that is the subject of such proceeding relates 
shall be suspended for the period during which such proceeding, and 
appeals therein, are pending. In no event shall any such period expire 
before the 90th day after the day on which there is a final 
determination in such proceeding.
    (f) Effective dates. For effective dates for this section, see Sec. 
1.6038A-1(n).

[T.D. 8353, 56 FR 28075, June 19, 1991]



Sec. 1.6038A-7  Noncompliance.

    (a) In general. In the case of any failure described in Sec. 
1.6038A-5 or Sec. 1.6038A-6, the rules of this Sec. 1.6038A-7 apply to 
the reporting corporation. In such a case--
    (1) The amount of the deduction allowed under subtitle A for any 
amount paid or incurred by the reporting corporation to the related 
party in connection with such transaction, and

[[Page 211]]

    (2) The cost to the reporting corporation of any property acquired 
in such transaction from the related party or transferred by such 
corporation in such transaction to the related party, may be determined 
by the District Director.
    (b) Determination of the amount. The amount of the deduction or the 
cost to the reporting corporation shall be the amount determined by the 
District Director (in the District Director's sole discretion) from the 
District Director's own knowledge or from such information as the 
District Director may choose to obtain through testimony or otherwise. 
The District Director shall consider any information or materials that 
have been submitted by the reporting corporation or a foreign related 
party. The District Director, however, may disregard any information, 
documents, or records submitted by the reporting corporation or the 
related party if (in the District Director's sole discretion) the 
District Director deems that they are insufficiently probative of the 
relevant facts.
    (c) Separate application. If the noncompliance penalty of this 
section applies with respect to transactions with a related party of the 
reporting corporation, it will not be applied with respect to any other 
related parties of the reporting corporation solely upon the basis of 
that failure. Thus, for example, if a reporting corporation engages in 
transactions with related party A and related party B, and the reporting 
corporation does not respond to a summons for records related to the 
transactions between the reporting corporation and related party A, the 
noncompliance penalty imposed as a result of such failure will not apply 
to the transactions between the reporting corporation and related party 
B. If a separate summons is issued for records relating to the 
transactions between the reporting corporation and related party B and 
the reporting corporation does not produce such records, the 
noncompliance penalty may be applied to those transactions.
    (d) Effective dates. For effective dates for this section, see Sec. 
1.6038A-1(n).

[T.D. 8353, 56 FR 28075, June 19, 1991]



Sec. 1.6038B-1  Reporting of certain transfers to foreign corporations.

    (a) Purpose and scope. This section sets forth information reporting 
requirements under section 6038B concerning certain transfers of 
property to foreign corporations. Paragraph (b) of this section provides 
general rules explaining when and how to carry out the reporting 
required under section 6038B with respect to the transfers to foreign 
corporations. Paragraph (c) of this section and Sec. 1.6038B-1T(d) 
specify the information that is required to be reported with respect to 
certain transfers of property that are described in section 
6038B(a)(1)(A) and 367(d), respectively. Section 1.6038B-1(e) describes 
the filing requirements for property transfers described in section 
367(e). Paragraph (f) of this section sets forth the consequences of a 
failure to comply with the requirements of section 6038B and this 
section. For effective dates, see paragraph (g) of this section. For 
rules regarding transfers to foreign partnerships, see section 
6038B(a)(1)(B) and any regulations thereunder.
    (b) Time and manner of reporting--(1) In general--(i) Reporting 
procedure. Except for stock or securities qualifying under the special 
reporting rule of Sec. 1.6038B-1(b)(2), and certain exchanges described 
in section 354 or 356 (listed below), any U.S. person that makes a 
transfer described in section 6038B(a)(1)(A), 367(d) or (e), is required 
to report pursuant to section 6038B and the rules of Sec. 1.6038B-1 and 
must attach the required information to Form 926, ``Return by a U.S. 
Transferor of Property to a Foreign Corporation.'' In addition, if the 
U.S. person files a statement under Sec. 1.367(a)-3(d)(2)(vi)(C), a 
gain recognition agreement under Sec. 1.367(a)-8, or a liquidation 
document under Sec. 1.367(e)-2(b), such person must comply in all 
material respects with the requirements of such section pursuant to the 
terms of the statement, gain recognition agreement, or liquidation 
document, as applicable, in order to satisfy a reporting obligation 
under section 6038B. For special rules regarding cash transfers made in 
tax years beginning after February 5, 1999, see paragraphs (b)(3) and 
(g) of this section. For purposes of determining a

[[Page 212]]

U.S. transferor that is subject to section 6038B, the rules of 
Sec. Sec. 1.367(a)-1(c) and 1.367(a)-3(d) shall apply with respect to a 
transfer described in section 367(a), and the rules of Sec. 1.367(a)-
1(c) shall apply with respect to a transfer described in section 367(d). 
Additionally, if in an exchange described in section 354 or 356, a U.S. 
person exchanges stock or securities of a foreign corporation in a 
reorganization described in section 368(a)(1)(E), or a U.S. person 
exchanges stock or securities of a domestic or foreign corporation 
pursuant to an asset reorganization described in section 368(a)(1) 
(involving a transfer of assets under section 361) that is not treated 
as an indirect stock transfer under Sec. 1.367(a)-3(d), then the U.S. 
person exchanging stock or securities is not required to report under 
section 6038B. Notwithstanding any statement to the contrary on Form 
926, the form and attachments must be attached to, and filed by the due 
date (including extensions) of the transferor's income tax return for 
the taxable year that includes the date of the transfer (as defined in 
Sec. 1.6038B-1T(b)(4)). For taxable years beginning before January 1, 
2003, any attachment to Form 926 required under the rules of this 
section is filed subject to the transferor's declaration under penalties 
of perjury on Form 926 that the information submitted is true, correct 
and complete to the best of the transferor's knowledge and belief. For 
taxable years beginning after December 31, 2002, Form 926 and any 
attachments shall be verified by signing the income tax return with 
which the form and attachments are filed.
    (ii) Reporting by corporate transferor. For transfers by 
corporations in taxable years beginning before January 1, 2003, Form 926 
must be signed by an authorized officer of the corporation if the 
transferor is not a member of an affiliated group under section 
1504(a)(1) that files a consolidated Federal income tax return and by an 
authorized officer of the common parent corporation if the transferor is 
a member of such an affiliated group. For transfers by corporations in 
taxable years beginning after December 31, 2002, Form 926 shall be 
verified by signing the income tax return to which the form is attached.
    (iii) Transfers of jointly-owned property. If two or more persons 
transfer jointly-owned property to a foreign corporation in a transfer 
with respect to which a notice is required under this section, then each 
person must report with respect to the particular interest transferred, 
specifying the nature and extent of the interest. However, a husband and 
wife who jointly file a single Federal income tax return may file a 
single Form 926 with their tax return.
    (2) Exceptions and special rules for transfers of stock or 
securities under section 367(a)--(i) Transfers on or after July 20, 
1998. A U.S. person that transfers stock or securities on or after July 
20, 1998 in a transaction described in section 6038B(a)(1)(A) will be 
considered to have satisfied the reporting requirement under section 
6038B and paragraph (b)(1) of this section if either--
    (A) The U.S. transferor owned less than 5 percent of both the total 
voting power and the total value of the transferee foreign corporation 
immediately after the transfer (taking into account the attribution 
rules of section 318 as modified by section 958(b)), and either:
    (1) The U.S. transferor qualified for nonrecognition treatment with 
respect to the transfer (i.e., the transfer was not taxable under 
Sec. Sec. 1.367(a)-3(b) or (c)); or
    (2) The U.S. transferor is a tax-exempt entity and the income was 
not unrelated business income; or
    (3) The transfer was taxable to the U.S. transferor under Sec. 
1.367(a)-3(c), and such person properly reported the income from the 
transfer on its timely-filed (including extensions) Federal income tax 
return for the taxable year that includes the date of the transfer; or
    (4) The transfer is considered to be to a foreign corporation solely 
by reason of Sec. 1.83-6(d)(1) and the fair market value of the 
property transferred did not exceed $100,000; or
    (B) The U.S. transferor owned 5 percent or more of the total voting 
power or the total value of the transferee foreign corporation 
immediately after the transfer (taking into account the attribution 
rules of section 318 as modified by section 958(b)) and either:

[[Page 213]]

    (1) Except as provided in paragraph (b)(2)(iii) of this section, the 
U.S. transferor (or one or more successors) filed an initial gain 
recognition agreement under Sec. 1.367(a)-8, and filed Form 926 in 
accordance with paragraph (b)(2)(iv) of this section; or
    (2) The transferor is a tax-exempt entity and the income was not 
unrelated business income; or
    (3) The transferor properly reported the income from the transfer on 
its timely-filed (including extensions) Federal income tax return for 
the taxable year that includes the date of the transfer; or
    (4) The transfer is considered to be to a foreign corporation solely 
by reason of Sec. 1.83-6(d)(1) and the fair market value of the 
property transferred did not exceed $100,000.
    (ii) Transfers before July 20, 1998. With respect to transfers 
occurring after December 16, 1987, and prior to July 20, 1998, a U.S. 
transferor that transferred U.S. or foreign stock or securities in a 
transfer described in section 367(a) is not subject to section 6038B if 
such person is described in paragraph (b)(2)(i)(A) of this section.
    (iii) Timely filed initial gain recognition agreement. Paragraph 
(b)(2)(i)(B)(1) of this section will not apply unless the initial gain 
recognition agreement is timely filed as determined under Sec. 
1.367(a)-8(d)(1), but for purposes of this section, determined without 
regard to Sec. 1.367(a)-8(p). However, see paragraph (f)(3) of this 
section for certain relief that may be available.
    (iv) Satisfaction of section 6038B reporting if a gain recognition 
agreement is timely filed. If the U.S. transferor is described in 
paragraph (b)(2)(i)(B)(1) of this section and is not otherwise required 
to file a Form 926 with respect to a transfer of assets other than the 
stock or securities to the transferee foreign corporation, the 
requirements of this section are satisfied with respect to the transfer 
of the stock or securities by completing Part I and Part II of Form 926, 
noting on the Form 926 that a gain recognition agreement is being filed 
pursuant to Sec. 1.367(a)-8; reporting on the Form 926 the fair market 
value, adjusted tax basis, and gain recognized with respect to the 
transferred stock or securities; submitting on the Form 926 any other 
information that Form 926, its accompanying instructions, or other 
applicable guidance require to be submitted with respect to the transfer 
of the stock or securities; and attaching a signed copy of the Form 926 
to its timely filed U.S. income tax return (including extensions) for 
the year of the transfer. If the U.S. transferor is required to file 
Form 926 with respect to a transfer of assets in addition to the stock 
or securities, the requirements of this section are satisfied with 
respect to the transfer of the stock or securities by noting on the Form 
926 that a gain recognition agreement is being filed pursuant to Sec. 
1.367(a)-8; reporting on the Form 926 the fair market value, adjusted 
tax basis, and gain recognized with respect to the transferred stock or 
securities; and submitting on the Form 926 any other information that 
Form 926, its accompanying instructions, or other applicable guidance 
require to be submitted with respect to the transfer of the stock or 
securities.
    (3) Special rule for transfers of cash. A U.S. person that transfers 
cash to a foreign corporation in a transfer described in section 
6038B(a)(1)(A) must report the transfer if--
    (i) Immediately after the transfer such person holds directly, 
indirectly, or by attribution (determined under the rules of section 
318(a), as modified by section 6038(e)(2)) at least 10 percent of the 
total voting power or the total value of the foreign corporation; or
    (ii) The amount of cash transferred by such person or any related 
person (determined under section 267(b)(1) through (3) and (10) through 
(12)) to such foreign corporation during the 12-month period ending on 
the date of the transfer exceeds $100,000.
    (4) [Reserved]. For further guidance, see Sec. 1.6038B-1T(b)(4).
    (c) Information required with respect to transfers described in 
section 6038B(a)(1)(A). A United States person that transfers property 
to a foreign corporation in an exchange described in section 
6038B(a)(1)(A) (including cash transferred in taxable years beginning 
after February 5, 1999, and other unappreciated property) must provide 
the following information, in paragraphs labeled to correspond with the

[[Page 214]]

number or letter set forth in this paragraph (c) and Sec. 1.6038B-
1T(c)(1) through (5). If a particular item is not applicable to the 
subject transfer, the taxpayer must list its heading and state that it 
is not applicable. For special rules applicable to transfers of stock or 
securities, see paragraph (b)(2)(ii) of this section.
    (1) through (4) introductory text [Reserved]. For further guidance, 
see Sec. 1.6038B-1T(c)(1) through (4) introductory text.
    (i) Active business property. Describe any transferred property that 
qualifies under Sec. 1.367(a)-2(a)(2). Provide here a general 
description of the business conducted (or to be conducted) by the 
transferee, including the location of the business, the number of its 
employees, the nature of the business, and copies of the most recently 
prepared balance sheet and profit and loss statement. Property listed 
within this category may be identified by general type. For example, 
upon the transfer of the assets of a manufacturing operation, a 
reasonable description of the property to be used in the business might 
include the categories of office equipment and supplies, computers and 
related equipment, motor vehicles, and several major categories of 
manufacturing equipment. However, any property that is includible in 
both paragraphs (c)(4)(i) and (iii) of this section (property subject to 
depreciation recapture under Sec. 1.367(a)-4(a)) must be identified in 
the manner required in paragraph (c)(4)(iii) of this section. If 
property is considered to be transferred for use in the active conduct 
of a trade or business under a special rule in paragraph (e), (f), or 
(g) of Sec. 1.367(a)-2, specify the applicable rule and provide 
information supporting the application of the rule.
    (ii) Stock or securities. Describe any transferred stock or 
securities, including the class or type, amount, and characteristics of 
the transferred stock or securities, as well as the name, address, place 
of incorporation, and general description of the corporation issuing the 
stock or securities.
    (iii) Depreciated property. Describe any property that is subject to 
depreciation recapture under Sec. 1.367(a)-4(a). Property within this 
category must be separately identified to the same extent as was 
required for purposes of the previously claimed depreciation deduction. 
Specify with respect to each such asset the relevant recapture 
provision, the number of months that such property was in use within the 
United States, the total number of months the property was in use, the 
fair market value of the property, a schedule of the depreciation 
deduction taken with respect to the property, and a calculation of the 
amount of depreciation required to be recaptured.
    (iv) Property not transferred for use in the active conduct of a 
trade or business. Describe any property that is eligible property, as 
defined in Sec. 1.367(a)-2(b) taking into account the application of 
Sec. 1.367(a)-2(c), that was transferred to the foreign corporation but 
not for use in the active conduct of a trade or business outside the 
United States (and was therefore not listed under paragraph (c)(4)(i) of 
this section).
    (v) Property transferred under compulsion. If property qualifies for 
the exception of Sec. 1.367(a)-2(a)(2) under the rules of paragraph (h) 
of that section, provide information supporting the claimed application 
of such exception.
    (vi) Certain ineligible property. Describe any property that is 
described in Sec. 1.367(a)-2(c) and that therefore cannot qualify under 
Sec. 1.367(a)-2(a)(2) regardless of its use in the active conduct of a 
trade or business outside of the United States. The description must be 
divided into the relevant categories, as follows:
    (A) Inventory, etc. Property described in Sec. 1.367(a)-2(c)(1);
    (B) Installment obligations, etc. Property described in Sec. 
1.367(a)-2(c)(2);
    (C) Foreign currency, etc. Property described in Sec. 1.367(a)-
2(c)(3); and
    (D) Leased property. Property described in Sec. 1.367(a)-2(c)(4).
    (vii) Other property that is ineligible property. Describe any 
property, other than property described in Sec. 1.367(a)-2(c), that 
cannot qualify under Sec. 1.367(a)-2(a)(2) regardless of its use in the 
active conduct of a trade or business outside of the United States and 
that is not subject to the rules of section 367(d) under Sec. 1.367(a)-
1(b)(5) (treatment of certain property as subject to

[[Page 215]]

section 367(d)). Each item of property must be separately identified.
    (viii) [Reserved]. For further guidance, see Sec. 1.6038B-
1T(c)(4)(viii).
    (5) Transfer of foreign branch with previously deducted losses. If 
the property transferred is property of a foreign branch with previously 
deducted losses subject to Sec. Sec. 1.367(a)-6 and -6T, provide the 
following information:
    (i) through (iv) [Reserved]. For further information, see Sec. 
1.6038B-1T(c)(5)(i) through (iv).
    (6) Transfers subject to section 367(a)(5)--(i) In general. This 
paragraph (c)(6) applies to a domestic corporation (U.S. transferor) 
that transfers section 367(a) property (as defined in Sec. 1.367(a)-
7(f)(10)) to a foreign corporation in a section 361 exchange (as defined 
in Sec. 1.367(a)-7(f)(8)) and to which the provisions of Sec. 
1.367(a)-7(c) apply. Paragraph (c)(6)(ii) of this section establishes 
the time and manner for the U.S. transferor to elect to apply the 
provisions of Sec. 1.367(a)-7(c). Paragraph (c)(6)(iii) of this section 
establishes the manner for the U.S. transferor to satisfy the 
requirement of Sec. 1.367(a)-7(c)(4).
    (ii) Election. The U.S. transferor elects to apply the provisions of 
Sec. 1.367(a)-7(c) by including a statement entitled, ``ELECTION TO 
APPLY EXCEPTION UNDER Sec. 1.367(a)-7(c),'' with its timely filed 
return (within the meaning of Sec. 1.367(a)-7(f)(12)) for the taxable 
year during which the reorganization occurs and that includes the 
information described in paragraphs (c)(6)(ii)(A), (c)(6)(ii)(B), 
(c)(6)(ii)(C), (c)(6)(ii)(D), (c)(6)(ii)(E), (c)(6)(ii)(F), 
(c)(6)(ii)(G), and (c)(6)(ii)(H) of this section. See Sec. 1.367(a)-
7(c)(5)(ii) for the statement required to be filed by a control group 
member (as defined in Sec. 1.367(a)-7(f)(1)) or final distributee (as 
defined in Sec. 1.367(a)-7(d)).
    (A) The name and taxpayer identification number (if any) of each 
control group member and final distributee (if any), the foreign 
acquiring corporation, and in the case of a triangular reorganization 
(within the meaning of Sec. 1.358-6(b)(2)) the corporation that 
controls the foreign acquiring corporation, and the ownership interest 
percentage (as defined in Sec. 1.367(a)-7(f)(7)) in the U.S. transferor 
of each control group member.
    (B) A calculation of the gain recognized (if any) by the U.S. 
transferor under Sec. 1.367(a)-7(c)(2)(i) and (c)(2)(ii), and the basis 
adjustments (if any) required to be made by each control group member 
under Sec. 1.367(a)-7(c)(3).
    (C) The date on which the U.S. transferor and each control group 
member or final distributee entered into the written agreement described 
in Sec. 1.367(a)-7(c)(5)(iv).
    (D) The amount of any deductible liability (as defined by Sec. 
1.367(a)-7(f)(2)).
    (E) The fair market value (as defined by Sec. 1.367(a)-7(f)(3)) of 
property transferred to the foreign acquiring corporation in the section 
361 exchange.
    (F) The inside basis (as defined by Sec. 1.367(a)-7(f)(4)).
    (G) The inside gain (as defined by Sec. 1.367(a)-7(f)(5)).
    (H) The section 367(a) percentage (as defined by Sec. 1.367(a)-
7(f)(9)).
    (iii) Agreement to amend U.S. transferor's tax return. The U.S. 
transferor complies with the requirement of Sec. 1.367(a)-7(c)(4)(i) by 
attaching a statement to its timely filed return (within the meaning of 
Sec. 1.367(a)-7(f)(12)) for the taxable year in which the 
reorganization occurs, entitled ``STATEMENT UNDER Sec. 1.367(a)-7(c)(4) 
FOR TRANSFERS OF ASSETS TO A FOREIGN CORPORATION IN A SECTION 361 
EXCHANGE.'' The statement must certify that if a significant amount of 
the section 367(a) property received by the foreign acquiring 
corporation from the U.S. transferor in the section 361 exchange is 
disposed of, directly or indirectly, in one or more related transactions 
described in paragraph (c)(6)(iii)(B) of this section occurring within 
the sixty (60) month period that begins on the date of distribution or 
transfer (within the meaning of Sec. 1.381(b)-1(b)), then the exception 
provided in Sec. 1.367(a)-7(c) will not apply to the section 361 
exchange. Accordingly, the U.S. transferor will recognize the gain 
realized but not recognized in the section 361 exchange, computed as if 
the exception provided in Sec. 1.367(a)-7(c) had never applied. A U.S. 
income tax return (or amended U.S. income tax return, as the case may 
be) for the year in which the reorganization occurred reporting the gain 
must be filed. If the

[[Page 216]]

section 361 exchange occurs in connection with a triangular 
reorganization (within the meaning of Sec. 1.358-6(b)(2)) and the 
corporation that controls the foreign acquiring corporation is foreign, 
an indirect disposition of the section 367(a) property includes the 
disposition by such controlling foreign corporation of the stock of the 
foreign acquiring corporation.
    (A) Disposition of a significant amount--(1) General rule. Except as 
provided in paragraphs (c)(6)(iii)(A)(2) and (c)(6)(iii)(A)(3) of this 
section, for purposes of this paragraph (c)(6)(iii), a disposition of a 
significant amount occurs if, in one or more related transactions, the 
foreign acquiring corporation disposes of an amount of the section 
367(a) property received from the U.S. transferor in the section 361 
exchange that is greater than 40 percent of the fair market value of all 
of the section 367(a) property transferred in the section 361 exchange.
    (2) Exception for certain nonrecognition exchanges. Section 367(a) 
property that is subsequently transferred (retransferred property) 
pursuant to a nonrecognition provision is not treated as disposed of for 
purposes of paragraph (c)(6)(iii)(A)(1) of this section, provided such 
transfer satisfies, and is treated in a manner consistent with the 
principles underlying Sec. 1.367(a)-8(k). Thus, for example, if section 
367(a) property is subsequently transferred to a foreign corporation in 
exchange solely for stock in a transaction described in section 351, 
such retransferred property is not treated as disposed of for purposes 
of paragraph (c)(6)(iii)(A)(1) of this section; in such a case, however, 
a subsequent disposition of either the retransferred property by the 
transferee foreign corporation, or of the stock of the transferee 
foreign corporation received in exchange for the retransferred property, 
is subject to the provisions of paragraph (c)(6)(iii)(A)(1) of this 
section.
    (3) Exception for dispositions occurring in the ordinary course of 
business. Dispositions of section 367(a) property described in section 
1221(a)(2) occurring in the ordinary course of business of the foreign 
acquiring corporation are not treated as disposed of for purposes of 
paragraph (c)(6)(iii)(A)(1) of this section.
    (B) Gain recognition transaction--(1) General rule. A transaction is 
described in this paragraph (c)(6)(iii)(B) if the transaction is entered 
into with a principal purpose of avoiding the U.S. tax that would have 
been imposed on the U.S. transferor on the disposition of the property 
transferred to the foreign acquiring corporation in the section 361 
exchange. A disposition may have a principal purpose of tax avoidance 
even if the tax avoidance purpose is outweighed by other purposes when 
taken together.
    (2) Presumptive tax avoidance. For purposes of this paragraph 
(c)(6)(iii)(B), the principal purpose of the foreign acquiring 
corporation's disposition of a significant amount of the section 367(a) 
property within the two-year period that begins on the date of 
distribution or transfer (within the meaning of Sec. 1.381(b)-1(b)) 
(whether in a recognition or nonrecognition transaction) will be 
presumed to be the avoidance of the U.S. tax that would have been 
imposed on the U.S. transferor on the disposition of the property 
transferred to the foreign acquiring corporation in the section 361 
exchange. However, this presumption will not apply if it is demonstrated 
to the satisfaction of the Director of Field Operations, Large Business 
& International (or any successor to the roles and responsibilities of 
such person (Director) that the avoidance of U.S. tax was not a 
principal purpose of the disposition.
    (3) Interest. If additional tax is required to be paid as a result 
of a transaction described in paragraph (c)(6)(iii)(B) of this section, 
then interest must be paid on that amount at rates determined under 
section 6621 with respect to the period between the date prescribed for 
filing the U.S. transferor's income tax return for the year in which the 
reorganization occurs and the date on which the additional tax for that 
year is paid.
    (d)(1) through (1)(iii) [Reserved]. For further guidance, see Sec. 
1.6038B-1T(d)(1) through (1)(iii).
    (iv) Intangible property transferred. Provide a description of the 
intangible property transferred, including its adjusted basis. 
Generally, each item of

[[Page 217]]

intangible property must be separately identified, including intangible 
property described in Sec. 1.367(d)-1(g)(2)(i). Identify all property 
that is subject to the rules of section 367(d) under Sec. 1.367(a)-
1(b)(5) (treatment of certain property as subject to section 367(d)). 
Describe any property for which the income required to be taken into 
account under section 367(d) and the regulations thereunder will be 
recognized over a 20-year period pursuant to Sec. 1.367(d)-1(c)(3)(ii). 
Estimate the anticipated income or cost reductions attributable to the 
intangible property's use beyond the 20-year period.
    (v)-(vi) [Reserved]. For further guidance, see Sec. 1.6038B-
1T(d)(1)(v) through (1)(vi).
    (vii) Coordination with loss rules. List any intangible property 
subject to section 367(d) the transfer of which also gives rise to the 
recognition of gain under section 904(f)(3) or Sec. Sec. 1.367(a)-6 or 
-6T. Provide a calculation of the gain required to be recognized with 
respect to such property, in accordance with the provisions of Sec. 
1.367(d)-1(g)(3).
    (d)(1)(viii) through (d)(2) [Reserved]. For further guidance, see 
Sec. 1.6038B-1T(d)(1)(viii) through (d)(2).
    (e) Transfers subject to section 367(e)--(1) In general. If a 
domestic corporation (distributing corporation) makes a distribution 
described in section 367(e)(1) or section 367(e)(2), the distributing 
corporation must comply with the reporting requirements of this 
paragraph (e). Unless otherwise provided in this section, a distributing 
corporation making a distribution described in sections 367(e)(1) or 
367(e)(2) must file a Form 926, ``Return by a U.S. Transferor of 
Property to a Foreign Corporation (under section 367),'' as amended and 
modified by this section.
    (2) Reporting requirements for section 367(e)(1) distributions of 
domestic controlled corporations. A domestic distributing corporation 
making a distribution of the stock or securities of a domestic 
corporation under section 355 is not required to file a Form 926, as 
described in paragraph (e)(1) of this section, and shall have no other 
reporting requirements under section 6038B.
    (3) Reporting requirements for section 367(e)(1) distributions of 
foreign controlled corporations. If the distributing corporation makes a 
section 355 distribution of the stock or securities of a foreign 
controlled corporation to distributee shareholders who are not qualified 
U.S. persons, as defined in Sec. 1.367(e)-1(b)(1), then the 
distributing corporation shall complete Part 1 of the Form 926 and 
attach a signed copy of such form to its U.S. income tax return for the 
year of the distribution. The distributing corporation shall also attach 
to its U.S. income tax return for the year of distribution a statement 
signed under the penalties of perjury entitled, ``Addendum to Form 
926.'' The addendum shall contain a brief description of the 
transaction, state the number of shares distributed to distributees who 
are not qualified U.S. persons (applying the rules contained in Sec. 
1.367(e)-1(d)), and state the basis and fair market value of the 
distributed stock or securities (including a list stating the amounts 
that were distributed to distributees who were not qualified U.S. 
persons and distributees who were qualified U.S. persons).
    (4) Reporting rules for section 367(e)(2) distributions by domestic 
liquidating corporations--(i) General rule. Except as provided in 
paragraph (e)(4)(ii) of this section, if the distributing corporation 
makes a distribution of property in complete liquidation under section 
332 to a foreign distributee corporation that meets the stock ownership 
requirements of section 332(b) with respect to the stock of the 
distributing corporation, then the distributing corporation must 
complete a Form 926 and attach a signed copy of such form to its timely 
filed U.S. income tax return (including extensions) for the taxable 
years that include one or more liquidating distributions. The property 
description contained in Part III of the Form 926 must contain a 
description, including the adjusted tax basis and fair market value, of 
all property distributed by the distributing corporation (regardless of 
whether the distribution of the property qualifies for nonrecognition 
treatment). The description must also identify the items of property for 
which nonrecognition treatment is claimed under Sec. 1.367(e)-
2(b)(2)(ii) or (iii), as applicable.
    (ii) Special rule. Except as provided in paragraph (e)(4)(iii) of 
this section, if

[[Page 218]]

the distributing corporation distributes items of property that will be 
used by the foreign distributee corporation in the conduct of a trade or 
business in the United States and the distributing corporation does not 
recognize gain or loss on such distribution under Sec. 1.367(e)-
2(b)(2)(i) with respect to such property, then the distributing 
corporation may satisfy the requirements of this section by completing 
Part I and Part II of Form 926, noting in Part III that the information 
required by Form 926 is contained in a statement required by Sec. 
1.367(e)-2(b)(2)(i)(C)(2), and attaching a signed copy of Form 926 to 
its timely filed U.S. income tax return (including extensions) for each 
taxable year that includes one or more distributions in liquidation. In 
addition, if the distributing corporation distributes stock of a 
domestic subsidiary corporation and does not recognize gain or loss on 
such distribution under Sec. 1.367(e)-2(b)(2)(iii) with respect to such 
stock, then the distributing corporation may satisfy the requirements of 
this section by completing Part I and Part II of Form 926, noting in 
Part III that the information required by Form 926 is contained in a 
statement required by Sec. 1.367(e)-2(b)(2)(iii)(D), and attaching a 
signed copy of Form 926 to its timely filed U.S. income tax return 
(including extensions) for the taxable years that include one or more 
distributions of domestic subsidiary stock.
    (iii) Properly filed statement. Paragraph (e)(4)(ii) will not apply 
if there is a failure to file an initial liquidation document as 
determined under Sec. 1.367(e)-2(e)(3)(i), but for purposes of this 
section, determined without regard to Sec. 1.367(e)-2(f). However, see 
paragraph (f)(3) of this section for certain relief that may be 
available.
    (f) Failure to comply with reporting requirements--(1) Consequences 
of failure. If a U.S. person is required to file a notice (or otherwise 
comply) under paragraph (b) of this section and fails to comply with the 
applicable requirements of section 6038B and this section, then with 
respect to the particular property as to which there was a failure to 
comply--
    (i) The U.S. person shall pay a penalty under section 6038B(b)(1) 
equal to 10 percent of the fair market value of the transferred property 
at the time of the exchange, but in no event shall the penalty exceed 
$100,000 unless the failure with respect to such exchange was due to 
intentional disregard (described under paragraph (g)(4) of this 
section); and
    (ii) The period of limitations on assessment of tax upon the 
transfer of that property does not expire before the date which is 3 
years after the date on which the Secretary is furnished the information 
required to be reported under this section. See section 6501(c)(8) and 
any regulations thereunder.
    (2) Failure to comply. A failure to comply with the requirements of 
section 6038B is--
    (i) The failure to report at the proper time and in the proper 
manner any material information required to be reported under the rules 
of this section; or
    (ii) The provision of false or inaccurate information in purported 
compliance with the requirements of this section. Thus, a transferor 
that timely files Form 926 with the attachments required under the rules 
of this section shall, nevertheless, have failed to comply if, for 
example, the transferor reports therein that property will be used in 
the active conduct of a trade or business outside of the United States, 
but in fact the property continues to be used in a trade or business 
within the United States.
    (iii) With respect to an initial gain recognition agreement filed 
under Sec. 1.367(a)-8, a failure to comply as determined under Sec. 
1.367(a)-8(j)(8), but for purposes of this section, determined without 
regard to the application of Sec. 1.367(a)-8(p).
    (iv) With respect to an initial liquidation document filed under 
Sec. 1.367(e)-2(b)(2), a failure to comply as determined under Sec. 
1.367(e)-2(e)(4)(i), but for purposes of this section, determined 
without regard to the application of Sec. 1.367(e)-2(f).
    (3) Reasonable cause for failure to comply--(i) Request for relief. 
If the U.S. transferor fails to comply with any requirement of section 
6038B and this section, the failure shall be deemed not to have occurred 
if the U.S. transferor

[[Page 219]]

is able to demonstrate that the failure was due to reasonable cause and 
not willful neglect using the procedure set forth in paragraph 
(f)(3)(ii) of this section. Whether the failure to timely comply was due 
to reasonable cause and not willful neglect will be determined by the 
Director of Field Operations, Cross Border Activities Practice Area of 
Large Business & International (Director) based on all the facts and 
circumstances.
    (ii) Procedures for establishing that a failure to timely comply was 
due to reasonable cause and not willful neglect--(A) Time of submission. 
A U.S. transferor's statement that the failure to timely comply was due 
to reasonable cause and not willful neglect will be considered only if, 
promptly after the U.S. transferor becomes aware of the failure, an 
amended return is filed for the taxable year to which the failure 
relates that includes the information that should have been included 
with the original return for such taxable year or that otherwise 
complies with the rules of this section, and that includes a written 
statement explaining the reasons for the failure to timely comply.
    (B) Notice requirement. In addition to the requirements of paragraph 
(f)(3)(ii)(A) of this section, the U.S. transferor must comply with the 
notice requirements of this paragraph (f)(3)(ii)(B). If any taxable year 
of the U.S. transferor is under examination when the amended return is 
filed, a copy of the amended return and any information required to be 
included with such return must be delivered to the Internal Revenue 
Service personnel conducting the examination. If no taxable year of the 
U.S. transferor is under examination when the amended return is filed, a 
copy of the amended return and any information required to be included 
with such return must be delivered to the Director.
    (4) Definition of intentional disregard. If the transferor fails to 
qualify for the exception under paragraph (f)(3) of this section and if 
the taxpayer knew of the rule or regulation that was disregarded, the 
failure will be considered an intentional disregard of section 6038B, 
and the monetary penalty under paragraph (f)(1)(ii) of this section will 
not be limited to $100,000. See Sec. 1.6662-3(b)(2).
    (g) Effective/applicability dates. (1) This section applies to 
transfers occurring on or after July 20, 1998, except as provided in 
paragraphs (g)(2) through (g)(7) of this section, and except for 
transfers of cash made in tax years beginning on or before February 5, 
1999 (which are not required to be reported under section 6038B), and 
transfers described in paragraph (e) of this section (which applies to 
transfers that are subject to Sec. Sec. 1.367(e)-1(f) and 1.367(e)-
2(e)). See Sec. 1.6038B-1T for transfers occurring prior to July 20, 
1998. See also Sec. 1.6038B-1T(e) in effect prior to August 9, 1999 (as 
contained in 26 CFR part 1 revised April 1, 1999), for transfers 
described in section 367(e) that are not subject to Sec. Sec. 1.367(e)-
1(f) and 1.367(e)-2(e).
    (2) The rules of paragraph (b)(1)(i) of this section as they apply 
to section 368(a)(1)(A) reorganizations (including reorganizations 
described in section 368(a)(2)(D) or (E)) apply to transfers occurring 
on or after January 23, 2006.
    (3) The rules of paragraph (b)(1)(i) of this section that provide an 
exception from reporting under section 6038B for transfers of stock or 
securities in a section 354 or 356 exchange, pursuant to a section 
368(a)(1)(G) reorganization that is not treated as an indirect stock 
transfer under Sec. 1.367(a)-3(d), apply to transfers occurring on or 
after January 23, 2006.
    (4) The rules of paragraph (b)(1)(i) of this section that provide an 
exception from reporting under section 6038B for transfers of stock in a 
section 354 or 356 exchange, pursuant to a section 368(a)(1)(E) 
reorganization or an asset reorganization under section 368(a)(1) that 
is not treated as an indirect stock transfer under Sec. 1.367(a)-3(d), 
apply to transfers occurring on or after January 23, 2006. The rules of 
paragraph (b)(1)(i) of this section that provide an exception from 
reporting under section 6038B for transfers of securities in a section 
354 or 356 exchange, pursuant to a section 368(a)(1)(E) reorganization 
or an asset reorganization under section 368(a)(1) that is not treated 
as an indirect stock transfer under Sec. 1.367(a)-3(d), apply only to 
transfers occurring after January 5, 2005 (although taxpayers

[[Page 220]]

may apply such provision to transfers of securities occurring on or 
after July 20, 1998 and on or before January 5, 2005 if done 
consistently to all transactions). See Sec. 1.6038-1T(b)(i), as 
contained in 26 CFR part 1 revised as of April 1, 2005, for transfers 
occurring prior to the effective dates described in paragraphs (g)(2) 
through (4) of this section.
    (5) Paragraphs (c)(6) and (f)(3) of this section apply to transfers 
occurring on or after April 18, 2013. For guidance with respect to 
paragraphs (c)(6) and (f)(3) of this section before April 18, 2013, see 
26 CFR part 1 revised as of April 1, 2012.
    (6) The second sentence of paragraph (b)(1)(i) and paragraphs 
(b)(2)(i)(B)(1), (b)(2)(iii), (b)(2)(iv), (c), (e)(4), (f)(2)(iii), and 
(f)(2)(iv) of this section will apply to transfers for which documents 
are required to be filed on or after November 19, 2014, as well as to 
transfers that are the subject of requests for relief submitted on or 
after November 19, 2014. The second sentence of paragraph (b)(1)(i) and 
paragraphs (b)(2)(i)(B)(1), (b)(2)(iii), (b)(2)(iv), (c), and 
(f)(2)(iii) of this section will also apply to any transfer that is the 
subject of a request for relief submitted pursuant to Sec. 1.367(a)-
8(r)(3).
    (7) Paragraphs (c)(4)(i) through (vii), (c)(5), and (d)(1)(iv) and 
(vii) of this section apply to transfers occurring on or after September 
14, 2015, and to transfers occurring before September 14, 2015, 
resulting from entity classification elections made under Sec. 
301.7701-3 that are filed on or after September 14, 2015. For guidance 
with respect to paragraphs (c)(4), (c)(5), and (d)(1) of this section 
before this section is applicable, see Sec. Sec. 1.6038B-1 and 1.6038B-
1T as contained in 26 CFR part 1 revised as of April 1, 2016.

[T.D. 8770, 63 FR 33568, June 19, 1998]

    Editorial Note: For Federal Register citations affecting Sec. 
1.6038B-1, see the List of CFR Sections Affected, which appears in the 
Finding Aids section of the printed volume and at www.govinfo.gov.



Sec. 1.6038B-1T  Reporting of certain transactions to foreign 
corporations (temporary).

    (a) through (b)(3) [Reserved]. For further guidance, see Sec. 
1.6038B-1(a) through (b)(3).
    (4) Date of transfer--(i) In general. For purposes of this section, 
the date of a transfer described in section 367 is the first date on 
which title to, possession of, or rights to the use of stock, 
securities, or other property passes pursuant to the plan for purposes 
of subtitle A of the Internal Revenue Code. A transfer will not be 
considered to begin with a decision of a board of directors or similar 
action unless the transaction otherwise takes effect for purposes of 
subtitle A of the Internal Revenue Code on that date.
    (ii) Termination of section 1504(d) election. A transfer deemed to 
occur as a result of the termination of an election under section 
1504(d) will be considered to occur on the date the contiguous country 
corporation first fails to continue to qualify for the election under 
section 1504(d). The rule of this paragraph (b)(3)(ii) is illustrated by 
the following example.

    Example. Domestic corporation W previously made a valid election 
under section 1504(d) to have its Mexican subsidiary S treated as a 
domestic corporation. On August 1, 1986, W disposes of its right, title, 
and interest in 10 percent of the stock of S by selling such stock to an 
unrelated United States person who is not a director of S. S first fails 
to continue to qualify for the election under section 1504(d) on August 
1, 1986, since on such date it ceases to be directly or indirectly 
wholly owned or controlled by W. The constructive transfer of assets 
from ``domestic'' corporation S to Mexican corporation S is considered 
to occur on that date.

    (iii) Change in classification. A transfer deemed to occur as a 
result of a change in classification of an entity caused by a change in 
the governing documents, articles, or agreements of the entity (as 
described in Sec. 1.367(a)-1T(c)(6)) will be considered to occur on the 
date that such changes take effect for purposes of subtitle A of the 
Internal Revenue Code.
    (iv) U.S. resident under section 6013 (g) or (h). A transfer made by 
an alien individual who is considered to be a U.S. resident by reason of 
a timely election

[[Page 221]]

under section 6013 (g) or (h) will be considered to occur, for purposes 
of this section (but not for purposes of section 367), on the later of--
    (A) The date on which the election under section 6013 (g) or (h) is 
made; or
    (B) The date on which the transfer would otherwise be considered to 
occur under the rules of this paragraph (b)(3).


The rule of this paragraph (b)(3)(iv) is illustrated by the following 
example.

    Example. D is a nonresident alien individual who is married to a 
United States citizen. On March 1, 1986, D transfers property to a 
foreign corporation in an exchange described in section 351. On April 
15, 1987, D and the spouse timely file with their tax return for the 
taxable year ended December 31, 1986, an election under section 6013(g) 
for D to be treated as a United States resident. The election is 
effective on January 1, 1986. For purposes of section 6038 B, the 
transfer described in section 367(a) made by D in connection with the 
section 351 exchange is considered to occur on April 15, 1987, the date 
on which the timely election was made under section 6013(g).

    (c) Introductory text [Reserved]. For further guidance, see Sec. 
1.6038B-1(c).
    (1) Transferor. Provide the name, U.S. taxpayer identification 
number, and address of the U.S. person making the transfer.
    (2) Transfer. Provide the following information concerning the 
transfer:
    (i) Name, U.S. taxpayer identification number (if any), address, and 
country of incorporation of transferee foreign corporation;
    (ii) A general description of the transfer, and any wider 
transaction of which it forms a part, including a chronology of the 
transfers involved and an identification of the other parties to the 
transaction to the extent known.
    (3) Consideration received. Provide a description of the 
consideration received by the U.S. person making the transfer, including 
its estimated fair market value and, in the case of stock or securities, 
the class or type, amount, and characteristics of the interest received.
    (4) Property transferred. Provide a description of the property 
transferred. The description must be divided into the following 
categories, and must include the estimated fair market value and 
adjusted basis of the property, as well as any additional information 
specified below.
    (i) through (c)(5) introductory text [Reserved]
    (i) Branch operation. Describe the foreign branch the property of 
which is transferred, in accordance with the definition of Sec. 
1.367(a)-6T(g).
    (ii) Branch property. Describe the property of the foreign branch, 
including its adjusted basis and fair market value. For this purpose 
property must be identified with reasonable particularity, but may be 
identified by category rather than listing every asset separately. 
Substantially similar property may be listed together for this purpose, 
and property of minor value may be grouped into functional categories. 
For example, a reasonable description of the property of a business 
office might include the following categories: Word processing or data 
processing equipment, other office equipment and furniture, and office 
supplies.
    (iii) Previously deducted losses. Set forth a detailed calculation 
of the sum of the losses incurred by the foreign branch before the 
transfer, and a detailed calculation of any reduction of such losses, in 
accordance with Sec. 1.367(a)-6T (d) and (e).
    (iv) Character of gain. Set forth a statement of the character of 
the gain required to be recognized, in accordance with Sec. 1.367(a)-
6T(c)(1).
    (6) [Reserved]. For further guidance, see Sec. 1.6038B-1(c)(6).
    (d) Transfers subject to section 367(d)--(1) Initial transfer. A 
U.S. person that transfers inntangible property to a foreign corporation 
in an exchange described in section 351 or 361 must provide the 
following information in paragraphs labelled to correspond with the 
number or letter set forth below. If a particular item is not applicable 
to the subject transfer, list its heading and state that it is not 
applicable. The information required by subdivisions (i) through (iii) 
need only be provided if such information was not otherwise provided 
under paragraph (c) of this section. (Note that the U.S. transferor may 
subsequently be required to file another return under paragraph (d)(2) 
of this section.)
    (i) Transferor. Provide the name, U.S. taxpayer identification 
number, and

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address of the U.S. person making the transfer.
    (ii) Transfer. Provide information concerning the transfer, 
including:
    (A) Name, U.S. taxpayer identification number (if any), address, and 
country of incorporation of the transferee foreign corporation;
    (B) A general description of the transfer, and any wider transaction 
of which it forms a part, including a chronology of the transfers 
involved and an identification of the other parties to the transaction 
to the extent known.
    (iii) Consideration received. Provide a description of the 
consideration received by the U.S. person making the transfer, including 
its estimated fair market value and, in the case of stock or securities, 
the class or type, amount, and characteristics of the interest received.
    (iv) [Reserved]
    (v) Annual payment. Provide and explain the calculation of the 
annual deemed payment for the use of the intangible property required to 
be recognized by the transferor under the rules of section 367(d).
    (vi) Election to treat as sale. List any intangible with respect to 
which an election is being made under Sec. 1.367(d)-1T(g)(2) to treat 
the transfer as a sale. Include the fair market value of the intangible 
on the date of the transfer and a calculation of the gain required to be 
recognized in the year of the transfer by reason of the election.
    (vii) [Reserved]
    (viii) Other intangibles. Describe any intangible property sold or 
licensed by the transferor to the transferee foreign corporation, and 
set forth the general terms of each sale or license.
    (2) Subsequent transfers. If a U.S. person transfers intangible 
property to a foreign corporation in an exchange described in section 
351 or 361, and at any time thereafter (within the useful life of the 
intangible property) either that U.S. person disposes of the stock of 
the transferee foreign corporation or the transferee foreign corporation 
disposes of the transferred intangible, then the U.S. person must 
provide the following information in paragraphs labelled to correspond 
with the number or letter set forth below. The information required by 
subdivisions (i) and (ii) need only be provided if such information was 
not otherwise provided in the same return, pursuant to paragraph (c) or 
(d)(1) of this section. For purposes of determining the date on which a 
return under this subparagraph (2) is required to be filed, the date of 
transfer is the date of the subsequent transfer of stock or intangible 
property.
    (i) Transferor. Provide the name, U.S. taxpayer identification 
number, and address of the U.S. person making the transfer.
    (ii) Initial transfer. Provide the following information concerning 
the initial transfer:
    (A) The date of the transfer;
    (B) The name, U.S. taxpayer identification number (if any), address, 
and country of incorporation of the transferee foreign corporation; and
    (C) A general description of the transfer and any wider transaction 
of which it formed a part.
    (iii) Subsequent transfer. Provide the following information 
concerning the subsequent transfer:
    (A) A general description of the subsequent transfer and any wider 
transaction of which it forms a part;
    (B) A calculation of any gain required to be recognized by the U.S. 
person under the rules of Sec. 1.367(d)-1T (d) through (f); and
    (C) The name, address, and identifying number of each person that 
under the rules of Sec. 1.367(d)-1T (e) or (f) will be considered to 
receive contingent annual payments for the use of the intangible 
property.
    (e) [Reserved]. For further guidance, see Sec. 1.6038B-1(e).
    (f)(1) through (f)(3) [Reserved] For further guidance, see Sec. 
1.6038B-1(f)(1) through (f)(2).
    (f)(4) [Reserved] For further guidance, see Sec. 1.6038B-1T(f)(4).
    (g) Effective date. This section applies to transfers occurring 
after December 31, 1984. See Sec. 1.6038B-1T(a) through (b)(2), (c) 
introductory text, and (f) (26 CFR part 1, revised April 1, 1998) for 
transfers occurring prior to July 20,

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1998. See Sec. 1.6038B-1 for transfers occurring on or after July 20, 
1998.

[T.D. 8087, 51 FR 17957, May 16, 1986, as amended by T.D. 8682, 61 FR 
42177, Aug. 14, 1996; T.D. 8770, 63 FR 33570, June 19, 1998; T.D. 8834, 
64 FR 43083, Aug. 9, 1999; T.D. 9100, 68 FR 70708, Dec. 19, 2003; 69 FR 
5017, Feb. 3, 2004; T.D. 9243, 71 FR 4294, Jan. 26, 2006; T.D. 9300, 71 
FR 71045, Dec. 8, 2006; T.D. 9615, 78 FR 17064, Mar. 19, 2013; T.D. 
9760, 81 FR 15169, Mar. 22, 2016; T.D. 9803, 81 FR 91032, Dec. 16, 2016]



Sec. 1.6038B-2  Reporting of certain transfers to foreign partnerships.

    (a) Reporting requirements--(1) Requirement to report transfers. A 
United States person that transfers property to a foreign partnership in 
a contribution described in section 721 (including section 721(b)) must 
report that transfer on Form 8865 ``Information Return of U.S. Persons 
With Respect to Certain Foreign Partnerships'' pursuant to section 6038B 
and the rules of this section, if--
    (i) Immediately after the transfer, the United States person owns, 
directly, indirectly, or by attribution, at least a 10-percent interest 
in the partnership, as defined in section 6038(e)(3)(C) and the 
regulations thereunder;
    (ii) The value of the property transferred, when added to the value 
of any other property transferred in a section 721 contribution by such 
person (or any related person) to the partnership during the 12-month 
period ending on the date of the transfer, exceeds $100,000; or
    (iii) The United States person is a U.S. transferor (as defined in 
Sec. 1.721(c)-1(b)(18)) that makes a gain deferral contribution and is 
required to report under Sec. 1.721(c)-6(b)(2). The reporting required 
under this paragraph (a) includes the annual reporting required by Sec. 
1.721(c)-6(b)(3). For purposes of applying this paragraph (a)(1)(iii) to 
partnerships formed on or after January 18, 2017, a domestic partnership 
is treated as a foreign partnership pursuant to section 7701(a)(4).
    (2) Indirect transfer through a domestic partnership--For purposes 
of this section, if a domestic partnership transfers property to a 
foreign partnership in a section 721 transaction, the domestic 
partnership's partners shall be considered to have transferred a 
proportionate share of the property to the foreign partnership. However, 
if the domestic partnership properly reports all of the information 
required under this section with respect to the contribution, no partner 
of the transferor partnership, whether direct or indirect (through tiers 
of partnerships), is also required to report under this section. For 
illustrations of this rule, see Examples 4 and 5 of paragraph (a)(7) of 
this section.
    (3) Indirect transfer through a foreign partnership. Solely for 
purposes of this section, if a foreign partnership transfers section 
721(c) property (as defined in Sec. 1.721(c)-1(b)(15)) to another 
foreign partnership in a transfer described in Sec. 1.721(c)-3(d) 
(tiered-partnership rules), then the transferor foreign partnership's 
partners will be considered to have transferred a proportionate share of 
the property to the foreign partnership.
    (4) Requirement to report dispositions--(i) In general. If a United 
States person was required to report a transfer to a foreign partnership 
of appreciated property under paragraph (a)(1) or (2) of this section, 
and the foreign partnership disposes of the property while such United 
States person remains a direct or indirect partner, that United States 
person must report the disposition by filing Form 8865. The form must be 
attached to, and filed by the due date (including extensions) of, the 
United States person's income tax return for the year in which the 
disposition occurred.
    (ii) Disposition of contributed property in nonrecognition 
transaction. If a foreign partnership disposes of contributed 
appreciated property in a nonrecognition transaction and substituted 
basis property is received in exchange, and the substituted basis 
property has built-in gain under Sec. 1.704-3(a)(8), the original 
transferor is not required to report the disposition. However, the 
transferor must report the disposition of the substituted basis property 
in the same manner as provided for the contributed property.
    (5) Time for filing Form 8865. The Form 8865 on which a transfer is 
reported must be attached to the transferor's timely filed (including 
extensions) income tax return for the tax year that

[[Page 224]]

includes the date of the transfer. If the person required to report 
under this section is not required to file an income tax return for its 
tax year during which the transfer occurred, but is required to file an 
information return for that year (for example, Form 1065, ``U.S. 
Partnership Return of Income,'' or Form 990, ``Return of Organization 
Exempt from Income Tax''), the person should attach the Form 8865 to its 
information return.
    (6) Returns to be made--(i) Separate returns for each partnership. 
If a United States person transfers property reportable under this 
section to more than one foreign partnership in a taxable year, the 
United States person must submit a separate Form 8865 for each 
partnership.
    (ii) Duplicate form to be filed. If required by the instructions 
accompanying Form 8865, a duplicate Form 8865 (including attachments and 
schedules) must also be filed by the due date for submitting the 
original Form 8865 under paragraph (a)(5)(i) or (ii) of this section, as 
applicable.
    (7) Examples. The application of this paragraph (a) may be 
illustrated by the following examples:

    Example 1. On November 1, 2001, US, a United States person that uses 
the calendar year as its taxable year, contributes $200,000 to FP, a 
foreign partnership, in a transaction subject to section 721. After the 
contribution, US owns a 5% interest in FP. US must report the 
contribution by filing Form 8865 for its taxable year ending December 
31, 2001. On March 1, 2002, US makes a $40,000 section 721 contribution 
to FP, after which US owns a 6% interest in FP. US must report the 
$40,000 contribution by filing Form 8865 for its taxable year ending 
December 31, 2002, because the contribution, when added to the value of 
the other property contributed by US to FP during the 12-month period 
ending on the date of the transfer, exceeds $100,000.
    Example 2. F, a nonresident alien, is the brother of US, a United 
States person. F owns a 15% interest in FP, a foreign partnership. US 
contributes $99,000 to FP, in exchange for a 1-percent partnership 
interest. Under sections 6038(e)(3)(C) and 267(c)(2), US is considered 
to own at least a 10-percent interest in FP and, therefore, US must 
report the $99,000 contribution under this section.
    Example 3. US, a United States person, owns 40 percent of FC, a 
foreign corporation. FC owns a 20-percent interest in FP, a foreign 
partnership. Under section 267(c)(1), US is considered to own 8 percent 
of FP due to its ownership of FC. US contributes $50,000 to FP in 
exchange for a 5-percent partnership interest. Immediately after the 
contribution, US is considered to own at least a 10-percent interest in 
FP and, therefore, must report the $50,000 contribution under this 
section.
    Example 4. US, a United States person, owns a 60-percent interest in 
USP, a domestic partnership. On March 1, 2001, USP contributes $200,000 
to FP, a foreign partnership, in exchange for a 5-percent partnership 
interest. Under paragraph (a)(2) of this section, US is considered as 
having contributed $120,000 to FP ($200,000 x 60%). However, under 
paragraph (a)(2), if USP properly reports the contribution to FP, US is 
not required to report its $120,000 contribution. If US directly 
contributes $5,000 to FP on June 10, 2001, US must report the $5,000 
contribution because US is considered to have contributed more than 
$100,000 to FP in the 12-month period ending on the date of the $5,000 
contribution.
    Example 5. US, a United States person, owns an 80-percent interest 
in USP, a domestic partnership. USP owns an 80-percent interest in USP1, 
a domestic partnership. On March 1, 2001, USP1 contributes $200,000 to 
FP, a foreign partnership, in exchange for a 3-percent partnership 
interest. Under paragraph (a)(2) of this section, USP is considered to 
have contributed $160,000 ($200,000 x 80%) to FP. US is considered to 
have contributed $128,000 to FP ($200,000 x 80% x 80%). However, if USP1 
reports the transfer of the $200,000 to FP, neither US nor USP are 
required to report under this section the amounts they are considered to 
have contributed. Additionally, regardless of whether USP1 reports the 
$200,000 contribution, if USP reports the $160,000 contribution it is 
considered to have made, US does not have to report under this section 
the $128,000 contribution US is considered to have made.

    (b) Transfers by trusts relating to state and local government 
employee retirement plans. Trusts relating to state and local government 
employee retirement plans are not required to report transfers under 
this section, unless otherwise specified in the instructions to Form 
8865.
    (c) Information required with respect to transfers of property. With 
respect to transfers required to be reported under paragraph (a)(1) or 
(2) of this section, the return must contain information in such form or 
manner as Form 8865 (and its accompanying instructions) prescribes with 
respect to reportable events, including--
    (1) The name, address, and U.S. taxpayer identification number of 
the

[[Page 225]]

United States person making the transfer;
    (2) The name, U.S. taxpayer identification number (if any), and 
address of the transferee foreign partnership, and the type of entity 
and country under whose laws the partnership was created or organized;
    (3) A general description of the transfer, and of any wider 
transaction of which it forms a part, including the date of transfer;
    (4) The names and addresses of the other partners in the foreign 
partnership, unless the transfer is solely of cash and the transferor 
holds less than a ten-percent interest in the transferee foreign 
partnership immediately after the transfer. However, for tax years of 
U.S. persons beginning on or after January 1, 2000, the person reporting 
pursuant to section 6038B (the transferor) must provide the names and 
addresses of each United States person that owned a ten-percent or 
greater direct interest in the foreign partnership during the 
transferor's tax year in which the transfer occurred, and the names and 
addresses of any other United States or foreign persons that were direct 
partners in the foreign partnership during that tax year and that were 
related to the transferor during that tax year. See paragraph (i)(4) of 
this section for the definition of a related person;
    (5) A description of the partnership interest received by the United 
States person, including a change in partnership interest;
    (6) A separate description of each item of contributed property that 
is appreciated property subject to the allocation rules of section 
704(c) (except to the extent that the property is permitted to be 
aggregated in making allocations under section 704(c)), or is intangible 
property, including its estimated fair market value and adjusted basis;
    (7) A description of other contributed property, not specified in 
paragraph (c)(6) of this section, aggregated by the following categories 
(with, in each case, a brief description of the property)--
    (i) Stock in trade of the transferor (inventory);
    (ii) Tangible property (other than stock in trade) used in a trade 
or business of the transferor;
    (iii) Cash;
    (iv) Stock, notes receivable and payable, and other securities; and
    (v) Other property;
    (8) With respect to reporting required under Sec. 1.721(c)-6(b)(2) 
and paragraph (a)(1)(iii) of this section with regard to a gain deferral 
contribution, the information required by Sec. 1.721(c)-6(b)(2); and
    (9) With respect to section 721(c) property for which reporting is 
required under Sec. 1.721(c)-6(b)(3) and paragraph (a)(1)(iii) of this 
section, the information required by Sec. 1.721(c)-6(b)(3).
    (d) Information required with respect to dispositions of property. 
In respect of dispositions required to be reported under paragraph 
(a)(4) of this section, the return must contain information in such form 
or manner as Form 8865 (and its accompanying instructions) prescribes 
with respect to reportable events, including--
    (1) The date and manner of disposition;
    (2) The gain and depreciation recapture amounts, if any, realized by 
the partnership; and
    (3) Any such amounts allocated to the United States person.
    (e) Method of reporting. Except as otherwise provided on Form 8865, 
or the accompanying instructions, all amounts reported as required under 
this section must be expressed in United States currency, with a 
statement of the exchange rates used. All statements required on or with 
Form 8865 pursuant to this section must be in the English language.
    (f) Reporting under this section not required of partnerships 
excluded from the application of subchapter K--(1) Election to be wholly 
excluded. The reporting requirements of this section will not apply to 
any United States person in respect of an eligible partnership as 
described in Sec. 1.761-2(a), if such partnership has validly elected 
to be excluded from all of the provisions of subchapter K of chapter 1 
of the Internal Revenue Code in the manner specified in Sec. 1.761-
2(b)(2)(i).
    (2) Deemed excluded. The reporting requirements of this section will 
not

[[Page 226]]

apply to any United States person in respect of an eligible partnership 
as described in Sec. 1.761-2(a), if such partnership is validly deemed 
to have elected to be excluded from all of the provisions of subchapter 
K of chapter 1 of the Internal Revenue Code in accordance with the 
provisions of Sec. 1.761-2(b)(2)(ii).
    (g) Deemed contributions. Deemed contributions resulting from IRS-
initiated section 482 adjustments are not required to be reported under 
section 6038B. However, taxpayers must report deemed contributions 
resulting from taxpayer-initiated adjustments. Such information will be 
furnished timely if filed by the due date, including extensions, for 
filing the taxpayer's income tax return for the year in which the 
adjustment is made.
    (h) Failure to comply with reporting requirements--(1) Consequences 
of a failure. If a United States person is required to file a return 
under paragraph (a) of this section and fails to comply with the 
reporting requirements of section 6038B and this section, or Sec. 
1.721(c)-6, then that person is subject to the following penalties:
    (i) The United States person is subject to a penalty equal to 10 
percent of the fair market value of the property at the time of the 
contribution. Such penalty with respect to a particular transfer is 
limited to $100,000, unless the failure to comply with respect to such 
transfer was due to intentional disregard.
    (ii) The United States person must recognize gain (reduced by the 
amount of any gain recognized, with respect to that property, by the 
transferor after the transfer) as if the contributed property had been 
sold for fair market value at the time of the contribution. Adjustments 
to the basis of the partnership's assets and any relevant partner's 
interest as a result of gain being recognized under this provision will 
be made as though the gain was recognized in the year in which the 
failure to report was finally determined.
    (2) Failure to comply. A failure to comply with the requirements of 
section 6038B includes--
    (i) The failure to report at the proper time and in the proper 
manner any information required to be reported under the rules of this 
section; and
    (ii) The provision of false or inaccurate information in purported 
compliance with the requirements of this section.
    (3) Reasonable cause exception. Under section 6038B(c)(2) and this 
section, the provisions of paragraph (h)(1) of this section will not 
apply if the United States person shows, in a timely manner, that a 
failure to comply was due to reasonable cause and not willful neglect. A 
United States person's statement that the failure to comply was due to 
reasonable cause and not willful neglect will be considered timely only 
if, promptly after the United States person becomes aware of the 
failure, an amended return is filed for the taxable year to which the 
failure relates that includes the information that should have been 
included with the original return for such taxable year or that 
otherwise complies with the rules of this section, and that includes a 
written statement explaining the reasons for the failure to comply. If 
any taxable year of the United States person is under examination when 
the amended return is filed, a copy of the amended return must be 
delivered to the Internal Revenue Service personnel conducting the 
examination when the amended return is filed. If no taxable year of the 
United States person is under examination when the amended return is 
filed, a copy of the amended return must be delivered to the Director of 
Field Operations, Cross Border Activities Practice Area of Large 
Business & International (or any successor to the roles and 
responsibilities of such position, as appropriate) (Director). Whether a 
failure to comply was due to reasonable cause and not willful neglect 
will be determined by the Director under all the facts and 
circumstances.
    (4) Statute of limitations. For exceptions to the limitations on 
assessment in the event of a failure to provide information under 
section 6038B, see section 6501(c)(8).
    (i) Definitions--(1) Appreciated property. Appreciated property is 
property that has a fair market value in excess of basis.

[[Page 227]]

    (2) Domestic partnership. A domestic partnership is a partnership 
described in section 7701(a)(4).
    (3) Foreign partnership. A foreign partnership is a partnership 
described in section 7701(a)(5).
    (4) Related person. Persons are related persons if they bear a 
relationship described in section 267(b)(1) through (3) or (10) through 
(12), after application of section 267(c) (except for (c)(3)), or in 
section 707(b)(1)(B).
    (5) Substituted basis property. Substituted basis property is 
property described in section 7701(a)(42).
    (6) Taxpayer-initiated adjustment. A taxpayer-initiated adjustment 
is a section 482 adjustment that is made by the taxpayer pursuant to 
Sec. 1.482-1(a)(3).
    (7) United States person. A United States person is a person 
described in section 7701(a)(30).
    (j) Effective dates--(1) In general. Except as otherwise provided in 
this section, this section applies to transfers made on or after January 
1, 1998. However, for a transfer made on or after January 1, 1998, but 
before January 1, 1999, the filing requirements of this section may be 
satisfied by--
    (i) Filing a Form 8865 with the taxpayer's income tax return 
(including a partnership return of income) for the first taxable year 
beginning on or after January 1, 1999; or
    (ii) Filing a Form 926 (modified to reflect that the transferee is a 
partnership, not a corporation) with the taxpayer's income tax return 
(including a partnership return of income) for the taxable year in which 
the transfer occurred.
    (2) Transfers made between August 5, 1997 and January 1, 1998. A 
United States person that made a transfer of property between August 5, 
1997, and January 1, 1998, that is required to be reported under section 
6038B may satisfy its reporting requirement by reporting in accordance 
with the provisions of this section or in accordance with the provisions 
of Notice 98-17 (1998-11 IRB 6)(see Sec. 601.601(d)(2) of this 
chapter).
    (3) Special rule for transfers made before January 1, 2000. Even if 
not reported in accordance with the rules provided in paragraph (a)(5) 
of this section, or paragraph (j) (1) or (2) of this section, a transfer 
that occurred before January 1, 2000 will nevertheless be considered 
timely reported if the transferor reports it on a Form 8865 attached to 
an amended tax return for the transferor's tax year in which the 
transfer occurred, provided such amended return is filed no later than 
September 15, 2000.
    (4) Transfers of section 721(c) property. Paragraph (c)(8) of this 
section applies to transfers occurring on or after August 6, 2015, and 
to transfers that occurred before August 6, 2015 resulting from an 
entity classification election made under Sec. 301.7701-3 of this 
chapter that was effective on or before August 6, 2015 but was filed on 
or after August 6, 2015. Paragraphs (a)(1)(iii), (a)(3), and (c)(9) of 
this section apply to transfers occurring on or after January 18, 2017, 
and to transfers that occurred before January 18, 2017 resulting from 
entity classification elections made under Sec. 301.7701-3 of this 
chapter that were effective on or before January 18, 2017 but were filed 
on or after January 18, 2017.
    (5) Reasonable cause exception. Paragraph (h)(3) of this section 
applies to all requests for relief for transfers of property to 
partnerships filed on or after January 18, 2017.

[T.D. 8817, 64 FR 5715, Feb. 5, 1999; 64 FR 15686, Apr. 1, 1999; T.D. 
8850, 64 FR 72554, Dec. 28, 1999, as amended by T.D. 9814, 82 FR 7610, 
Jan. 19, 2017; T.D. 9891, 85 FR 3851, Jan. 23, 2020]



Sec. 1.6038D-0  Outline of regulation provisions.

    This section lists the table of contents for Sec. Sec. 1.6038D-1 
through 1.6038D-8.

 Sec. 1.6038D-1 Reporting with respect to specified foreign financial 
                      assets, definition of terms.

    (a) In general.
    (1) Specified person.
    (2) Specified individual.
    (3) Resident alien.
    (4) Bona fide resident of a U.S. possession.
    (5) U.S. possession.
    (6) Specified foreign financial asset.
    (7) Financial account.
    (8) Financial institution.
    (9) Foreign financial institution.
    (10) Foreign entity.
    (11) Annual return.
    (12) Specified domestic entity.
    (13) Model 1 IGA and Model 2 IGA.
    (b) Effective/applicability dates.

[[Page 228]]

    (1) In general.
    (2) Financial accounts.

   Sec. 1.6038D-2 Requirement to report specified foreign financial 
                                 assets.

    (a) Reporting requirement.
    (1) In general.
    (2) Special rule for married specified individuals filing a joint 
annual return.
    (3) Special rule for certain specified individuals living abroad.
    (4) Special rule for married specified individuals filing a joint 
annual return and living abroad.
    (5) Assets with no positive value.
    (6) Aggregate value calculation in case of specified foreign 
financial asset excluded from reporting.
    (i) Specified individual.
    (ii) Specified domestic entity.
    (7) Form 8938 filed with annual return.
    (i) General rule.
    (ii) Consolidated returns.
    (8) Reporting required regardless of tax result.
    (9) Reporting period.
    (10) Successor forms.
    (b) Interest in a specified foreign financial asset.
    (1) In general.
    (2) Property transferred in connection with the performance of 
services.
    (3) Special rule for parent making an election under section 
1(g)(7).
    (4) Entities.
    (i) In general.
    (ii) Specified foreign financial assets held by certain trusts.
    (iii) Specified foreign financial assets held by a disregarded 
entity.
    (iv) Interest in a foreign trust or foreign estate.
    (c) Special rules for joint interests.
    (1) In general.
    (i) Determining aggregate value of assets.
    (ii) Reporting maximum value.
    (2) Aggregate asset value for married specified individuals filing a 
joint annual return.
    (3) Aggregate asset value for married specified individuals filing a 
separate annual return.
    (i) Both spouses are specified individuals.
    (ii) One spouse is not a specified individual.
    (d) Annual return filed by a married specified individual.
    (1) Joint annual return.
    (2) Separate annual return.
    (e) Special rules for dual resident taxpayers.
    (1) In general.
    (2) Dual resident taxpayer filing as a nonresident alien at end of 
taxable year.
    (3) Dual resident taxpayer filing as a resident alien at end of 
taxable year.
    (f) Example.
    (1) Facts.
    (2) Filing requirement.
    (i) Married specified individuals filing separate annual returns.
    (ii) Married specified individuals filing a joint annual return.
    (g) Effective/applicability dates.

           Sec. 1.6038D-3 Specified foreign financial assets.

    (a) Financial accounts.
    (1) In general.
    (2) Financial account in a U.S. possession.
    (3) Excepted financial accounts.
    (i) Accounts maintained by U.S. payors.
    (ii) Mark-to-market election under section 475.
    (b) Other specified foreign financial assets.
    (1) In general.
    (2) Mark-to-market election under section 475.
    (3) Held for investment.
    (4) Trade-or-business test.
    (5) Direct relationship between holding an asset and a trade or 
business.
    (i) In general.
    (ii) Presumption of direct relationship.
    (c) Special rule for interests in foreign trusts and foreign 
estates.
    (d) Examples.
    (e) Effective/applicability dates.

          Sec. 1.6038D-4 Information required to be reported.

    (a) Required information.
    (b) Effective/applicability dates.

                  Sec. 1.6038D-5 Valuation guidelines.

    (a) Fair market value.
    (b) Valuation of assets.
    (1) Maximum value.
    (2) U.S. dollars.
    (3) Asset with no positive value.
    (c) Foreign currency conversion.
    (1) In general.
    (2) Other publicly available exchange rate.
    (3) Currency exchange rate.
    (4) Determination date.
    (d) Financial accounts.
    (e) Asset held in a financial account.
    (f) Other specified foreign financial assets.
    (1) General rule.
    (2) Interests in trusts that are specified foreign financial assets.
    (i) Maximum value.
    (ii) Reporting threshold.
    (3) Interests in estates, pension plans, and deferred compensation 
plans.
    (i) Maximum value.
    (ii) Reporting threshold.
    (g) Effective/applicability dates.

              Sec. 1.6038D-6 Specified domestic entities.

    (a) Specified domestic entity.
    (b) Corporations and partnerships.
    (1) Formed or availed of.
    (2) Closely held.
    (i) Domestic corporation.
    (ii) Domestic partnership.

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    (iii) Constructive ownership.
    (3) Determination of passive income and assets.
    (i) Definition of passive income.
    (ii) Exception from passive income treatment for dealers.
    (iii) Related entities.
    (4) Examples.
    (c) Domestic trusts.
    (d) Excepted domestic entities.
    (1) Certain persons described in section 1473(3).
    (2) Certain domestic trusts.
    (3) Domestic trusts owned by one or more specified persons.
    (e) Effective/applicability dates.

 Sec. 1.6038D-7 Exceptions from the reporting of certain assets under 
                             section 6038D.

    (a) Elimination of duplicative reporting of assets.
    (1) In general.
    (2) Foreign grantor trusts.
    (3) Joint Form 5471 or Form 8865 filing.
    (b) Owner of certain trusts.
    (c) Special rules for bona fide residents of a U.S. possession.
    (d) Effective/applicability dates.

           Sec. 1.6038D-8 Penalties for failure to disclose.

    (a) In general.
    (b) Married specified individuals filing a joint annual return.
    (c) Increase in penalty.
    (d) Presumption of aggregate value.
    (e) Reasonable cause exception.
    (1) In general.
    (2) Affirmative showing required.
    (3) Facts and circumstances taken into account.
    (f) Penalties for underpayments attributable to undisclosed foreign 
financial assets.
    (1) Accuracy related penalty.
    (2) Criminal penalties.
    (g) Effective/applicability dates.

[T.D. 9706, 79 FR 73824, Dec. 12, 2014, as amended by T.D. 9752, 81 FR 
8838, Feb. 23, 2016]



Sec. 1.6038D-1  Reporting with respect to specified foreign financial
assets, definition of terms.

    (a) In general. The following definitions apply for purposes of 
section 6038D and the regulations--
    (1) Specified person. The term specified person means a specified 
individual or a specified domestic entity.
    (2) Specified individual. The term specified individual means an 
individual who is a--
    (i) U.S. citizen;
    (ii) Resident alien of the United States for any portion of the 
taxable year;
    (iii) Nonresident alien for whom an election under section 6013(g) 
or (h) is in effect; or
    (iv) Nonresident alien who is a bona fide resident of Puerto Rico or 
a section 931 possession (as defined in Sec. 1.931-1(c)(1)).
    (3) Resident alien. The term resident alien has the meaning set 
forth in section 7701(b) and Sec. Sec. 301.7701(b)-1 through 
301.7701(b)-9 of this chapter.
    (4) Bona fide resident of a U.S. possession. The term bona fide 
resident of a U.S. possession means an individual who is a ``bona fide 
resident'' under section 937(a) and Sec. 1.937-1.
    (5) U.S. possession. The term U.S. possession means American Samoa, 
Guam, the Northern Mariana Islands, Puerto Rico, or the U.S. Virgin 
Islands.
    (6) Specified foreign financial asset. The term specified foreign 
financial asset has the meaning set forth in Sec. 1.6038D-3.
    (7) Financial account. The term financial account has the meaning 
set forth in Sec. 1.1471-5(b), provided, however, that the exclusions 
of retirement and pension accounts and non-retirement savings accounts 
under Sec. 1.1471-5(b)(2)(i) and retirement and pension accounts, non-
retirement savings accounts, and accounts satisfying similar conditions 
in an applicable Model 1 IGA or Model 2 IGA under Sec. 1.1471-
5(b)(2)(vi) shall not apply (see the section 6038D coordination rule in 
Sec. 1.1471-5(b)(2)(i)(D)). See Sec. 1.6038D-3(a)(2) relating to 
financial accounts maintained by a financial institution that is 
organized under the laws of a U.S. possession.
    (8) Financial institution. The term financial institution has the 
meaning set forth in section 1471(d)(5) and the regulations thereunder.
    (9) Foreign financial institution. The term foreign financial 
institution has the meaning set forth in Sec. 1.1471-5(d).
    (10) Foreign entity. The term foreign entity has the meaning set 
forth in Sec. 1.1473-1(e).
    (11) Annual return. The term annual return means an annual federal 
income tax return of a specified individual or an annual federal income 
tax return or

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information return of a specified domestic entity filed with the 
Internal Revenue Service under section 876, 6011, 6012, 6013, 6031, or 
6037, and the regulations.
    (12) Specified domestic entity. The term specified domestic entity 
has the meaning set forth in Sec. 1.6038D-6.
    (13) Model 1 IGA and Model 2 IGA. The terms Model 1 IGA and Model 2 
IGA have the meanings set forth in Sec. 1.1471-1(b)(78) and (79), 
respectively.
    (b) Effective/applicability dates--(1) In general. Except as 
otherwise provided in this paragraph (b), this section applies to 
taxable years ending after December 19, 2011. Taxpayers may elect to 
apply the rules of this section to taxable years ending prior to 
December 19, 2011.
    (2) Financial accounts. For purposes of applying the financial 
account definition in Sec. 1.6038D-1(a)(7), the treatment under Sec. 
1.1471-5(b)(2)(vi) of retirement and pension accounts, non-retirement 
savings accounts, and accounts satisfying similar conditions in an 
applicable Model 1 IGA or Model 2 IGA (see Sec. 1.1471-1(b)(78) and 
(79)) as financial accounts for purposes of the reporting required under 
section 6038D and Sec. 1.6038D-2(a) shall apply to taxable years 
beginning after December 12, 2014.

[T.D. 9706, 79 FR 73825, Dec. 12, 2014, as amended by T.D. 9752, 81 FR 
8838, Feb. 23, 2016]



Sec. 1.6038D-2  Requirement to report specified foreign financial
assets.

    (a) Reporting requirement--(1) In general. Except as otherwise 
provided, a specified person that has any interest in a specified 
foreign financial asset during the taxable year must attach Form 8938, 
``Statement of Specified Foreign Financial Assets,'' to that specified 
person's annual return for the taxable year to report the information 
required by section 6038D and Sec. 1.6038D-4 if the aggregate value of 
all such assets exceeds--
    (i) $50,000 on the last day of the taxable year; or
    (ii) $75,000 at any time during the taxable year.
    (2) Special rule for married specified individuals filing a joint 
annual return. Except as provided in paragraph (a)(4) of this section, 
married specified individuals who file a joint annual return for the 
taxable year must attach a single Form 8938 to their joint annual return 
for the taxable year to report the information required by section 6038D 
and Sec. 1.6038D-4 if the aggregate value of all of the specified 
foreign financial assets in which either married specified individual 
has an interest exceeds--
    (i) $100,000 on the last day of the taxable year; or
    (ii) $150,000 at any time during the taxable year.
    (3) Special rule for certain specified individuals living abroad. 
Except as provided in paragraph (a)(4) of this section, a specified 
individual who is a qualified individual under section 911(d)(1) for the 
taxable year must attach a Form 8938 to his or her annual return for the 
taxable year to report the information required by section 6038D and 
Sec. 1.6038D-4 if the aggregate value of the specified foreign 
financial assets in which the specified individual has an interest 
exceeds--
    (i) $200,000 on the last day of the taxable year; or
    (ii) $300,000 at any time during the taxable year.
    (4) Special rule for married specified individuals filing a joint 
annual return and living abroad. A specified individual who is a 
qualified individual under section 911(d)(1) for the taxable year and 
the qualified individual's spouse who file a joint annual return for the 
taxable year must attach a single Form 8938 to their return for the 
taxable year to report the information required by section 6038D and 
Sec. 1.6038D-4 if the aggregate value of the all of the specified 
foreign financial assets in which either married individual has an 
interest exceeds--
    (i) $400,000 on the last day of the taxable year; or
    (ii) $600,000 at any time during the taxable year.
    (5) Assets with no positive value. A specified foreign financial 
asset is subject to reporting even if the specified foreign financial 
asset does not have a positive value. See Sec. 1.6038D-5(b)(3) to 
determine the maximum value of a specified foreign financial asset that 
does not have a positive value during the taxable year.

[[Page 231]]

    (6) Aggregate value calculation in case of specified foreign 
financial asset excluded from reporting--(i)Specified individual. The 
value of any specified foreign financial asset in which a specified 
individual has an interest and that is excluded from reporting on Form 
8938 pursuant to Sec. 1.6038D-7(a) (concerning certain assets reported 
on another form) is included for purposes of determining the aggregate 
value of specified foreign financial assets. The value of any specified 
foreign financial asset in which a specified individual has an interest 
and that is excluded from reporting under Sec. 1.6038D-7(b) (concerning 
assets held by certain domestic trusts) or Sec. 1.6038D-7(c) 
(concerning certain assets owned by a bona fide resident of a U.S. 
possession) is excluded for purposes of determining the aggregate value 
of specified foreign financial assets.
    (ii) Specified domestic entity. The value of any specified foreign 
financial asset in which a specified domestic entity has an interest and 
that is excluded from reporting on Form 8938 pursuant to Sec. 1.6038D-
7(a) (concerning certain assets reported on another form) is excluded 
for purposes of determining the aggregate value of specified foreign 
financial assets. For purposes of determining the aggregate value of 
specified foreign financial assets, a specified domestic entity that is 
a corporation or partnership and that has an interest in any specified 
foreign financial asset is treated as owning all the specified foreign 
financial assets (excluding specified foreign financial assets excluded 
from reporting on Form 8938 pursuant to Sec. 1.6038D-7(a)) held by all 
domestic corporations and domestic partnerships that are closely held by 
the same specified individual as determined under Sec. 1.6038D-6(b)(2).
    (7) Form 8938 filed with annual return--(i) General rule. A 
specified person, including a specified individual who is a bona fide 
resident of a U.S. possession, is not required to file Form 8938 with 
respect to a taxable year if the specified person is not required to 
file an annual return with the Internal Revenue Service with respect to 
such taxable year.
    (ii) Consolidated returns. If a specified domestic entity is a 
member of an affiliated group of corporations that files a consolidated 
income tax return, the Form 8938 of the specified domestic entity must 
be filed with the affiliated group's annual return.
    (8) Reporting required regardless of tax result. The Form 8938 
required by section 6038D and this section must be furnished by a 
specified person even if none of the specified foreign financial assets 
that must be reported affect the specified person's tax liability under 
the Internal Revenue Code for the taxable year.
    (9) Reporting period. The reporting period covered by Form 8938 is 
the specified person's taxable year, except the reporting period for a 
specified person that is a specified individual for less than an entire 
taxable year is the portion of the taxable year that the specified 
person is a specified individual.
    (10) Successor forms. References to Form 8938 include any successor 
form.
    (b) Interest in a specified foreign financial asset--(1) In general. 
A specified person has an interest in a specified foreign financial 
asset if any income, gains, losses, deductions, credits, gross proceeds, 
or distributions attributable to the holding or disposition of the 
specified foreign financial asset are or would be required to be 
reported, included, or otherwise reflected by the specified person on an 
annual return. A specified person has an interest in a specified foreign 
financial asset even if no income, gains, losses, deductions, credits, 
gross proceeds, or distributions are attributable to the holding or 
disposition of the specified foreign financial asset for the taxable 
year.
    (2) Property transferred in connection with the performance of 
services. A specified person that is transferred property in connection 
with the performance of personal services is first considered to have an 
interest in the property for purposes of section 6038D on the first date 
that the property is substantially vested (within the meaning of Sec. 
1.83-3(b)) or, in the case of property with respect to which a specified 
person makes a valid election under section 83(b), on the date of 
transfer of the property.
    (3) Special rule for parent making election under section 1(g)(7). A 
parent who makes an election under section 1(g)(7)

[[Page 232]]

to include certain unearned income of a child in the parent's gross 
income has an interest in any specified foreign financial asset held by 
the child for the purposes of section 6038D and the regulations.
    (4) Entities--(i) In general. Except as provided in this paragraph 
(b)(4), a specified person is not treated as having an interest in any 
specified foreign financial assets held by a corporation, partnership, 
trust, or estate solely as a result of the specified person's status as 
a shareholder, partner, or beneficiary of such entity.
    (ii) Specified foreign financial assets held by certain trusts. A 
specified person that is treated as the owner of a trust or any portion 
of a trust under sections 671 through 679, other than a domestic 
liquidating trust under Sec. 301.7701-4(d) of this chapter created 
pursuant to a court order issued in a bankruptcy under Chapter 7 (11 
U.S.C. 701 et seq.) or a confirmed plan under Chapter 11 (11 U.S.C. 1101 
et seq.) of the Bankruptcy Code, or a domestic widely held fixed 
investment trust under Sec. 1.671-5, is treated as having an interest 
in any specified foreign financial assets held by the trust or the 
portion of the trust.
    (iii) Specified foreign financial assets held by a disregarded 
entity. A specified person that owns a foreign or domestic entity that 
is disregarded as an entity separate from its owner as described in 
Sec. 301.7701-2 of this chapter (a disregarded entity) is treated as 
having an interest in any specified foreign financial assets held by the 
disregarded entity.
    (iv) Interest in a foreign trust or foreign estate. See Sec. 
1.6038D-3(c) to determine whether an interest in a foreign trust or 
foreign estate is a specified foreign financial asset. See Sec. 
1.6038D-5(f) to determine the maximum value of an interest in a foreign 
trust or foreign estate.
    (c) Special rules for joint interests--(1) In general--(i) 
Determining aggregate value of assets. Except as otherwise provided in 
this paragraph (c), each specified person that is a joint owner of a 
specified foreign financial asset (whether with a spouse or other 
person) must include the entire value of the specified foreign financial 
asset (and not the value of the specified person's interest) for 
purposes of determining whether the aggregate value of the specified 
person's specified foreign financial assets exceeds the reporting 
thresholds set forth in Sec. 1.6038D-2(a).
    (ii) Reporting maximum value. Except as provided in paragraph (d) of 
this section, a specified person that is a joint owner of a specified 
foreign financial asset must report the entire value of each jointly 
owned specified foreign financial asset on Form 8938.
    (2) Aggregate asset value for married specified individuals filing a 
joint annual return. Married specified individuals who file a joint 
annual return must include the value of each specified foreign financial 
asset that they jointly own or in which both have an interest under 
paragraph (b)(1) of this section only once in determining whether the 
aggregate value of all of the specified foreign financial assets in 
which either married specified individual has an interest exceeds the 
reporting thresholds set forth in Sec. 1.6038D-2(a).
    (3) Aggregate asset value for married specified individual filing a 
separate annual return--(i) Both spouses are specified individuals. If a 
married specified individual files a separate annual return and his or 
her spouse is a specified individual, the married specified individual 
must include one-half of the value of a specified foreign financial 
asset that the married specified individual jointly owns with his or her 
spouse in determining whether the married specified individual has an 
interest in specified foreign financial assets the aggregate value of 
which exceeds the reporting thresholds set forth in Sec. 1.6038D-2(a).
    (ii) One spouse is not a specified individual. If a married 
specified individual files a separate annual return and his or her 
spouse is not a specified individual, the married specified individual 
must include the entire value of a specified foreign financial asset 
that the married specified individual jointly owns with his or her 
spouse in determining whether the married specified individual has an 
interest in specified foreign financial assets the aggregate value of 
which exceeds the reporting thresholds set forth in Sec. 1.6038D-2(a).

[[Page 233]]

    (d) Annual return filed by a married specified individual--(1) Joint 
annual return. Married specified individuals who file a joint annual 
return must file a single Form 8938 to fulfill their reporting 
requirements under section 6038D and Sec. 1.6038D-2(a). The single Form 
8938 must report all of the specified foreign financial assets in which 
either married specified individual has an interest. If both married 
specified individuals jointly own a specified foreign financial asset or 
if they have an interest in a specified foreign financial asset under 
paragraph (b)(1) of this section, the asset must be reported only once 
on the single Form 8938 filed for the taxable year.
    (2) Separate annual return. A married specified individual who files 
a separate annual return for the taxable year must fulfill the reporting 
requirements under section 6038D and Sec. 1.6038D-2(a) by filing a 
separate Form 8938 with his or her return that reports all of the 
specified foreign financial assets in which the married specified 
individual has an interest, including each of the assets jointly owned 
with the married specified individual's spouse or with another person. 
If both of the spouses are specified individuals, each specified 
individual must report the entire value of each specified foreign 
financial asset that the spouses jointly own on Form 8938, not the value 
taken into account under paragraph (c)(3)(i) of this section for 
purposes of applying the applicable reporting thresholds.
    (e) Special rules for dual resident taxpayers--(1) In general. 
Subject to the provisions of paragraphs (e)(2) and (3) of this section, 
a specified individual is not required to report specified foreign 
financial assets on Form 8938 for a taxable year or any portion of a 
taxable year that the individual is a dual resident taxpayer (within the 
meaning of Sec. 301.7701(b)-7(a)(1) of this chapter) who is treated as 
a nonresident alien pursuant to Sec. 301.7701(b)-7 of this chapter for 
purposes of computing his or her U.S. tax liability with respect to the 
portion of the taxable year the individual is considered a dual resident 
taxpayer.
    (2) Dual resident taxpayer filing as a nonresident alien at end of 
taxable year. If a specified individual to whom this paragraph (e) 
applies computes his or her U.S. income tax liability as a nonresident 
alien on the last day of the taxable year and complies with the filing 
requirements of Sec. 301.7701(b)-7(b) and (c) of this chapter and, in 
particular, such individual timely files with the Internal Revenue 
Service Form 1040NR, ``U.S. Nonresident Alien Income Tax Return,'' or 
Form 1040NR-EZ, ``U.S. Income Tax Return for Certain Nonresident Aliens 
With No Dependents,'' as applicable, and attaches thereto Form 8833, 
``Treaty-Based Return Position Disclosure Under Section 6114 or 
7701(b),'' such individual will not be required to report specified 
foreign financial assets on Form 8938 with respect to the portion of the 
taxable year covered by Form 1040NR (or Form 1040NR-EZ).
    (3) Dual resident taxpayer filing as resident alien at end of 
taxable year. If a specified individual to whom this paragraph (e) 
applies computes his or her U.S. income tax liability as a resident 
alien on the last day of the taxable year and complies with the filing 
requirements of Sec. 1.6012-1(b)(2)(ii)(a) and, in particular, such 
individual timely files with the Internal Revenue Service Form 1040, 
``U.S. Individual Income Tax Return,'' or Form 1040EZ, ``Income Tax 
Return for Single and Joint Filers With No Dependents,'' as applicable, 
and attaches a properly completed Form 8833 to the schedule required by 
Sec. 1.6012-1(b)(2)(ii)(a), such individual will not be required to 
report specified foreign financial assets on Form 8938 with respect to 
the portion of the individual's taxable year reflected on the schedule 
to such Form 1040 or Form 1040EZ required by Sec. 1.6012-
1(b)(2)(ii)(a).
    (f) Example. The following example illustrates the application of 
paragraph (c) of this section:

    Example. (1) Facts. Two married specified individuals, H and W, 
jointly own a specified foreign financial asset with a value of $90,000 
at all times during the taxable year. H separately has an interest in a 
specified foreign financial asset with a value of $10,000 at all times 
during the taxable year. W separately has an interest in a specified 
foreign financial asset with a value of $1,000 at all times during the 
taxable year.
    (2) Filing requirement--(i) Married specified individuals filing 
separate annual returns. If H

[[Page 234]]

and W file separate annual returns, the aggregate value of the specified 
foreign financial assets in which H has an interest at the end of the 
taxable year is $55,000, comprising one-half of the value of the jointly 
owned asset, $45,000, and the value of H's separately owned specified 
foreign financial asset, $10,000. The aggregate value of the specified 
foreign financial assets in which W has an interest at the end of the 
taxable year is $46,000, comprising one-half of the value of the jointly 
owned asset, $45,000, and the value of W's separately owned specified 
foreign financial asset, $1,000. H must file Form 8938 with his annual 
return for the taxable year because the aggregate value of the specified 
foreign financial assets in which H has an interest exceeds the 
applicable reporting threshold ($50,000) set forth in Sec. 1.6038D-
2(a)(1). H must report the maximum value of the entire jointly owned 
asset, $90,000, and the maximum value of the separately owned asset, 
$10,000. See Sec. 1.6038D-5(b) regarding the maximum value of a jointly 
owned specified foreign financial asset to be reported by a specified 
person, including a married specified individual, that is a joint owner 
of an asset. The aggregate value of the specified foreign financial 
assets in which W has an interest, $46,000, does not exceed the 
applicable reporting threshold set forth in Sec. 1.6038D-2(a)(1). W is 
not required to file Form 8938 with her separate annual return.
    (ii) Married specified individuals filing a joint annual return. If 
H and W file a joint annual return, they must file a single Form 8938 
with their joint annual return for the taxable year because the 
aggregate value of all of the specified foreign financial assets in 
which either H or W have an interest ($90,000 (included only once), 
$10,000, and $1000, or $101,000) exceeds the applicable reporting 
threshold ($100,000) set forth in Sec. 1.6038D-2(a)(2). The single Form 
8938 must report the maximum value of the jointly owned specified 
foreign financial asset, $90,000, and the maximum value of the specified 
foreign financial assets separately owned by H and W, $10,000 and 
$1,000, respectively.

    (g) Effective/applicability dates. This section, with the exception 
of Sec. 1.6038D-2(a)(6)(ii), applies to taxable years ending after 
December 19, 2011. Section 1.6038D-2(a)(6)(ii) applies to taxable years 
beginning after December 31, 2015. Taxpayers may elect to apply the 
rules of this section, with the exception of Sec. 1.6038D-2(a)(6)(ii), 
to taxable years ending on or prior to December 19, 2011.

[T.D. 9706, 79 FR 73826, Dec. 12, 2014, as amended by T.D. 9752, 81 FR 
8838, Feb. 23, 2016]



Sec. 1.6038D-3  Specified foreign financial assets.

    (a) Financial accounts--(1) In general. Except as otherwise provided 
in this section, a specified foreign financial asset includes any 
financial account maintained by a foreign financial institution. An 
asset held in a financial account maintained by a foreign financial 
institution is not required to be separately reported on Form 8938, 
``Statement of Specified Foreign Financial Assets.''
    (2) Financial account in a U.S. possession. A specified foreign 
financial asset includes a financial account maintained by a financial 
institution that is organized under the laws of a U.S. possession.
    (3) Excepted financial accounts--(i) Accounts maintained by U.S. 
payors. A financial account maintained by a U.S. payor as defined in 
Sec. 1.6049-5(c)(5)(i) (including assets held in such an account) is 
not a specified foreign financial asset for purposes of section 6038D 
and the regulations.
    (ii) Mark-to-market election under section 475. A financial account 
is not a specified foreign financial asset if the rules of section 
475(a) apply to all of the holdings in the account or an election under 
section 475(e) or (f) is made with respect to all of the holdings in the 
account.
    (b) Other specified foreign financial assets--(1) In general. Except 
as otherwise provided in this section, a specified foreign financial 
asset includes any of the following assets that are not financial 
accounts and that are held for investment and not held in an account 
maintained by a financial institution--
    (i) Stock or securities issued by a person other than a United 
States person (including stock or securities issued by a person 
organized under the laws of a U.S. possession);
    (ii) A financial instrument or contract that has an issuer or 
counterparty which is other than a United States person (including a 
financial instrument or contract issued by a person organized under the 
laws of a U.S. possession); and
    (iii) An interest in a foreign entity.

[[Page 235]]

    (2) Mark-to-market election under section 475. An asset is not a 
specified foreign financial asset if the rules of section 475(a) apply 
to the asset or an election under section 475(e) or (f) is made with 
respect to the asset.
    (3) Held for investment. An asset is held for investment for 
purposes of section 6038D and the regulations if that asset is not used 
in, or held for use in, the conduct of a trade or business of a 
specified person.
    (4) Trade-or-business test. For purposes of section 6038D and the 
regulations, an asset is used in, or held for use in, the conduct of a 
trade or business and not held for investment if the asset is--
    (i) Held for the principal purpose of promoting the present conduct 
of the trade or business;
    (ii) Acquired and held in the ordinary course of the trade or 
business, as, for example, in the case of an account or note receivable 
arising from that trade or business; or
    (iii) Otherwise held in a direct relationship to the trade or 
business as determined under paragraph (b)(5) of this section.
    (5) Direct relationship between holding an asset and a trade or 
business--(i) In general. In determining whether an asset is held in a 
direct relationship to the conduct of a trade or business by a specified 
person, principal consideration will be given to whether the asset is 
needed in the trade or business of the specified person. An asset shall 
be considered needed in the trade or business, for this purpose, only if 
the asset is held to meet the present needs of that trade or business 
and not its anticipated future needs. An asset shall be considered as 
needed in the trade or business if, for example, the asset is held to 
meet the operating expenses of the trade or business. Conversely, an 
asset shall be considered as not needed in the trade or business if, for 
example, the asset is held for the purpose of providing for future 
diversification into a new trade or business, future plant replacement, 
or future business contingencies. Stock is never considered used or held 
for use in a trade or business for purposes of applying this test.
    (ii) Presumption of direct relationship. An asset will be treated as 
held in a direct relationship to the conduct of a trade or business of a 
specified person if--
    (A) The asset was acquired with funds generated by the trade or 
business of the specified person or the affiliated group of the 
specified person, if any;
    (B) The income from the asset is retained or reinvested in the trade 
or business; and
    (C) Personnel who are actively involved in the conduct of the trade 
or business exercise significant management and control over the 
investment of such asset.
    (c) Special rule for interests in foreign trusts and foreign 
estates. An interest in a foreign trust or a foreign estate is not a 
specified foreign financial asset of a specified person unless the 
person knows, or has reason to know based on readily accessible 
information, of the interest. Receipt of a distribution from the foreign 
trust or foreign estate constitutes actual knowledge for this purpose.
    (d) Examples. Examples of assets other than financial accounts that 
may be considered other specified foreign financial assets include, but 
are not limited to--
    (1) Stock issued by a foreign corporation;
    (2) A capital or profits interest in a foreign partnership;
    (3) A note, bond, debenture, or other form of indebtedness issued by 
a foreign person;
    (4) An interest in a foreign trust;
    (5) An interest rate swap, currency swap, basis swap, interest rate 
cap, interest rate floor, commodity swap, equity swap, equity index 
swap, credit default swap, or similar agreement with a foreign 
counterparty; and
    (6) Any option or other derivative instrument with respect to any of 
the items listed as examples in this paragraph or with respect to any 
currency or commodity that is entered into with a foreign counterparty 
or issuer.
    (e) Effective/applicability dates. This section applies to taxable 
years ending after December 19, 2011. Taxpayers may elect to apply the 
rules of this section to taxable years ending prior to December 19, 
2011.

[T.D. 9706, 79 FR 73828, Dec. 12, 2014]

[[Page 236]]



Sec. 1.6038D-4  Information required to be reported.

    (a) Required information. The following information must be reported 
on Form 8938, ``Statement of Specified Foreign Financial Assets,'' with 
respect to each specified foreign financial asset:
    (1) In the case of a financial account, the name and address of the 
foreign financial institution with which the account is maintained and 
the account number of the financial account;
    (2) In the case of stock or securities, the name and address of the 
issuer, and information that identifies the class or issue of which the 
stock or security is a part;
    (3) In the case of a financial instrument or contract, information 
that identifies the financial instrument or contract, including the 
names and addresses of all issuers and counterparties;
    (4) In the case of an interest in a foreign entity, information that 
identifies the interest, including the name and address of the foreign 
entity in which the interest is held;
    (5) The maximum value of the specified foreign financial asset 
during the portion of the taxable year in which the specified person has 
an interest in the asset;
    (6) In the case of a financial account that is a depository account 
as defined in Sec. 1.1471-5(b)(3)(i) or a custodial account as defined 
in Sec. 1.1471-5(b)(3)(ii), whether the account was opened or closed 
during the taxable year;
    (7) The date, if any, on which the specified foreign financial 
asset, other than a financial account that is a depository account as 
defined in Sec. 1.1471-5(b)(3)(i) or a custodial account as defined in 
Sec. 1.1471-5(b)(3)(ii), was either acquired or disposed of (or both) 
during the taxable year;
    (8) The amount of any income, gain, loss, deduction, or credit 
recognized for the taxable year with respect to the reported specified 
foreign financial asset, and the schedule, form, or return filed with 
the Internal Revenue Service on which the income, gain, loss, deduction, 
or credit, if any, is reported or included by the specified person;
    (9) The foreign currency in which the account is maintained or the 
asset is denominated, the foreign currency exchange rate and, if the 
source of such rate is other than as described in Sec. 1.6038D-5(c)(1), 
the source of the rate used to determine the specified foreign financial 
asset's U.S. dollar value, including maximum value;
    (10) For any specified foreign financial asset excepted from 
reporting on Form 8938 under Sec. 1.6038D-7(a), the specified person 
must report the number of Forms 3520, ``Annual Return To Report 
Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts,'' 
Forms 3520-A, ``Annual Information Return of Foreign Trust With a U.S. 
Owner,'' Forms 5471, ``Information Return of U.S. Persons With Respect 
To Certain Foreign Corporations,'' Forms 8621, ``Return by a Shareholder 
of a Passive Foreign Investment Company or a Qualified Electing Fund,'' 
Forms 8865, ``Return of U.S. Persons With Respect To Certain Foreign 
Partnerships,'' and, solely for taxable years beginning after March 18, 
2010, and ending on or before December 31, 2013, Forms 8891, ``U.S. 
Information Return for Beneficiaries of Certain Canadian Registered 
Retirement Plans,'' or such other form under Title 26 of the United 
States Code identified by the Secretary under Sec. 1.6038D-7(a), timely 
filed with the Internal Revenue Service on which excepted foreign 
financial assets are reported or reflected for the taxable year; and
    (11) Such other information as may be required by Form 8938 or its 
instructions or other guidance.
    (b) Effective/applicability dates. This section applies to taxable 
years ending after December 19, 2011. Taxpayers may elect to apply the 
rules of this section to taxable years ending prior to December 19, 
2011.

[T.D. 9706, 79 FR 73829, Dec. 12, 2014]



Sec. 1.6038D-5  Valuation guidelines.

    (a) Fair market value. Except as provided in paragraphs (c) and (e) 
of this section, the value of a specified foreign financial asset for 
purposes of determining the aggregate value of specified foreign 
financial assets held by a specified person and the maximum value of a 
specified foreign financial asset required to be reported on Form 8938,

[[Page 237]]

``Statement of Specified Foreign Financial Assets,'' is the asset's fair 
market value.
    (b) Valuation of assets--(1) Maximum value. Except as provided in 
this section, the maximum value of a specified foreign financial asset 
means a reasonable estimate of the asset's maximum fair market value 
during the taxable year.
    (2) U.S. dollars. For purposes of determining the aggregate value of 
specified foreign financial assets in which a specified person has an 
interest and determining the maximum value of a specified foreign 
financial asset, the value of a specified foreign financial asset 
denominated in a foreign currency during the taxable year must be 
determined in the foreign currency and then converted to U.S. dollars.
    (3) Asset with no positive value. If the maximum fair market value 
of a specified foreign financial asset is zero or less than zero, then 
the asset's value is treated as zero for purposes of determining the 
aggregate value of specified foreign financial assets in which a 
specified person has an interest, and the maximum value of the specified 
foreign financial asset is zero for purposes of reporting under Sec. 
1.6038D-4(a)(5).
    (c) Foreign currency conversion--(1) In general. Except as provided 
in paragraphs (c)(2) and (d) of this section, the U.S. Treasury 
Department's Bureau of the Fiscal Service foreign currency exchange rate 
is to be used to convert the value of a specified foreign financial 
asset into U.S. dollars for purposes of determining the aggregate value 
of specified foreign financial assets in which a specified person has an 
interest and determining the maximum value of a specified foreign 
financial asset.
    (2) Other publicly available exchange rate. If no U.S. Treasury 
Department Bureau of the Fiscal Service foreign currency exchange rate 
is available for a particular currency, another publicly available 
foreign currency exchange rate may be used to convert the value of a 
specified foreign financial asset into U.S. dollars. In such case, the 
source of the foreign currency exchange rate must be disclosed on Form 
8938.
    (3) Currency exchange rate. In converting the currency of a foreign 
country, the foreign currency exchange rate applicable for converting 
the currency into U.S. dollars (that is, to purchase U.S. dollars) must 
be used.
    (4) Determination date. In converting the currency of a foreign 
country into U.S. dollars for purposes of determining the maximum value 
of a specified foreign financial asset and determining the aggregate 
value of specified foreign financial assets in which a specified person 
has an interest, the applicable foreign currency exchange rate is the 
rate on the last day of the taxable year of the specified person, even 
if the specified person sold or otherwise disposed of a specified 
foreign financial asset prior to the last day of such year.
    (d) Financial accounts. A specified person may rely upon periodic 
account statements that are provided at least annually by or on behalf 
of a financial institution maintaining an account, including the foreign 
currency conversion reflected in those statements, to determine the 
financial account's maximum value unless the specified person has actual 
knowledge, or reason to know based on readily accessible information, 
that the statements do not reflect a reasonable estimate of the maximum 
account value during the taxable year.
    (e) Asset held in a financial account. The value of an asset held in 
a financial account maintained by a foreign financial institution is 
included in determining the value of that financial account for purposes 
of Sec. 1.6038D-5(a).
    (f) Other specified foreign financial assets--(1) General rule. 
Except as provided in paragraphs (f)(2) and (3) of this section, for 
specified foreign financial assets that are not financial accounts and 
that are held for investment and not held in an account maintained by a 
financial institution, a specified person may use the value of the asset 
as of the last day of the taxable year on which the specified person has 
an interest in the asset as the maximum value of that asset, unless the 
specified person has actual knowledge, or reason to know based on 
readily accessible information, that the value does not reflect a 
reasonable estimate of the maximum

[[Page 238]]

value of the asset during the taxable year.
    (2) Interests in trusts that are specified foreign financial 
assets--(i) Maximum value. If a specified person is a beneficiary of a 
foreign trust, the maximum value of the specified person's interest in 
the trust is the sum of--
    (A) The fair market value, determined as of the last day of the 
taxable year, of all of the currency or other property distributed from 
the foreign trust during the taxable year to the specified person as a 
beneficiary; and
    (B) The value, determined as of the last day of the taxable year, of 
the specified person's right as a beneficiary to receive mandatory 
distributions from the foreign trust as determined under section 7520.
    (ii) Reporting threshold. For purposes of determining the aggregate 
value of specified foreign financial assets in which a specified person 
has an interest, if the specified person does not know, or have reason 
to know based on readily accessible information, the fair market value 
of the person's interest in a foreign trust during the taxable year, the 
value to be included in determining the aggregate value of the specified 
foreign financial assets is the maximum value of the specified person's 
interest in the foreign trust under paragraph (f)(2)(i) of this section.
    (3) Interests in estates, pension plans, and deferred compensation 
plans--(i) Maximum value. The maximum value of a specified person's 
interest in a foreign estate, foreign pension plan, or foreign deferred 
compensation plan is the fair market value, determined as of the last 
day of the taxable year, of the specified person's beneficial interest 
in the assets of the foreign estate, foreign pension plan, or foreign 
deferred compensation plan. If the specified person does not know, or 
have reason to know based on readily accessible information, such fair 
market value, the maximum value to be reported is the fair market value, 
determined as of the last day of the taxable year, of the currency and 
other property distributed during the taxable year to the specified 
person as a beneficiary or participant.
    (ii) Reporting threshold. For purposes of determining the aggregate 
value of specified foreign financial assets in which a specified person 
has an interest, if the specified person does not know, or have reason 
to know based on readily accessible information, the fair market value 
of the person's interest in a foreign estate, foreign pension plan, or 
foreign deferred compensation plan during the taxable year, the value to 
be included in determining the aggregate value of the specified foreign 
financial assets is the fair market value, determined as of the last day 
of the taxable year, of the currency and other property distributed 
during the taxable year to the specified person as a beneficiary or 
participant.
    (g) Effective/applicability dates. This section applies to taxable 
years ending after December 19, 2011. Taxpayers may elect to apply the 
rules of this section to taxable years ending prior to December 19, 
2011.

[T.D. 9706, 79 FR 73830, Dec. 12, 2014]



Sec. 1.6038D-6  Specified domestic entities.

    (a) Specified domestic entity. A specified domestic entity is a 
domestic corporation, a domestic partnership, or a trust described in 
section 7701(a)(30)(E), if such corporation, partnership, or trust is 
formed or availed of for purposes of holding, directly or indirectly, 
specified foreign financial assets. Whether a domestic corporation, a 
domestic partnership, or a trust described in section 7701(a)(30)(E) is 
a specified domestic entity is determined annually.
    (b) Corporations and partnerships--(1) Formed or availed of. Except 
as otherwise provided in paragraph (d) of this section, a domestic 
corporation or a domestic partnership is formed or availed of for 
purposes of holding, directly or indirectly, specified foreign financial 
assets if and only if--
    (i) The corporation or partnership is closely held by a specified 
individual as determined under paragraph (b)(2) of this section; and
    (ii) At least 50 percent of the corporation's or partnership's gross 
income for the taxable year is passive income or at least 50 percent of 
the assets held by the corporation or partnership for the taxable year 
are assets that produce or are held for the production of passive income 
as determined under paragraph

[[Page 239]]

(b)(3) of this section (passive assets). For purposes of this paragraph 
(b)(1)(ii), the percentage of passive assets held by a corporation or 
partnership for a taxable year is the weighted average percentage of 
passive assets (weighted by total assets and measured quarterly), and 
the value of assets of a corporation or partnership is the fair market 
value of the assets or the book value of the assets that is reflected on 
the corporation's or partnership's balance sheet (as determined under 
either a U.S. or an international financial accounting standard).
    (2) Closely held--(i) Domestic corporation. A domestic corporation 
is closely held by a specified individual if at least 80 percent of the 
total combined voting power of all classes of stock of the corporation 
entitled to vote, or at least 80 percent of the total value of the stock 
of the corporation, is owned, directly, indirectly, or constructively, 
by a specified individual on the last day of the corporation's taxable 
year.
    (ii) Domestic partnership. A partnership is closely held by a 
specified individual if at least 80 percent of the capital or profits 
interest in the partnership is held, directly, indirectly, or 
constructively, by a specified individual on the last day of the 
partnership's taxable year.
    (iii) Constructive ownership. For purposes of this paragraph (b)(2), 
sections 267(c) and (e)(3) apply for the purpose of determining the 
constructive ownership of a specified individual in a corporation or 
partnership, except that section 267(c)(4) is applied as if the family 
of an individual includes the spouses of the individual's family 
members.
    (3) Determination of passive income and assets--(i) Definition of 
passive income. Except as provided in paragraph (b)(3)(ii) of this 
section, for purposes of paragraph (b)(1)(ii) of this section, passive 
income means the portion of gross income that consists of--
    (A) Dividends, including substitute dividends;
    (B) Interest;
    (C) Income equivalent to interest, including substitute interest;
    (D) Rents and royalties, other than rents and royalties derived in 
the active conduct of a trade or business conducted, at least in part, 
by employees of the corporation or partnership;
    (E) Annuities;
    (F) The excess of gains over losses from the sale or exchange of 
property that gives rise to passive income described in paragraphs 
(b)(3)(i)(A) through (b)(3)(i)(E) of this section;
    (G) The excess of gains over losses from transactions (including 
futures, forwards, and similar transactions) in any commodity, but not 
including--
    (1) Any commodity hedging transaction described in section 
954(c)(5)(A), determined by treating the corporation or partnership as a 
controlled foreign corporation; or
    (2) Active business gains or losses from the sale of commodities, 
but only if substantially all the corporation or partnership's 
commodities are property described in paragraph (1), (2), or (8) of 
section 1221(a);
    (H) The excess of foreign currency gains over foreign currency 
losses (as defined in section 988(b)) attributable to any section 988 
transaction; and
    (I) Net income from notional principal contracts as defined in Sec. 
1.446-3(c)(1).
    (ii) Exception from passive income treatment for dealers. 
Notwithstanding paragraph (b)(3)(i) of this section, in the case of a 
corporation or partnership that regularly acts as a dealer in property 
described in paragraph (b)(3)(i)(F) of this section (referring to the 
sale or exchange of property that gives rise to passive income), forward 
contracts, option contracts, or similar financial instruments (including 
notional principal contracts and all instruments referenced to 
commodities), the term passive income does not include--
    (A) Any item of income or gain (other than any dividends or 
interest) from any transaction (including hedging transactions and 
transactions involving physical settlement) entered into in the ordinary 
course of such dealer's trade or business as such a dealer; and
    (B) If such dealer is a dealer in securities (within the meaning of 
section 475(c)(2)), any income from any transaction entered into in the 
ordinary course of such trade or business as a dealer in securities.

[[Page 240]]

    (iii) Related entities. For purposes of applying the passive income 
and asset thresholds of paragraph (b)(1)(ii) of this section, all 
domestic corporations and domestic partnerships that are closely held by 
the same specified individual as determined under paragraph (b)(2) of 
this section and that are connected through stock or partnership 
interest ownership with a common parent corporation or partnership are 
treated as owning the combined assets and receiving the combined income 
of all members of that group. For purposes of the preceding sentence, 
assets relating to any contract, equity, or debt existing between 
members of such a group, as well as any items of gross income arising 
under or from such contract, equity, or debt, are eliminated. A domestic 
corporation or a domestic partnership is considered connected through 
stock or partnership interest ownership with a common parent corporation 
or partnership if stock representing at least 80 percent of the total 
combined voting power of all classes of stock of the corporation 
entitled to vote or of the value of such corporation, or partnership 
interests representing at least 80 percent of the profits interests or 
capital interests of such partnership, in each case other than stock of 
or partnership interests in the common parent, is owned by one or more 
of the other connected corporations, connected partnerships, or the 
common parent.
    (4) Examples. The following examples illustrate the application of 
this section:

    Example 1. Closely held and constructive ownership. (i) Facts. DC1 
is a domestic corporation the total value of the stock of which is owned 
60% by A, a specified individual, 30% by B, a member of A's family for 
purposes of section 267(c)(2) who is not a specified individual, and 10% 
by FC1, a foreign corporation. DC1 owns 90% of the total value of the 
stock of DC2, a domestic corporation. FC2, a foreign corporation, owns 
10% of DC2. Neither A nor B owns, directly, indirectly, or 
constructively, any stock in FC1 or FC2.
    (ii) Closely held ownership determination. A is considered to own 
90% and 81% of the total value of DC1 and DC2, respectively, by 
application of the rules of section 267(c) and this section. DC1 and DC2 
are closely held by A within the meaning of paragraph (b)(2) of this 
section because A, a specified individual, is considered to own more 
than 80% of their total value.
    Example 2. Application of aggregation rule and reporting threshold. 
(i) Facts. L is a specified individual. In Year X, L wholly owns DC1, a 
domestic corporation, and also owns a 90% capital interest in DP, a 
domestic partnership. DC1 owns 80% of the sole class of stock of DC2, a 
domestic corporation. DC1 has no assets other than its interest in DC2. 
DC2's only assets are assets that produce passive income, with a maximum 
value in Year X of $40,000 on October 12. DC2's assets are comprised in 
relevant part of specified foreign financial assets with a maximum value 
in Year X of $15,000 on October 12. DP's only assets are assets that 
produce passive income and that are specified foreign financial assets 
with a maximum value of $90,000 in Year X on October 12.
    (ii) Specified domestic entity status--(A) DC1 and DC2. DC1 and DC2 
are closely held by a specified individual for purposes of paragraph 
(b)(2) of this section. DC1 and DC2 are considered related entities that 
are connected through stock ownership with a common parent corporation 
under paragraph (b)(3)(iii) of this section, because DC1 and DC2 are 
closely held by L, and DC2 is connected with DC1 through DC1's ownership 
of stock of DC2 representing at least 80% of the voting power or value 
of DC2. As a result, for purposes of applying paragraph (b)(1)(ii) of 
this section, each of DC1 and DC2 is considered as owning the combined 
assets, and receiving the combined income, of both DC1 and DC2; however, 
DC1's equity interest in DC2 is disregarded for this purpose under 
paragraph (b)(3)(iii) of this section. Therefore, DC1 and DC2 each 
satisfies the passive asset threshold of paragraph (b)(1)(ii) of this 
section, because 100 percent of each company's assets is passive. DC1 
and DC2 are specified domestic entities for Year X.
    (B) DP. DP is closely held by a specified individual for purposes of 
paragraph (b)(2) of this section. DP is not considered a related entity 
with DC1 and DC2 under paragraph (b)(3)(iii) of this section, because 
DC1 and DP are not owned by a common parent corporation or partnership. 
As a result, whether the passive income or passive asset threshold of 
paragraph (b)(1)(ii) of this section is met with respect to DP is 
determined solely by reference to DP's separately earned passive income 
and separately held passive assets. DP holds only passive assets during 
Year X and therefore satisfies paragraph (b)(1)(ii) of this section. DP 
is a specified domestic entity for Year X.
    (iii) Reporting requirements--(A) DC1. Under Sec. 1.6038D-
2(a)(6)(ii), DC1 is not treated as owning the specified foreign 
financial assets held by DC2 and DP for purposes of applying the 
reporting threshold of Sec. 1.6038D-2(a)(1), because DC1 does not have 
an interest in any specified foreign financial assets. DC1 is not

[[Page 241]]

required to file Form 8938 because DC1 does not satisfy the reporting 
threshold of Sec. 1.6038D-2(a)(1).
    (B) DC2 and DP. Under Sec. 1.6038D-3, DC2 and DP each has an 
interest in specified foreign financial assets. For purposes of applying 
the reporting threshold of Sec. 1.6038D-2(a)(1), Sec. 1.6038D-
2(a)(6)(ii) provides that DC2 is treated as owning in addition to its 
own assets the assets of DP, and DP is treated as owning in addition to 
its own assets the assets of DC2. As a result, DC2 and DP each satisfies 
the reporting threshold of Sec. 1.6038D-2(a)(1), because the value of 
the specified foreign financial assets each is considered as owning for 
purposes of Sec. 1.6038D-2(a)(1) is $105,000 on October 12, Year X, 
which exceeds DC2's and DP's $75,000 reporting threshold. DC2 and DP 
must each file Form 8938 for Year X to report their respective specified 
foreign financial assets in which they have an interest and disclose 
their maximum values as provided in Sec. 1.6038D-4 ($15,000 in the case 
of DC2 and $90,000 in the case of DP).
    Example 3. Application of aggregation rule and entity with an active 
trade or business. (i) Facts. The facts are the same as in Example 2, 
except that DC2 also owns an active business. The assets attributable to 
the business are not passive assets and constitute at least 60% of the 
value of DC2's assets at all times during Year X. The income from the 
business is not passive income and constitutes at least 60% of the gross 
income generated by DC2 in Year X.
    (ii) Specified domestic entity status--(A) DC1 and DC2. DC1 and DC2 
are considered related entities that are connected through stock 
ownership with a common parent corporation under paragraph (b)(3)(iii) 
of this section because DC1 and DC2 are closely held by L, and DC2 is 
connected with DC1 though DC1's ownership of stock of DC2 representing 
at least 80% of the voting power or value of DC2. As a result, for 
purposes of applying paragraph (b)(1)(ii) of this section, each of DC1 
and DC2 is treated as owning the combined assets, and receiving the 
combined income, of both DC1 and DC2; however, DC1's equity interest in 
DC2 is disregarded for this purpose under paragraph (b)(3)(iii) of this 
section. As a result, no more than 40 percent of the value of DC1's and 
DC2's assets at all times during Year X are passive and no more than 40 
percent of DC1's and DC2's gross income for Year X is passive. DC1 and 
DC2 do not satisfy the passive income or passive asset threshold in 
paragraph (b)(1)(ii) of this section for Year X. DC1 and DC2 are not 
specified domestic entities for Year X.
    (B) DP. For the reasons described in paragraph (ii)(B) of Example 2, 
DP is a specified domestic entity for Year X.
    (iii) Reporting requirements--(A) DC1 and DC2. DC1 and DC2 are not 
specified domestic entities for Year X, and are not required to file 
Form 8938.
    (B) DP. Under Sec. 1.6038D-3, DP has an interest in specified 
foreign financial assets. Under Sec. 1.6038D-2(a)(6)(ii), DP is treated 
as owning in addition to its own assets the assets of DC2. As a result, 
DP satisfies the reporting threshold of Sec. 1.6038D-2(a)(1) because 
the value of the specified foreign financial assets it is considered to 
own for purposes of Sec. 1.6038D-2(a)(1) is $105,000 on October 12, 
Year X, which exceeds DP's $75,000 reporting threshold. DP must file 
Form 8938 for Year X to report the specified foreign financial assets in 
which it has an interest and disclose their maximum values as provided 
in Sec. 1.6038D-4, which is $90,000.

    (c) Domestic trusts. Except as otherwise provided in paragraph (d) 
of this section, a trust described in section 7701(a)(30)(E) is formed 
or availed of for purposes of holding, directly or indirectly, specified 
foreign financial assets if and only if the trust has one or more 
specified persons as a current beneficiary. The term current beneficiary 
means, with respect to the taxable year, any person who at any time 
during such taxable year is entitled to, or at the discretion of any 
person may receive, a distribution from the principal or income of the 
trust (determined without regard to any power of appointment to the 
extent that such power remains unexercised at the end of the taxable 
year). The term current beneficiary also includes any holder of a 
general power of appointment, whether or not exercised, that was 
exercisable at any time during the taxable year, but does not include 
any holder of a general power of appointment that is exercisable only on 
the death of the holder.
    (d) Excepted domestic entities. An entity is not considered to be a 
specified domestic entity if the entity is--
    (1) Certain persons described in section 1473(3). An entity, except 
for a trust that is exempt from tax under section 664(c), that is 
excepted from the definition of the term ``specified United States 
person'' under section 1473(3) and the regulations issued under that 
section;
    (2) Certain domestic trusts. A trust described in section 
7701(a)(30)(E) provided that the trustee of the trust--
    (i) Has supervisory authority over or fiduciary obligations with 
regard to the specified foreign financial assets held by the trust;

[[Page 242]]

    (ii) Timely files (including any applicable extensions) annual 
returns and information returns on behalf of the trust; and
    (iii) Is--
    (A) A bank that is examined by the Office of the Comptroller of the 
Currency, the Board of Governors of the Federal Reserve System, the 
Federal Deposit Insurance Corporation, or the National Credit Union 
Administration;
    (B) A financial institution that is registered with and regulated or 
examined by the Securities and Exchange Commission; or
    (C) A domestic corporation described in section 1473(3)(A) or (B), 
and the regulations issued with respect to those provisions.
    (3) Domestic trusts owned by one or more specified persons. A trust 
described in section 7701(a)(30)(E) to the extent such trust or any 
portion thereof is treated as owned by one or more specified persons 
under sections 671 through 678 and the regulations issued under those 
sections.
    (e) Effective/applicability dates. This section applies to taxable 
years beginning after December 31, 2015.

[T.D. 9752, 81 FR 8838, Feb. 23, 2016]



Sec. 1.6038D-7  Exceptions from the reporting of certain assets under
section 6038D.

    (a) Elimination of duplicative reporting of assets--(1) In general. 
A specified person is not required to report a specified foreign 
financial asset on Form 8938, ``Statement of Specified Foreign Financial 
Assets,'' if the specified person--
    (i) Reports the asset on at least one of the following forms timely 
filed with the Internal Revenue Service for the taxable year--
    (A) Form 3520, ``Annual Return To Report Transactions With Foreign 
Trusts and Receipt of Certain Foreign Gifts'' (in the case of a 
specified person that is the beneficiary of a foreign trust);
    (B) Form 5471, ``Information Return of U.S. Persons With Respect To 
Certain Foreign Corporations'';
    (C) Form 8621, ``Return by a Shareholder of a Passive Foreign 
Investment Company or Qualified Electing Fund'';
    (D) Form 8865, ``Return of U.S. Persons With Respect To Certain 
Foreign Partnerships'';
    (E) For taxable years beginning after March 18, 2010, and ending on 
or before December 31, 2013, Form 8891, ``U.S. Information Return for 
Beneficiaries of Certain Canadian Registered Retirement Plans''; or
    (F) Any other form under Title 26 of the United States Code timely 
filed with the Internal Revenue Service and identified for this purpose 
by the Secretary in regulations or other guidance; and
    (ii) Reports on Form 8938 the filing of the form on which the asset 
is reported.
    (2) Foreign grantor trusts. A specified person that is treated as an 
owner of a foreign trust or any portion of a foreign trust under 
sections 671 through 679 is not required to report any specified foreign 
financial assets held by the foreign trust on Form 8938, provided--
    (i) The specified person reports the trust on a Form 3520 timely 
filed with the Internal Revenue Service for the taxable year;
    (ii) The trust timely files Form 3520-A, ``Annual Information Return 
of Foreign Trust With a U.S. Owner,'' with the Internal Revenue Service 
for the taxable year; and
    (iii) The Form 8938 filed by the specified person for the taxable 
year reports the filing of the Form 3520 and Form 3520-A.
    (3) Joint Form 5471 or Form 8865 filing. A specified person that is 
included as part of a joint Form 5471 filing pursuant to Sec. 1.6038-
2(j) or a joint Form 8865 filing pursuant to Sec. 1.6038-3(c) and who 
notifies the Internal Revenue Service as required by Sec. 1.6038-2(i) 
or Sec. 1.6038D-(3)(c) will be considered to have filed a Form 5471 or 
Form 8865 for purposes of paragraph (a)(1) of this section.
    (b) Owner of certain trusts. A specified person that is treated as 
an owner of any portion of a domestic trust under sections 671 through 
678 is not required to file Form 8938 to report any specified foreign 
financial asset held by the trust if the trust is--
    (1) A widely-held fixed investment trust under Sec. 1.671-5; or

[[Page 243]]

    (2) A liquidating trust within the meaning of Sec. 301.7701-4(d) of 
this chapter that is created pursuant to a court order issued in a 
bankruptcy under Chapter 7 (11 U.S.C. 701 et seq.) or a confirmed plan 
under Chapter 11 (11 U.S.C. 1101 et seq.) of the Bankruptcy Code.
    (c) Special rules for bona fide residents of a U.S. possession. A 
specified individual who is a bona fide resident of a U.S. possession is 
not required to include the following specified foreign financial assets 
in the determination of the aggregate value of his or her specified 
foreign financial assets and, if required to file Form 8938 with the 
Internal Revenue Service, is not required to report the following 
specified foreign financial assets:
    (1) A financial account maintained by a financial institution 
organized under the laws of the U.S. possession of which the specified 
individual is a bona fide resident;
    (2) A financial account maintained by a branch of a financial 
institution not organized under the laws of the U.S. possession of which 
the specified individual is a bona fide resident, if the branch is 
subject to the same tax and information reporting requirements 
applicable to a financial institution organized under the laws of the 
U.S. possession;
    (3) Stock or securities issued by an entity organized under the laws 
of the U.S. possession of which the specified individual is a bona fide 
resident;
    (4) An interest in an entity organized under the laws of the U.S. 
possession of which the specified individual is a bona fide resident; 
and
    (5) A financial instrument or contract held for investment, provided 
each issuer or counterparty that is not a United States person is--
    (i) An entity organized under the laws of the U.S. possession of 
which the specified individual is a bona fide resident; or
    (ii) A bona fide resident of the U.S. possession of which the 
specified individual is a bona fide resident.
    (d) Effective/applicability dates. This section applies to taxable 
years ending after December 19, 2011. Taxpayers may elect to apply the 
rules of this section to taxable years ending prior to December 19, 
2011.

[T.D. 9706, 79 FR 73831, Dec. 12, 2014]



Sec. 1.6038D-8  Penalties for failure to disclose.

    (a) In general. If a specified person fails to file a Form 8938, 
``Statement of Specified Foreign Financial Assets,'' that includes the 
information required by section 6038D(c) and Sec. 1.6038D-4 with 
respect to any taxable year at the time and in the manner described in 
section 6038D(a) and Sec. 1.6038D-2, a penalty of $10,000 will apply to 
that specified person.
    (b) Married specified individuals filing a joint annual return. 
Married specified individuals who file a joint annual return and fail to 
file a required Form 8938 that includes the information required by 
section 6038D(c) and Sec. 1.6038D-4 with respect to any taxable year at 
the time and in the manner described in section 6038D(a) and Sec. 
1.6038D-2 are subject to penalties under this section as if the married 
specified individuals are a single specified individual. The liability 
of married specified individuals who file a joint annual return with 
respect to any penalties under this section is joint and several.
    (c) Increase in penalty. If any failure to comply with the 
applicable reporting requirement of section 6038D and the regulations 
continues for more than 90 days after the day on which the Commissioner 
or his delegate mails a notice of the failure to the specified person 
required to file the Form 8938, the specified person is required to pay 
an additional penalty of $10,000 for each 30-day period (or fraction 
thereof) during which the failure continues after the 90-day period has 
expired. The additional penalty imposed by section 6038D(d)(2) and this 
paragraph (c) is limited to a maximum of $50,000 for each such failure.
    (d) Presumption of aggregate value. For the purpose of assessing 
penalties imposed under section 6038D(d), if the Commissioner or his 
delegate determines that a specified person has an interest in one or 
more specified foreign financial assets and the specified person does 
not provide sufficient information to demonstrate the aggregate value of 
the assets upon request by the

[[Page 244]]

Commissioner or his delegate, then the aggregate value of the assets is 
treated as being in excess of the applicable reporting threshold set 
forth in Sec. 1.6038D-2(a).
    (e) Reasonable cause exception--(1) In general. If the failure to 
report the information required in section 6038D(c) and Sec. 1.6038D-4 
is shown to be due to reasonable cause and not due to willful neglect, 
no penalty will be imposed under section 6038D(d) or this section.
    (2) Affirmative showing required. In order to show that the failure 
to report the information required in section 6038D(c) and Sec. 
1.6038D-4 is due to reasonable cause and not due to willful neglect for 
purposes of section 6038D(g) and this section, the specified person must 
make an affirmative showing of all the facts alleged as reasonable cause 
for the failure to disclose.
    (3) Facts and circumstances taken into account. The determination of 
whether a failure to disclose a specified foreign financial asset on 
Form 8938 was due to reasonable cause and not due to willful neglect is 
made on a case-by-case basis, taking into account all pertinent facts 
and circumstances. The fact that a foreign jurisdiction would impose a 
civil or criminal penalty on the specified person (or any other person) 
for disclosing the required information is not reasonable cause.
    (f) Penalties for underpayments attributable to undisclosed foreign 
financial assets--(1) Accuracy-related penalty. For application of the 
accuracy-related penalty in the case of any portion of an underpayment 
attributable to any undisclosed foreign financial asset understatement, 
see section 6662(j).
    (2) Criminal penalties. In addition to other penalties, failure to 
comply with the reporting requirements of section 6038D and the 
regulations, or any underpayment related to such failure, may result in 
criminal penalties under sections 7201, 7203, 7206, et seq., or other 
provisions of Federal law.
    (g) Effective/applicability dates. This section applies to taxable 
years ending after December 19, 2011. Taxpayers may elect to apply the 
rules of this section to taxable years ending prior to December 19, 
2011.

[T.D. 9706, 79 FR 73832, Dec. 12, 2014]



Sec. 1.6039-1  Returns required in connection with certain options.

    (a) Requirement of return with respect to incentive stock options 
under section 6039(a)(1). (1) Every corporation which in any calendar 
year transfers to any person a share of stock pursuant to such person's 
exercise of an incentive stock option shall, for such calendar year, 
file a return with respect to each transfer made during such year. This 
return must include the following information--
    (i) The name, address, and employer identification number of the 
corporation transferring the stock;
    (ii) If other than the corporation identified in paragraph (a)(1)(i) 
of this section, the name, address and employer identification number of 
the corporation whose stock is being transferred;
    (iii) The name, address, and identifying number of the person to 
whom the share or shares of stock were transferred pursuant to the 
exercise of the option;
    (iv) The date the option was granted to the person;
    (v) The exercise price per share;
    (vi) The date the option was exercised by the person;
    (vii) The fair market value of a share of stock on the date the 
option was exercised by the person; and
    (viii) The number of shares of stock transferred to the person 
pursuant to the exercise of the option.
    (2) Each return required by this paragraph (a) shall be made on Form 
3921, Exercise of an Incentive Stock Option Under Section 422(b) (or its 
designated successor) and shall be filed in such manner as provided in 
the instructions thereto.
    (b) Requirement of return with respect to stock purchased under an 
employee stock purchase plan under section 6039(a)(2). (1) Every 
corporation which in any calendar year records, or has by its agent 
recorded, a transfer of the legal title of a share of stock acquired by 
the transferor (person who acquires the shares pursuant to the exercise 
of the option) pursuant to the transferor's exercise of an option 
granted under an employee stock purchase plan as described in section 
423(c) and where the exercise price is less than 100 percent of

[[Page 245]]

the value of the stock on date of grant or is not fixed or determinable 
on the date of the grant, shall, for such calendar year, file a return 
with respect to each transfer made during such year. This return must 
include the following information--
    (i) The name, address, and identifying number of the transferor;
    (ii) The name, address and employer identification number of the 
corporation whose stock is being transferred;
    (iii) The date the option was granted to the transferor;
    (iv) The fair market value of the stock on the date the option was 
granted;
    (v) The actual exercise price paid per share;
    (vi) The exercise price per share determined as if the option were 
exercised on the date the option was granted to the transferor (to be 
provided only if the exercise price per share is not fixed or 
determinable on the date the option was granted);
    (vii) The date the option was exercised by the transferor;
    (viii) The fair market value of the stock on the date the option was 
exercised by the transferor;
    (ix) The date the legal title of the shares was transferred by the 
transferor (see paragraph (b)(3) of this section); and
    (x) The number of shares to which legal title was transferred by the 
transferor.
    (2) Each return required by this paragraph (b) shall be made on Form 
3922, Transfer of Stock Acquired Through an Employee Stock Purchase Plan 
Under Section 423(c) (or its designated successor) and shall be filed in 
such manner as provided in the instructions thereto.
    (3) A return is required by reason of a transfer described in 
section 6039(a)(2) only with respect to the first transfer of legal 
title of the shares by the transferor, including the first transfer of 
legal title to a recognized broker or financial institution. If a 
contractual agreement exists or is entered into with a recognized broker 
or financial institution pursuant to which shares acquired upon exercise 
of the option will be immediately deposited into a brokerage account 
established on behalf of the transferor, then the deposit of shares by 
the transferor into the brokerage account following the exercise of the 
option is the first transfer of legal title of the shares acquired by 
the transferor, and the corporation is only required to file a return 
relating to such transfer of legal title.
    (4) Every corporation that transfers any share of stock pursuant to 
the exercise of an option described in this paragraph shall identify 
such stock in a manner sufficient to enable the accurate reporting of 
the transfer of legal title to such shares. Such identification may be 
accomplished by assigning to the certificates of stock issued pursuant 
to the exercise of such options a special serial number or color.
    (c) Time for filing returns. Each return required by this section 
for a calendar year must be filed in accordance with the guidelines and 
procedures set forth in the instructions to Form 3921 and Form 3922.
    (d) Penalty. For provisions relating to the penalty applicable to 
the failure to file a return under this section, see section 6721.
    (e) Exception to return requirements of section 6039(a) for certain 
nonresident aliens--(1) Return requirement under section 6039(a)(1). The 
return requirement of section 6039(a)(1) is not applicable to the 
exercise of an incentive stock option by an employee who is a 
nonresident alien (as defined in section 7701(b)) and to whom the 
corporation is not required to provide a Form W-2, Wage and Tax 
Statement (or its designated successor) for any calendar year within the 
time period beginning with the first day of the calendar year in which 
the option was granted to the employee and ending on the last day of the 
calendar year in which the employee exercised the option.
    (2) Return requirement under section 6039(a)(2). The return 
requirement of section 6039(a)(2) is not applicable to the first 
transfer of legal title of a share of stock by an employee who is a 
nonresident alien (as defined in section 7701(b)) and to whom the 
corporation is not required to provide a Form W-2 for any calendar year 
within the time period beginning with the first day of the calendar year 
in which the option was granted to the employee and ending on

[[Page 246]]

the last day of the calendar year in which the employee first 
transferred legal title to shares acquired under the option as described 
in paragraph (b)(3) of this section.
    (3) For purposes of this paragraph (e), the term corporation is 
defined in section 7701(a) and includes, but is not limited to, the 
corporation issuing the stock, a related corporation of the corporation, 
any agent of the corporation, any party distributing shares of stock or 
other payments in connection with the plan (for example, a brokerage 
firm), and any party in control of the payment of remuneration for 
employment to the employee.
    (f) Effective/applicability date--(1) In general. This section is 
effective on November 17, 2009. This section will apply as of January 1, 
2007.
    (2) Transition period. Taxpayers are not required to comply with the 
return requirements of paragraphs (a) and (b) of this section for stock 
transfers that occur during the 2007, 2008 and 2009 calendar years.

[T.D. 9470, 74 FR 59090, Nov. 17, 2009]



Sec. 1.6039-2  Statements to persons with respect to whom information
is reported.

    (a) Requirement of statement with respect to incentive stock options 
under section 6039(b). (1) Every corporation filing a return under Sec. 
1.6039-1(a) shall furnish to each person whose name is set forth in such 
return a written statement with respect to the transfer or transfers 
made to such person during such year. This statement must include the 
information described in Sec. 1.6039-1(a)(1).
    (2) Each statement required by this paragraph (a) to be furnished to 
any person must be furnished to such person on Form 3921, Exercise of an 
Incentive Stock Option Under Section 422(b) (or its designated 
successor) and be delivered at such time and in such manner as provided 
in the instructions thereto.
    (b) Requirement of statement with respect to stock purchased under 
an employee stock purchase plan under section 6039(b). (1) Every 
corporation filing a return under Sec. 1.6039-1(b) shall furnish to 
each person whose name is set forth in such return a written statement 
with respect to the transfer or transfers made by such person during 
such year. This statement must include the information described in 
Sec. 1.6039-1(b)(1).
    (2) Each statement required by this paragraph (b) to be furnished to 
any person must be furnished to such person on Form 3922, Transfer of 
Stock Acquired Through an Employee Stock Purchase Plan Under Section 
423(c) (or its designated successor) and be delivered at such time and 
in such manner as provided in the instructions thereto.
    (3) If the statement required by this paragraph is made by the 
authorized transfer agent of the corporation, it is deemed to have been 
made by the corporation. The term transfer agent, as used in this 
section, means any designee authorized to keep the stock ownership 
records of a corporation and to record a transfer of title of the stock 
of such corporation on behalf of such corporation.
    (c) Time for furnishing statements--(1) In general. Each statement 
required by this section to be furnished to any person for a calendar 
year must be furnished to such person on or before January 31 of the 
year following the year for which the statement is required. However, 
for a statement required to be furnished after December 31, 2008, the 
February 15 due date under section 6045 applies to the statement if the 
statement is furnished in a consolidated reporting statement under 
section 6045. See Sec. Sec. 1.6045-1(k)(3), 1.6045-2(d)(2), 1.6045-
3(e)(2), 1.6045-4(m)(3), and 1.6045-5(a)(3)(ii).
    (2) Extension of time. An extension of time to furnish statements 
required by this section may be granted in accordance with the 
guidelines and procedures set forth in the instructions to Form 3921 and 
Form 3922.
    (d) Penalty. For provisions relating to the penalty applicable to 
the failure to furnish a statement under this section, see section 6722.
    (e) Effective/applicability date--(1) In general. This section is 
effective on November 17, 2009. This section will apply as of January 1, 
2007.
    (2) Reliance and transition period. Notwithstanding Sec. 1.6039-
1(f), corporations must furnish information statements to employees in 
accordance with this section for stock transfers that are subject to 
Sec. 1.6039-1(a) and (b), and

[[Page 247]]

occur during the 2007, 2008 and 2009 calendar years. For purposes of 
furnishing information statements for stock transfers that occur during 
the 2007 or 2008 calendar years, taxpayers may rely on Sec. 1.6039-1 of 
the 2004 final regulations (69 FR 46401) or Sec. 1.6039-2 of the 2008 
proposed regulations (REG-103146-08) (73 FR 40999). For purposes of 
furnishing information statements for stock transfers that occur during 
the 2009 calendar year, taxpayers may rely on Sec. 1.6039-1 of the 2004 
final regulations (69 FR 46401), Sec. 1.6039-2 of the 2008 proposed 
regulations (REG-103146-08) (73 FR 40999), or this section.

[T.D. 9470, 74 FR 59091, Nov. 17, 2009, as amended at 74 FR 67973, Dec. 
22, 2009; T.D. 9504, 75 FR 64090, Oct. 18, 2010]



Sec. 1.6039I-1  Reporting of certain employer-owned life insurance 
contracts.

    (a) Requirement to report. Section 6039I requires every taxpayer 
that is an applicable policyholder owning one or more employer-owned 
life insurance contracts issued after August 17, 2006, to file a return 
showing the following information for each year the contracts are 
owned--
    (1) The number of employees of the applicable policyholder at the 
end of the year;
    (2) The number of such employees insured under such contracts at the 
end of the year;
    (3) The total amount of insurance in force at the end of the year 
under such contracts;
    (4) The name, address, and taxpayer identification number of the 
applicable policyholder and the type of business in which the 
policyholder is engaged; and
    (5) That the applicable policyholder has a valid consent for each 
insured employee (or, if all such consents are not obtained, the number 
of insured employees for whom such consent was not obtained).
    (b) Time and manner of reporting. Applicable policyholders owning 
one or more employer-owned life insurance contracts issued after August 
17, 2006, must provide the information required under Sec. 6039I by 
attaching Form 8925, ``Report of Employer-Owned Life Insurance 
Contracts'', to the policyholder's income tax return by the due date of 
that return, or by filing such other form at such time and in such 
manner as the Commissioner may in the future prescribe.
    (c) Effective/applicability date. These regulations are applicable 
for tax years ending after November 6, 2008.

[T.D. 9431, 73 FR 65982, Nov. 6, 2008]



Sec. 1.6041-1  Return of information as to payments of $600 or more.

    (a) General rule--(1) Information returns required--(i) Payments 
required to be reported. Except as otherwise provided in Sec. Sec. 
1.6041-3 and 1.6041-4, every person engaged in a trade or business shall 
make an information return for each calendar year with respect to 
payments it makes during the calendar year in the course of its trade or 
business to another person of fixed or determinable income described in 
paragraph (a)(1)(i) (A) or (B) of this section. For purposes of the 
regulations under this section, the person described in this paragraph 
(a)(1)(i) is a payor.
    (A) Salaries, wages, commissions, fees, and other forms of 
compensation for services rendered aggregating $600 or more.
    (B) Interest (including original issue discount), rents, royalties, 
annuities, pensions, and other gains, profits, and income aggregating 
$600 or more.
    (ii) Information returns required under other provisions of the 
Internal Revenue Code. The payments described in paragraphs (a)(1)(i)(A) 
and (B) of this section shall not include any payments of amounts with 
respect to which an information return is required by, or may be 
required under authority of, section 6042(a) (relating to dividends), 
section 6043(a)(2) (relating to distributions in liquidation), section 
6044(a) (relating to patronage dividends), section 6045 (relating to 
brokers' transactions with customers and certain other transactions), 
sections 6049(a)(1) and (2) (relating to interest), section 6050N(a) 
(relating to royalties), or section 6050P(a) or (b) (relating to 
cancellation of indebtedness). For information returns required under 
section 6045(f) (relating to payments to attorneys), see special rules 
in Sec. Sec. 1.6041-1(a)(1)(iii) and 1.6045-5(c)(4). For payment card 
transactions (as described in

[[Page 248]]

Sec. 1.6050W-1(b)) and third party network transactions (as defined in 
Sec. 1.6050W-1(c)) required to be reported on information returns 
required under section 6050W (relating to payment card and third party 
network transactions), see special rules in Sec. 1.6041-1(a)(1)(iv).
    (iii) Information returns required under section 6045(f) on or after 
January 1, 2007. For payments made on or after January 1, 2007 to which 
section 6045(f) (relating to payments to attorneys) applies, the 
following rules apply. Not withstanding the provisions of paragraph 
(a)(1)(ii) of this section, payments to an attorney that are described 
in paragraph (a)(1)(i) of this section but which otherwise would be 
reportable under section 6045(f) are reported under section 6041 and 
this section and not section 6045(f). This exception applies only if the 
payments are reportable with respect to the same payee under both 
sections. Thus, a person who, in the course of a trade or business, pays 
$600 of taxable damages to a claimant by paying that amount to the 
claimant's attorney is required to file an information return under 
section 6041 with respect to the claimant, as well as another 
information return under section 6045(f) with respect to the claimant's 
attorney. For provisions relating to information reporting for payments 
to attorneys, see Sec. 1.6045-5.
    (iv) Information returns required under section 6050W for calendar 
years beginning after December 31, 2010. For payments made by payment 
card (as defined in Sec. 1.6050W-1(b)(3)) or through a third party 
payment network (as defined in Sec. 1.6050W-1(c)(3)) after December 31, 
2010, that are required to be reported on an information return under 
section 6050W (relating to payment card and third party network 
transactions), the following rule applies. Transactions that are 
described in paragraph (a)(1)(ii) of this section that otherwise would 
be subject to reporting under both sections 6041 and 6050W are reported 
under section 6050W and not section 6041. For provisions relating to 
information reporting for payment card and third party network 
transactions, see Sec. 1.6050W-1. Solely for purposes of this 
paragraph, the de minimis threshold for third party network transactions 
in Sec. 1.6050W-1(c)(4) is disregarded in determining whether the 
transaction is subject to reporting under section 6050W.
    (v) Examples. The provisions of paragraph (a)(1)(iv) of this section 
are illustrated by the following examples:

    Example 1. Restaurant owner A, in the course of business, pays $600 
of fixed or determinable income to B, a repairman, by credit card. B is 
one of a network of unrelated persons that has agreed to accept A's 
credit card as payment under an agreement that provides standards and 
mechanisms for settling the transactions between a merchant acquiring 
bank and the persons who accept the cards. Merchant acquiring bank Y is 
responsible for making the payment to B. Under paragraph (a)(1)(iv) of 
this section, A, as payor, is not required to file an information return 
under section 6041 with respect to the transaction because Y, as the 
payment settlement entity for the payment card transaction, is required 
to file an information return under section 6050W.
    Example 2. Restaurant owner A, in the course of business, pays $600 
of fixed or determinable income to B, a repairman, through a third party 
payment network. B is one of a substantial number of persons who have 
established accounts with Y, a third party settlement organization that 
provides standards and mechanisms for settling the transactions and 
guarantees payments to those persons for goods or services purchased 
through the network. Y is responsible for making the payment to B. Under 
paragraph (a)(1)(iv) of this section, A, as payor, is not required to 
file an information return under section 6041 with respect to the 
transaction because the transaction is a third party network transaction 
that is subject to reporting under section 6050W. Solely for purposes of 
determining whether A is eligible for relief from reporting under 
section 6041, the de minimis threshold for third party network 
transactions in Sec. 1.6050W-1(c)(4) is disregarded.

    (2) Prescribed form. The return required by subparagraph (1) of this 
paragraph shall be made on Forms 1096 and 1099 except that (i) the 
return with respect to distributions to beneficiaries of a trust or of 
an estate shall be made on Form 1041, and (ii) the return with respect 
to certain payments of compensation to an employee by his employer shall 
be made on Forms W-3 and W-2 under the provisions of Sec. 1.6041-2 
(relating to return of information as to payments to employees). Where 
Form 1099 is required to be filed under this section, a separate Form 
1099 shall be

[[Page 249]]

furnished for each person to whom payments described in subdivision (i), 
(ii), or (iii) of subparagraph (1) of this paragraph are made. For time 
and place for filing Forms 1096 and 1099, see Sec. 1.6041-6. For the 
requirement to submit the information required by Form 1099 on magnetic 
media for payments after December 31, 1983, see section 6011(e) and 
Sec. 301.6011-2 of this chapter (Procedure and Administration 
Regulations).
    (b) Persons engaged in trade or business--(1) In general. The term 
``all persons engaged in a trade or business'', as used in section 
6041(a), includes not only those so engaged for gain or profit, but also 
organizations the activities of which are not for the purpose of gain or 
profit. Thus, the term includes the organizations referred to in section 
401(a), 501(c), 501(d) and 521 and in paragraph (i) of this section. On 
the other hand, section 6041(a) applies only to payments in the course 
of trade or business; hence it does not apply to an amount paid by the 
proprietor of a business to a physician for medical services rendered by 
the physician to the proprietor's child.
    (2) Special rule for REMICs. For purposes of chapter 1 subtitle F, 
chapter 61A, part IIIB, the terms ``all persons engaged in a trade or 
business'' and ``any service-recipient engaged in a trade or business'' 
includes a real estate mortgage investment conduit or REMIC (as defined 
in section 860D).
    (c) Fixed or determinable income. Income is fixed when it is to be 
paid in amounts definitely predetermined. Income is determinable 
whenever there is a basis of calculation by which the amount to be paid 
may be ascertained. The income need not be paid annually or at regular 
intervals. The fact that the payments may be increased or decreased in 
accordance with the happening of an event does not for purposes of this 
section make the payments any the less determinable. A payment made 
jointly to two or more payees may be fixed and determinable income to 
one payee even though the payment is not fixed and determinable income 
to another payee. For example, property insurance proceeds paid jointly 
to the owner of damaged property and to a contractor that repairs the 
property may be fixed and determinable income to the contractor but not 
fixed and determinable income to the owner, and should be reported to 
the contractor. A salesman working by the month for a commission on 
sales which is paid or credited monthly receives determinable income.
    (d) Payments specifically included--(1) In general. Amounts paid in 
respect of life insurance, endowment, or annuity contracts are required 
to be reported in returns of information under this section--
    (i) Unless the payment is made in respect of a life insurance or 
endowment contract by reason of the death of the insured and is not 
required to be reported by paragraph (b) of Sec. 1.6041-2,
    (ii) Unless the payment is made by reason of the surrender prior to 
maturity or lapse of a policy, other than a policy which was purchased 
(a) by a trust described in section 401(a) which is exempt from tax 
under section 501(a), (b) as part of a plan described in section 403(a), 
or (c) by an employer described in section 403(b)(1)(A),
    (iii) Unless the payment is interest as defined in Sec. 1.6049-2 
and is made after December 31, 1962,
    (iv) Unless the payment is a payment with respect to which a return 
is required by Sec. 1.6047-1, relating to employee retirement plans 
covering owner-employees,
    (v) Unless the payment is payment with respect to which a return is 
required by Sec. 1.6052-1, relating to payment of wages in the form of 
group-term life insurance.
    (2) Professional fees. Fees for professional services paid to 
attorneys, physicians, and members of other professions are required to 
be reported in returns of information if paid by persons engaged in a 
trade or business and paid in the course of such trade or business.
    (3) Prizes and awards. Amounts paid as prizes and awards that are 
required to be included in gross income under section 74 and Sec. 1.74-
1 when paid in the course of a trade or business are required to be 
reported in returns of information under this section.
    (4) Disability payments. Amounts paid as disability payments under 
section 105(d) are required to be reported in returns of information 
under this section.

[[Page 250]]

    (5) Notional principal contracts. Except as provided in paragraphs 
(b)(5)(i) and (ii) of this section, amounts paid after December 31, 
2000, with respect to notional principal contracts referred to in Sec. 
1.863-7 or 1.988-2(e) to persons who are not described in Sec. 1.6049-
4(c)(1)(ii) are required to be reported in returns of information under 
this section. The amount required to be reported under this paragraph 
(d)(5) is limited to the amount of cash paid from the notional principal 
contract as described in Sec. 1.446-3(d). A non-periodic payment is 
reportable for the year in which an actual payment is made. Any amount 
of interest determined under the provisions of Sec. 1.446-3(g)(4) 
(dealing with interest in the case of a significant non-periodic 
payment) is reportable under this paragraph (d)(5) and not under section 
6049 (see Sec. 1.6049-5(b)(15)). See Sec. 1.6041-4(a)(4) for reporting 
exceptions regarding payments to foreign persons. See, however, Sec. 
1.1461-1(c)(1) for reporting amounts described under this paragraph 
(d)(5) that are paid to foreign persons. The provisions of Sec. 1.6049-
5(d) shall apply for determining whether a payment with respect to a 
notional principal contract is made to a foreign person. See Sec. 
1.6049-4(a) for a definition of payor. For purposes of this paragraph 
(d)(5), a payor includes a middleman defined in Sec. 1.6049-4(f)(4).
    (i) An amount paid with respect to a notional principal contract is 
not required to be reported if the amount is paid by a non-U.S. payor or 
a non-U.S. middleman and is paid and received outside the United States 
(as defined in Sec. 1.6049-4(f)(16)).
    (ii) An amount paid with respect to a notional principal contract is 
not required to be reported if the amount is paid by a payor that has no 
actual knowledge that the payee is a U.S. person and is paid and 
received outside the United States (as defined in Sec. 1.6049-
4(f)(16)), and the payor is--
    (A) A U.S. payor or U.S. middleman that is not a U.S. person (such 
as a controlled foreign corporation defined in section 957(a) or certain 
foreign corporations or foreign partnerships engaged in a U.S. trade or 
business); or
    (B) A foreign branch of a U.S. bank. See Sec. 1.6049-5(c)(5) for a 
definition of a U.S. payor, a U.S. middleman, a non-U.S. payor, and a 
non-U.S. middleman.
    (e) Payment made on behalf of another person--(1) In general. A 
person that makes a payment in the course of its trade or business on 
behalf of another person is the payor that must make a return of 
information under this section with respect to that payment if the 
payment is described in paragraph (a) of this section and, under all the 
facts and circumstances, that person--
    (i) Performs management or oversight functions in connection with 
the payment (this would exclude, for example, a person who performs mere 
administrative or ministerial functions such as writing checks at 
another's direction); or
    (ii) Has a significant economic interest in the payment (i.e., an 
economic interest that would be compromised if the payment were not 
made, such as by creation of a mechanic's lien on property to which the 
payment relates, or a loss of collateral).
    (2) Determination of payor obligated to report. If two or more 
persons meet the requirements for making a return of information with 
respect to a payment, as set forth in paragraph (e)(1) of this section, 
the person obligated to report the payment is the person closest in the 
chain to the payee, unless the parties agree in writing that one of the 
other parties meeting the requirements set forth in paragraph (e)(1) of 
this section will report the payment.
    (3) Special rule for payment by employee to employer. 
Notwithstanding the provisions of paragraph (e)(1) of this section, an 
employee acting in the course of his employment who makes a payment to 
his employer on behalf of another person is not required to make a 
return of information with respect to that payment.
    (4) Optional method to report. A person that makes a payment on 
behalf of another person but is not required to make an information 
return under paragraph (e)(1) of this section may elect to do so 
pursuant to the procedures established by the Commissioner. See, e.g., 
Rev. Proc. 84-33 (1984-1 C.B. 502) (optional method for a paying agent 
to report and deposit amounts

[[Page 251]]

withheld for payors under the statutory provisions of backup 
withholding) (see Sec. 601.601(d)(2) of this chapter).
    (5) Examples. The provisions of this paragraph (e) are illustrated 
by the following examples:

    Example 1. Bank B provides financing to C, a real estate developer, 
for a construction project. B makes disbursements from the account for 
labor, materials, services, and other expenses related to the 
construction project. In connection with the payments, B performs the 
following functions: approves payments to the general contractor or 
subcontractors; ensures that loan proceeds are properly applied and that 
all approved bills are properly paid to avoid mechanics' or 
materialmen's liens; conducts site inspections to determine whether work 
has been completed (but does not check the quality of the work). B is 
performing management or oversight functions in connection with the 
payments and is subject to the information reporting requirements of 
section 6041 with respect to payments.
    Example 2. Mortgage company D holds a mortgage on business property 
owned by E. When the property is damaged by a storm, E's insurance 
company issues a check payable to both D and E in settlement of E's 
claim. Pursuant to the contract between D and E, D holds the insurance 
proceeds in an escrow account and makes disbursements, according to E's 
instructions, to contractors and subcontractors performing repairs on 
the property. D is not performing management or oversight functions, but 
D has a significant economic interest in the payments because the 
purpose of the arrangement is to ensure that property on which D holds a 
mortgage is repaired or replaced. D is subject to the information 
reporting requirements of section 6041 with respect to the payments to 
contractors.
    Example 3. Settlement agent F provides real estate closing services 
to real estate brokers and agents. F deposits money received from the 
buyer or lender in an escrow account and makes payments from the account 
to real estate agents or brokers, appraisers, land surveyors, building 
inspectors, or similar service providers according to the provisions of 
the real estate contract and written instructions from the lender. F may 
also make disbursements pursuant to oral instructions of the seller or 
purchaser at closing. F is not performing management or oversight 
functions and does not have a significant economic interest in the 
payments, and is not subject to the information reporting requirements 
of section 6041. For the rules relating to F's obligation to report the 
gross proceeds of the sale, see section 6045(e) and Sec. 1.6045-4.
    Example 4. Assume the same facts as in Example 3. In addition, the 
seller instructs F to hire a contractor to perform repairs on the 
property. F selects the contractor, negotiates the cost, monitors the 
progress of the project, and inspects the work to ensure it complies 
with the contract. With respect to the payments to the contractor, F is 
performing management or oversight functions and is subject to the 
information reporting requirements of section 6041.
    Example 5. G is a rental agent who manages certain rental property 
on behalf of property owner H. G finds tenants, arranges leases, 
collects rent, responds to tenant inquiries regarding maintenance, and 
hires and makes payments to repairmen. G subtracts her commission and 
any maintenance payments from rental payments and remits the remainder 
to H. With respect to payments to repairmen, G is performing management 
or oversight functions and is subject to the information reporting 
requirements of section 6041. With respect to the payment of rent to H, 
G is subject to the information reporting requirements of section 6041 
regardless of whether she performs management or oversight functions or 
has a significant economic interest in the payment. See Sec. 1.6041-
3(d) for rules relating to rental agents. See Sec. 1.6041-1(f) to 
determine the amount that G should report to H as rent.
    Example 6. Literary agent J receives a payment from publisher L of 
fees earned by J's client, author K. J deposits the payment into a bank 
account in J's name. From time to time and as directed by K, J makes 
payments from these funds to attorneys, managers, and other third 
parties for services rendered to K. After subtracting J's commission, J 
pays K the net amount. J does not order or direct the provision of 
services by the third parties to K, and J exercises no discretion in 
making the payments to the third parties or to K. J is not performing 
management or oversight functions and does not have a significant 
economic interest in the payments and is not subject to the information 
reporting requirements of section 6041 in connection with the payments 
to K or to the third parties. For the rules relating to L's obligation 
to report the payment of the fees to K, see paragraphs (a)(1)(i) and (f) 
of this section. For the rules relating to K's obligation to report the 
payment of the commission to J and the payments to the third parties for 
services, see paragraphs (a)(1)(i) and (d)(2) of this section.
    Example 7. Attorney P deposits into a client trust fund a settlement 
payment from R, the defendant in a breach of contract action for lost 
profits in which P represented plaintiff Q. P makes payments from the 
client trust fund to service providers such as expert witnesses and 
private investigators for expenses incurred in the litigation. P decides

[[Page 252]]

whom to hire, negotiates the amount of payment, and determines that the 
services have been satisfactorily performed. In the event of a dispute 
with a service provider, P withholds payment until the dispute is 
settled. With respect to payments to the service providers, P is 
performing management or oversight functions and is subject to the 
information reporting requirements of section 6041.
    Example 8. Assume the same facts as in Example 7. In addition, 
assume that after paying the service providers and deducting his legal 
fee, P pays Q the remaining funds that P had received from the 
settlement with R. With respect to the payment to Q, P is not performing 
management or oversight functions, does not have a significant economic 
interest in the payment, and is not subject to the information reporting 
requirements of section 6041. For the rules relating to R's obligation 
to report the payment of the settlement proceeds to P, see section 
6045(f) and the regulations thereunder. For the rules relating to R's 
obligation to report the payment of the settlement proceeds to Q, see 
paragraphs (a)(1)(i) and (f) of this section. For the rules relating to 
Q's obligation to report the payment of attorney fees to P, see 
paragraphs (a)(1)(i) and (d)(2) of this section.
    Example 9. Medical insurer S operates as the administrator of a 
health care program under a contract with a state. S makes payments of 
government funds to health care providers who provide care to eligible 
patients. S receives and reviews claims submitted by patients or health 
care providers, determines if the claims meet all the requirements of 
the program (e.g., that the care is authorized and that the patients are 
eligible beneficiaries), and determines the amount of payment. S is 
performing management or oversight functions and is subject to the 
information reporting requirements of section 6041 with respect to the 
payments.
    Example 10. Race track employee T holds deposits made by horse owner 
U in a special escrow account in U's name. U enters into a contract with 
jockey V to ride U's horse in a race at the track. As directed by U, T 
pays V the fee for riding U's horse from U's escrow account. T is not 
performing management or oversight functions, does not have a 
significant economic interest in the payment, and is not subject to the 
information reporting requirements of section 6041. For the rules 
relating to U's obligation to report the payment of the fee to V, see 
paragraph (a)(1)(i) of this section.
    Example 11. X is a certified public accountant employed by Firm Y, 
and is not a partner. Client Z pays X directly for accounting services. 
X remits the amount received to Y, as required by the terms of his 
employment. X does not have any reporting obligation with respect to the 
payment to Y. For the rules relating to Z's obligation to report the 
payment to Y for services, see paragraphs (a)(1)(i) and (d)(2) of this 
section.
    Example 12. Bank contracts with Title Company with respect to the 
disbursement of funds on a construction loan. Pursuant to their 
arrangement, the contractor sends draw requests to Title Company, which 
inspects the work, verifies the amount requested, and then sends the 
draw request to Bank with supporting documents. Bank pays Title Company 
the amount of the draw request, and Title Company insures Bank against 
any loss if it cannot obtain the necessary lien waivers. Bank has a 
significant economic interest in the payment as a mortgagee, and Title 
Company exercises management or oversight over the payment. Since Title 
Company is closest in the chain to the contractor, Title Company should 
report the payment, unless the parties agree in writing that Bank will 
report the payment.

    (f) Amount to be reported when fees, expenses or commissions are 
deducted--(1) In general. The amount to be reported as paid to a payee 
is the amount includible in the gross income of the payee (which in many 
cases will be the gross amount of the payment or payments before fees, 
commissions, expenses, or other amounts owed by the payee to another 
person have been deducted), whether the payment is made jointly or 
separately to the payee and another person. The Commissioner may, by 
guidance published in the Internal Revenue Bulletin, illustrate the 
circumstances under which the gross amount or less than the gross amount 
may be reported.
    (2) Examples. The provisions of this paragraph (f) are illustrated 
by the following examples:

    Example 1. Attorney P represents client Q in a breach of contract 
action for lost profits against defendant R. R settles the case for 
$100,000 damages and $40,000 for attorney fees. Under applicable law, 
the full $140,000 is includible in Q's gross taxable income. R issues a 
check payable to P and Q in the amount of $140,000. R is required to 
make an information return reporting a payment to Q in the amount of 
$140,000. For the rules with respect to R's obligation to report the 
payment to P, see section 6045(f) and the regulations thereunder.
    Example 2. Assume the same facts as in Example 1, except that R 
issues a check to Q for $100,000 and a separate check to P for $40,000. 
R is required to make an information return reporting a payment to Q in 
the amount of $140,000. For the rules with respect to R's obligation to 
report the payment to P, see section 6045(f) and the regulations 
thereunder.


[[Page 253]]


    (g) Payment made in medium other than cash. If any payment required 
to be reported on Form 1099 is made in property other than money, the 
fair market value of the property at the time of payment is the amount 
to be included on such form.
    (h) When payment deemed made. For purposes of a return of 
information, an amount is deemed to have been paid when it is credited 
or set apart to a person without any substantial limitation or 
restriction as to the time or manner of payment or condition upon which 
payment is to be made, and is made available to him so that it may be 
drawn at any time, and its receipt brought within his own control and 
disposition.
    (i) Payments made by the United States or a State. Information 
returns on:
    (1) Forms 1096 and 1099 and
    (2) Forms W-3 and W-2 (when made under the provisions of Sec. 
1.6041-2)


of payments made by the United States or a State, or political 
subdivision thereof, or the District of Columbia, or any agency or 
instrumentality of any one or more of the foregoing, shall be made by 
the officer or employee of the United States, or of such State, or 
political subdivision, or of the District of Columbia, or of such agency 
or instrumentality, as the case may be, having control of such payments 
or by the officer or employee appropriately designated to make such 
returns.
    (j) Effective/applicability date. This section applies to payments 
made on or after January 6, 2017. (For payments made after June 30, 
2014, and before January 6, 2017, see this section as in effect and 
contained in 26 CFR part 1, as revised April 1, 2016. For payments made 
after December 31, 2010, and before July 1, 2014, see this section as in 
effect and contained in 26 CFR part 1, as revised April 1, 2013.)

[T.D. 6500, 25 FR 12108, Nov. 26, 1960]

    Editorial Note: For Federal Register citations affecting Sec. 
1.6041-1, see the List of CFR Sections Affected, which appears in the 
Finding Aids section of the printed volume and at www.govinfo.gov.



Sec. 1.6041-2  Return of information as to payments to employees.

    (a)(1) In general. Wages, as defined in section 3401, paid to an 
employee are required to be reported on Form W-2. See section 6011 and 
the Employment Tax Regulations thereunder. All other payments of 
compensation, including the cash value of payments made in any medium 
other than cash, to an employee by his employer in the course of the 
trade or business of the employer must also be reported on Form W-2 if 
the total of such payments and the amount of the employee's wages (as 
defined in section 3401), if any, required to be reported on Form W-2 
aggregates $600 or more in a calendar year. For example, if a payment of 
$700 was made to an employee and $400 thereof represents wages subject 
to withholding under section 3402 and the remaining $300 represents 
compensation not subject to withholding, such wages and compensation 
must both be reported on Form W-2. A separate Form W-2 shall be 
furnished for each employee for whom a return must be made. At the 
election of the employer, components of amounts required to be reported 
on Form W-2 pursuant to the provisions of this subparagraph may be 
reported on more than one Form W-2.
    (2) Transmittal form. The transmittal form for a return on Form W-2 
made pursuant to the provisions of subparagraph (1) of this paragraph 
shall be Form W-3. In a case where an employer must file a Form W-3 
under this paragraph and also under Sec. 31.6011(a)-4 or Sec. 
31.6011(a)-5 of this chapter (Employment Tax Regulations), the Form W-3 
filed under such Sec. 31.6011(a)-4 or Sec. 31.6011(a)-5 shall also be 
used as the transmittal form for a return on Form W-2 made pursuant to 
the provisions of this paragraph.
    (3) Time for filing--(i) General rule. In a case where an employer 
must file Forms W-3 and W-2 under this paragraph and also under Sec. 
31.6011(a)-4 or Sec. 31.6011(a)-5 of this chapter (Employment Tax 
Regulations), the time for filing such forms under this paragraph shall 
be the same as the time (including extensions thereof) for filing such 
forms under Sec. 31.6011(a)-4 or Sec. 31.6011(a)-5.

[[Page 254]]

    (ii) Exception. In a case where an employer is not required to file 
Forms W-3 and W-2 under Sec. 31.6011(a)-4 or Sec. 31.6011(a)-5 of this 
chapter, returns on Forms W-3 and W-2 required under this paragraph (a) 
for any calendar year shall be filed on or before January 31 of the 
following year.
    (iii) Cross reference. For extensions of time for filing returns, 
see section 6081 and the regulations thereunder.
    (4) Place for filing. The returns on Forms W-3 and W-2 required 
under this paragraph shall be filed pursuant to the rules contained in 
Sec. 31.6091-1 of this chapter (Employment Tax Regulations), relating 
to the place for filing certain returns.
    (5) Statement for employees. An employer required under this 
paragraph (a) to file Form W-2 with respect to an employee is also 
required under sections 6041(d) and 6051 to furnish a written statement 
to the employee. This written statement must be furnished on Form W-2 in 
accordance with section 6051 and the regulations.
    (b) Distributions under employees' trust or plan. (1) Amounts which 
are:
    (i) Distributed or made available to a beneficiary, and to which 
section 402 (relating to employees' trusts) or section 403 (relating to 
employee annuity plans) applies, or
    (ii) Described in section 72(m)(3)(B), shall be reported on Forms 
1096 and 1099 to the extent such amounts are includible in the gross 
income of such beneficiary if the amounts so includible aggregate $600 
or more in any calendar year. In addition, every trust described in 
section 501(c)(17) which makes one or more payments (including 
separation and sick and accident benefits) totaling $600 or more in 1 
year to an individual must file an annual information return on Form 
1096, accompanied by a statement on Form 1099, for each such individual. 
Payments made by an employer or a person other than the trustee of the 
trust should not be considered in determining whether the $600 minimum 
has been paid by the trustee. The provisions of this subparagraph shall 
not be applicable to payments of supplemental unemployment compensation 
benefits made after December 31, 1970, which are treated as if they were 
wages for purposes of section 3401(a). Such amounts are required to be 
reported on Forms W-3 and W-2. See paragraph (b)(14) of Sec. 
31.3401(a)-1 of this chapter (Employment Tax Regulations).
    (2) Any amount with respect to which a statement is required by 
Sec. 1.6047-1, relating to employee retirement plans covering owner-
employees, shall not be included in amounts required to be reported 
under section 6041.
    (c) Payments to foreign persons. See Sec. 1.6041-4 for reporting 
exemptions regarding payments to foreign persons. See Sec. 1.6049-5(d) 
for determining whether a payment is made to a foreign person.
    (d) Applicability date. This section applies to returns filed on or 
after January 30, 2020. Section 1.6041-2T (as contained in 26 CFR part 
1, revised April 2019) applies to returns filed before January 30, 2020.

[T.D. 7284, 38 FR 20827, Aug. 3, 1973, as amended by T.D. 7580, 43 FR 
60159, Dec. 26, 1978; T.D. 8734, 62 FR 53472, Oct. 14, 1997; T.D. 8895, 
65 FR 50406, Aug. 18, 2000; T.D. 9114, 69 FR 7570, Feb. 18, 2004; T.D. 
9821, 82 FR 33445, July 20, 2017; T.D. 9892, 85 FR 5325, Jan. 30, 2020]



Sec. 1.6041-3  Payments for which no return of information is 
required under section 6041.

    Returns of information are not required under section 6041 and 
Sec. Sec. 1.6041-1 and 1.6041-2 for payments described in paragraphs 
(a) through (q) of this section. See Sec. 1.6041-4 for reporting 
exemptions regarding payments to foreign persons.
    (a) Payments of income required to be reported on Forms 1120-S, 941, 
W-2, and W-3 (however, see Sec. 1.6041-2(a) with respect to Forms W-2 
and W-3).
    (b) Payments by a broker to his customer (but for reporting 
requirements as to certain of such payments, see sections 6042, 6045, 
and 6049 and the regulations thereunder in this part).
    (c) Payments of bills for merchandise, telegrams, telephone, 
freight, storage, and similar charges.
    (d) Payments of rent made to rental agents (but the agent is 
required to report payments of rent to the landlord in accordance with 
Sec. 1.6041-1(a)(1)(i)(B) and (2)).
    (e) Payments representing earned income for services rendered 
without the

[[Page 255]]

United States made to a citizen of the United States, if it is 
reasonable to believe that such amounts will be excluded from gross 
income under the provisions of section 911 and the regulations 
thereunder.
    (f) Compensation and profits paid or distributed by a partnership to 
the individual partners (but for reporting requirements, see Sec. 
1.6031-1).
    (g) Payments of commissions to general agents by fire insurance 
companies or other companies insuring property, except when specifically 
directed by the Commissioner to be filed.
    (h)(1) In general. Payments made under reimbursement or other 
expense allowance arrangements that meet the requirements of section 
62(c) of the Code and Sec. 1.62-2, that do not exceed the amount of the 
expenses substantiated (i.e., amounts which are treated as paid under an 
accountable plan), and that are received by an employee on or after 
January 1, 1989, with respect to expenses paid or incurred on or after 
January 1, 1989.
    (2) Transition rule. Payments made under reimbursement or other 
expense allowance arrangements that are received by an employee on or 
after January 1, 1989, but prior to July 1, 1990, to the extent that the 
employee is required to account (within the meaning of the term 
``account'' as set forth in Sec. 1.162-17(b)(4) or 1.274-5T(f)(4), 
whichever is applicable) and does so account to the payor for such 
expenses, provided the payor has made a reasonable, good faith effort to 
comply with the requirements of section 62(c). In general, compliance 
with the provisions of this section, as in effect for payments made 
under reimbursement or other expense allowance arrangements that were 
received by an employee before January 1, 1989, with respect to expenses 
paid or incurred before January 1, 1989, will constitute such reasonable 
good faith compliance. In no event, however, will reasonable good faith 
compliance exist if a payor fails to report payments made under an 
arrangement (other than a per diem or mileage allowance type 
arrangement) under which an employee is not required to substantiate 
expenses paid or incurred or is not required to return amounts in excess 
of the substantiated expenses.
    (i) Payments of interest on obligations of the United States, or a 
State, Territory, or political subdivision thereof, or the District of 
Columbia, or any agency or instrumentality of any one or more of the 
foregoing (but for requirements for reporting certain such payments by 
the United States or any agency or instrumentality thereof, see 
Sec. Sec. 1.1461-1 to 1.1461-3, inclusive).
    (j) Payments of interest on corporate bonds (but for reporting 
requirements as to payments on certain corporate bonds, see Sec. 
1.6049-5.
    (k) Amounts paid as an allowance or reimbursement for traveling or 
other bona fide ordinary and necessary expenses, including an allowance 
for meals and lodging or a per diem allowance in lieu of subsistence, to 
persons in the service of an international organization (without regard 
to whether there is a requirement to account for such amounts) if-
    (1) The organization is designated as an international organization 
by the President of the United States in Executive Orders issued 
pursuant to 22 U.S.C. 288, and
    (2) The organization has immunity with respect to the invoilability 
of its archives pursuant to an international agreement having full force 
and effect in the United States.
    (l) A payment to an informer as an award, fee, or reward for 
information relating to criminal activity, but only if such payment is 
made by the United States, a State, Territory, or political subdivision 
thereof, or the District of Columbia, or any agency or instrumentality 
of any one or more of the foregoing, or, with respect to payments made 
after December 31, 1987, by an organization that is described in section 
501(c)(3) and that makes such payments in furtherance of a charitable 
purpose to lessen the burdens of government within the meaning of Sec. 
1.501(c)(3)-1(d)(2).
    (m) On and after September 9, 1968, payments by a person carrying on 
the banking business of interest on a deposit evidenced by a negotiable 
time certificate of deposit (but for reporting requirements as to 
payments made after December 31, 1962, of interest on certain deposits, 
see sec. 6049 and the regulations thereunder in this part).

[[Page 256]]

    (n) Payments to individuals as scholarships or fellowship grants 
within the meaning of section 117(b)(1), whether or not ``qualified 
scholarships'' as described in section 117(b). This exception does not 
apply to any amount of a scholarship or fellowship grant that represents 
payment for services within the meaning of section 117(c). Instead, 
these amounts are required to be reported as wages on Form W-2. See 
Sec. 1.1461-1(c) for applicable reporting requirements for amounts paid 
to foreign persons.
    (o) Per diem of certain alien trainees described under section 
1441(c)(6).
    (p) Payments made to the following persons:
    (1) A corporation described in Sec. 1.6049-4(c)(1)(ii)(A), except 
with respect to payments made to a corporation after December 31, 1997 
for attorneys' fees, and except a corporation engaged in providing 
medical and health care services or engaged in the billing and 
collecting of payments in respect to the providing of medical and health 
care services. However, no reporting is required where payment is made 
to a hospital or extended care facility described in section 501(c)(3) 
which is exempt from taxation under section 501(a) or to a hospital or 
extended care facility owned and operated by the United States, a State, 
the District of Columbia, a possession of the United States, or a 
political subdivision, agency or instrumentality of any of the 
foregoing. For reporting requirements as to payments by cooperatives, 
and to certain other payments, see sections 6042, 6044, and 6049 and the 
regulations thereunder in this part.
    (2) An organization exempt from taxation under section 501(a), as 
described in Sec. 1.6049-4(c)(1)(ii)(B)(1), or an individual retirement 
plan, as described in Sec. 1.6049-4(c)(1)(ii)(C).
    (3) The United States, as described in Sec. 1.6049-4(c)(1)(ii)(D).
    (4) A State, the District of Columbia, a possession of the United 
States, or any political subdivision of any of the foregoing, as 
described in Sec. 1.6049-4(c)(1)(ii)(E).
    (5) A foreign government or political subdivision of a foreign 
government, as described in Sec. 1.6049-4(c)(1)(ii)(F).
    (6) An international organization, as described in Sec. 1.6049-
4(c)(1)(ii)(G).
    (7) A foreign central bank of issue, as described in Sec. 1.6049-
4(c)(1)(ii)(H) and the Bank for International Settlements.
    (8) Any wholly owned agency or instrumentality of any person 
described in paragraph (p) (2), (3), (4), (5), (6), or (7) of this 
section.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960]

    Editorial Note: For Federal Register citations affecting Sec. 
1.6041-3, see the List of CFR Sections Affected, which appears in the 
Finding Aids section of the printed volume and at www.govinfo.gov.



Sec. 1.6041-4  Foreign-related items and other exceptions.

    (a) Exempted foreign-related items.(1) Returns of information are 
not required for payments that a payor can, prior to payment, reliably 
associate with documentation upon which it may rely to treat as made to 
a foreign beneficial owner in accordance with Sec. 1.1441-1(e)(1)(ii) 
or as made to a foreign payee in accordance with Sec. 1.6049-5(d)(1) or 
presumed to be made to a foreign payee under Sec. 1.6049-5(d)(2), (3), 
(4), or (5). Returns of information are also not required for a payment 
that a payor or middleman can, prior to payment, reliably associate with 
documentation upon which it may rely to treat as made to a foreign 
intermediary or flow-through entity in accordance with Sec. 1.1441-1(b) 
if it obtains from the intermediary or flow-through entity a withholding 
statement described in Sec. 1.6049-5(b)(14) that allocates the payment 
to a chapter 4 withholding rate pool (as defined in Sec. 1.6049-
4(f)(5)) or specific payees to which withholding applies under chapter 
4. Payments excepted from reporting under this paragraph (a)(1) may be 
reportable, for purposes of chapter 3 of the Internal Revenue Code 
(Code), under Sec. 1.1461-1(b) and (c) and, for purposes of chapter 4 
of the Code, under Sec. 1.1474-1(d)(2). The provisions in Sec. 1.6049-
5(c) regarding documentation of foreign status shall apply for purposes 
of this paragraph (a)(1). The provisions in Sec. 1.6049-5(c)(5) 
regarding the definitions of U.S. payor and non-U.S. payor shall also 
apply for purposes of this paragraph (a)(1). See Sec. 1.1441-
1(b)(3)(iii)(B) and (C) for special payee

[[Page 257]]

rules regarding scholarships, grants, pensions, annuities, etc. The 
provisions of Sec. 1.1441-1 shall apply by substituting the term 
``payor'' for the term ``withholding agent'' and without regard to the 
fact that the provisions apply only to amounts subject to withholding 
under chapter 3 of the Code and the regulations under that chapter.
    (2) Returns of information are not required for payments of amounts 
from sources outside the United States (determined under the provisions 
of part I, subchapter N, chapter 1 of the Code and the regulations under 
those provisions) paid by a non-U.S. payor or non-U.S. middleman and 
that are paid and received outside the United States. For a definition 
of non-U.S. payor and non-U.S. middleman, see Sec. 1.6049-5(c)(5). For 
circumstances in which an amount is considered to be paid and received 
outside the United States, see Sec. 1.6049-4(f)(16).
    (3) If a foreign intermediary, as described in Sec. 1.1441-
1(c)(13), or a U.S. branch that is not treated as a U.S. person receives 
a payment from a payor, which payment the payor can reliably associate 
with a valid withholding certificate described in Sec. 1.1441-
1(e)(3)(ii) or (iii), or Sec. 1.1441-1(e)(3)(v), respectively, 
furnished by such intermediary or branch, then the intermediary or 
branch is not required to report such payment when it, in turn, pays the 
amount, unless, and to the extent, the intermediary or branch knows that 
the payment is required to be reported under this section and was not so 
reported. For example, if a U.S. branch described in Sec. 1.1441-
1(b)(2)(iv) fails to provide information regarding U.S. persons that are 
not exempt from reporting under Sec. 1.6041-3(q) to the person from 
whom the U.S. branch receives the payment, the U.S. branch must report 
the payment on an information return. See, however, paragraph (a)(7) of 
this section for when reporting under section 6041is coordinated with 
reporting under chapter 4 of the Code or an applicable IGA (as defined 
in Sec. 1.6049-4(f)(7)). The exception described in this paragraph 
(a)(3) for amounts paid by a foreign intermediary shall not apply to a 
qualified intermediary that assumes reporting responsibility under 
chapter 61 of the Code with respect to amounts reportable under the 
agreement described in Sec. 1.1441-1(e)(5)(iii).
    (4) Returns of information are not required for amounts paid with 
respect to notional principal contracts referred to in Sec. 1.863-7 or 
1.988-2(e) which the payor may treat as effectively connected income of 
a foreign payee under the provisions of Sec. 1.1441-4(a)(3) or if the 
payee provides a representation in a master agreement that governs the 
transactions in notional principal contracts between the parties (for 
example, an International Swap and Derivatives Association (ISDA) 
Agreement, including the Schedule thereto) or in the confirmation on the 
particular notional principal contract transaction that the counterparty 
is a foreign person. See, however, Sec. 1.1461-1(c)(2)(i) for 
applicable reporting requirements.
    (5) Returns of information are not required for the period that the 
amounts paid represent assets blocked as described in Sec. 1.1441-
2(e)(3). The exemption in this paragraph (a)(5) shall terminate when 
payment is deemed to occur in accordance with the provisions of Sec. 
1.1441-2(e)(3).
    (6) For rules concerning direct sellers, see Sec. 1.6041A-
1(d)(3)(i)(C).
    (7) Returns of information are not required for payments with 
respect to which a return is not required by applying the rules of Sec. 
1.6049-4(c)(4) (by substituting the term ``a payment subject to 
reporting under section 6041'' for the term ``an interest payment'').
    (b) Joint owners. Amounts paid to joint owners for which a 
certificate or documentation is required as a condition for being exempt 
from reporting under paragraph (a) of this section are presumed made to 
U.S. payees who are not exempt recipients if, prior to payment, the 
payor or middleman cannot reliably associate the payment either with a 
Form W-9 furnished by one of the joint owners in the manner required in 
Sec. Sec. 31.3406(d)-1 through 31.3406(d)-5, or with documentation 
described in paragraph (a)(1) of this section furnished by each joint 
owner upon which the payor or middleman can rely to treat each joint 
owner as a foreign payee or foreign beneficial owner. However, in the 
case of a withholdable payment (as defined in

[[Page 258]]

Sec. 1.6049-4(f)(15)) made to joint payees, if any joint payee does not 
appear to be an individual, the payment is presumed made to a foreign 
payee that is a nonparticipating FFI (as defined in Sec. 1.1471-
1(b)(82)). See Sec. 1.1471-3(f)(7).
    (c) Conversion into United States dollars of amounts paid in foreign 
currency. For rules concerning foreign currency conversion, see Sec. 
1.6049-4(d)(3)(i).
    (d) Effective/applicability date. This section applies to payments 
made on or after January 6, 2017. (For payments made after June 30, 
2014, and before January 6, 2017, see this section as in effect and 
contained in 26 CFR part 1, as revised April 1, 2016. For payments made 
after December 31, 2002, and before July 1, 2014, see this section as in 
effect and contained in 26 CFR part 1, as revised April 1, 2013.)

[T.D. 8734, 62 FR 53473, Oct. 14, 1997, as amended by T.D. 8804, 63 FR 
72188, Dec. 31, 1998; T.D. 8856, 64 FR 73412, Dec. 30, 1999; T.D. 8881, 
65 FR 32205, May 22, 2000; T.D. 9658, 79 FR 12793, Mar. 6, 2014; T.D. 
9808, 82 FR 2106, Jan. 6, 2017]



Sec. 1.6041-5  Information as to actual owner.

    When a person receiving a payment described in section 6041 is not 
the actual owner of the income received, the name and address of the 
actual owner shall be furnished upon demand of the person paying the 
income, and in default of compliance with such demand the payee becomes 
liable for the penalties provided. See section 7203.



Sec. 1.6041-6  Returns made on Forms 1096 and 1099 under section 6041;
contents and time and place for filing.

    (a) In general. Except as provided in paragraph (b) of this section, 
returns made under section 6041 on Forms 1096 and 1099 for any calendar 
year shall be filed on or before February 28 (March 31 if filed 
electronically) of the following year with any of the Internal Revenue 
Service Centers, the addresses of which are listed in the instructions 
for such forms. The name and address of the person making the payment 
and the name and address of the recipient of the payment shall be stated 
on Form 1099. If the present address of the recipient is not available, 
the last known post office address must be given. See section 6109 and 
the regulations in part 301 of this title under section 6109 for rules 
requiring the inclusion of identifying numbers in Form 1099.
    (b) Exception. Returns made on Form 1099 reporting nonemployee 
compensation shall be filed on or before January 31 of the year 
following the calendar year to which such returns relate.
    (c) Applicability date. This section applies to returns filed on or 
after January 30, 2020. Section 1.6041-6T (as contained in 26 CFR part 
1, revised April 2019) applies to returns filed before January 30, 2020.

[T.D. 9892, 85 FR 5325, Jan. 30, 2020]



Sec. 1.6041-7  Magnetic media requirement.

    (a) General. For rules relating to permission to submit the 
information required by Form 1099 or W-2 on magnetic tape or other 
media, see Sec. 1.9101-1. See also paragraph (b)(2) of Sec. 
31.6011(a)-7 of this chapter (Employment Tax Regulations) for additional 
rules relating to Form W-2. High-volume filers of information returns 
must file their returns on magnetic media. See section 6011(e) and Sec. 
301.6011-2 of this chapter (Procedure and Administration Regulations) 
for the requirements for filing on magnetic media.
    (b) Returns on magnetic tape by departments of health care carriers. 
(1) For calendar years beginning on or after January 1, 1971, a health 
care carrier, or an agent thereof, making payment of fees or other 
compensation to providers of medical and health care services, may make 
a separate return on magnetic tape for each separate department within a 
specific line of such carrier's business, so long as all of such returns 
taken together contain all of the information required by section 6041 
with respect to each provider of medical and health care services to 
whom such health care carrier makes payments aggregating $600 or more 
during the calendar year. Examples of separate departments within a 
specific line of such carrier's business (such as health and accident 
insurance) include, but are not limited to, separate departments to 
process claims of individual and group policyholders; and separate 
departments established along geographic lines.

[[Page 259]]

    (2) For purposes of this paragraph, the term ``health care carrier'' 
means any person making health care payments: (i) In exchange for the 
payment of a premium, (ii) in accordance with an employee benefit 
program, or (iii) in connection with a government-sponsored health care 
program.

[T.D. 7106, 36 FR 6422, Apr. 3, 1971, as amended by T.D. 8734, 62 FR 
53473, Oct. 14, 1997]



Sec. 1.6041-8  Cross-reference to penalties.

    For provisions relating to the penalty provided for failure to file 
timely a correct information return required under section 6041(a) or 
(b), see Sec. 301.6721-1 of this chapter (Procedure and Administration 
Regulations). For provisions relating to the penalty provided for 
failure to furnish timely a correct payee statement required under 
section 6041(d), see Sec. 301.6722-1 of this chapter. See Sec. 
301.6724-1 of this chapter for the waiver of a penalty if the failure is 
due to reasonable cause and is not due to willful neglect.

[T.D. 8734, 62 FR 53474, Oct. 14, 1997]



Sec. 1.6041-9  Coordination with reporting rules for widely held 
fixed investment trusts under Sec. 1.671-5.

    See Sec. 1.671-5 for the reporting rules for widely held fixed 
investment trusts (WHFIT) (as defined under that section). For purposes 
of section 6041, middlemen and trustees of WHFITs are deemed to have 
management and oversight functions in connection with payments made by 
the WHFIT.

[T.D. 9241, 71 FR 4024, Jan. 24, 2006]



Sec. 1.6041-10  Return of information as to payments of winnings from
bingo, keno, and slot machine play.

    (a) In general. Every person engaged in a trade or business (as 
defined in Sec. 1.6041-1(b)) and who, in the course of such trade or 
business, makes a payment of reportable gambling winnings (defined in 
paragraph (b)(1) of this section) must make an information return with 
respect to such payment. Unless the provisions of paragraph (g) of this 
section (regarding aggregate reporting) apply, a separate information 
return is required with respect to each payment of reportable gambling 
winnings.
    (b) Definitions--(1) Reportable gambling winnings. (i) For purposes 
of this section, the term reportable gambling winnings is defined as 
follows:
    (A) For bingo, the term ``reportable gambling winnings'' means 
winnings of $1,200 or more from one bingo game, without reduction for 
the amount wagered. All winnings received from all wagers made during 
one bingo game are combined (for example, all winnings from all cards 
played during one bingo game are combined).
    (B) For keno, the term ``reportable gambling winnings'' means 
winnings of $1,500 or more from one keno game reduced by the amount 
wagered on the same keno game. All winnings received from all wagers 
made during one keno game are combined (for example, all winnings from 
all ``ways'' on a multi-way keno ticket are combined).
    (C) For slot machine play, the term ``reportable gambling winnings'' 
means winnings of $1,200 or more from one slot machine play, without 
reduction for the amount wagered.
    (ii) Winnings and wagers from different types of games are not 
combined to determine if the reporting threshold is satisfied. Bingo, 
keno, and slot machine play are different types of games.
    (iii) Winnings include the fair market value of a payment in any 
medium other than cash.
    (iv) The amount wagered in the case of a free play is zero.
    (2) Information reporting period--(i) In general. For purposes of 
paragraph (g) of this section, the ``information reporting period'' 
begins when a patron places the first wager on a particular type of game 
at a gaming establishment, as defined in paragraph (b)(2)(iv) of this 
section, and ends when the patron places his or her last wager on the 
same type of game at the same gaming establishment before the end of the 
``information reporting period.'' An information reporting period is a 
24-hour period. A payor may select a calendar day (as defined in 
paragraph (b)(2)(ii) of this section) or a gaming day (as defined in 
paragraph (b)(2)(iii) of this section) as the information reporting 
period for purposes of the aggregate reporting method in paragraph (g) 
of this section. For purposes of this paragraph (b)(2), time is 
determined by the time

[[Page 260]]

zone of the location where the patron places the wager. A payor must use 
the same information reporting period (a calendar day or gaming day) to 
report all ``reportable gambling winnings'' paid during the calendar 
year. Once selected, a payor may not change its information reporting 
period during a calendar year. Any changes to a payor's information 
reporting period from one calendar year to another must be implemented 
on January 1.
    (ii) Calendar day. A calendar day is determined with reference to a 
period beginning at 12 a.m. and ending no later than 11:59 p.m. of the 
same calendar day.
    (iii) Gaming day--(A) In general. A gaming day is a 24-hour period 
other than a calendar day (as defined in paragraph (b)(2)(ii) of this 
section) selected by the payor, subject to the special rules for 
December 31 and January 1 in paragraphs (b)(2)(iii)(B) and (C) of this 
section.
    (B) Special rule for December 31. For purposes of paragraph 
(b)(2)(iii) of this section, the gaming day that begins on December 31 
of any calendar year ends at 11:59 p.m. on December 31, regardless of 
the time on December 31 on which that gaming day began.
    (C) Special rule for January 1. For purposes of paragraph 
(b)(2)(iii) of this section, the gaming day of January 1 begins at 12:00 
a.m. on January 1, regardless of the time and calendar day on which that 
gaming day ends, and may extend beyond 24 hours.
    (iv) Gaming establishment. For purposes of this section, a gaming 
establishment is a business entity of a payor of reportable gambling 
winnings with respect to bingo, keno, or slot machine play, and includes 
all gaming establishments owned by such payor using the same employer 
identification number (EIN) issued to such payor in accordance with 
section 6109.
    (v) Examples. The following examples illustrate the provisions of 
paragraph (b)(2) of this section.

    Example 1. Casino R uses the aggregate reporting method under 
paragraph (g) of this section to report certain reportable gambling 
winnings. For other regulatory purposes, Casino R uses a gaming day that 
begins at 3 a.m. and ends at 2:59 a.m. the following calendar day. 
Casino R chooses to use its gaming day as its information reporting 
period for purposes of paragraph (b)(2) of this section during Year 1. 
Accordingly, the information reporting period for purposes of paragraph 
(g) of this section for each day during Year 1 begins at 3 a.m. and ends 
at 2:59 a.m. the following day. The information reporting period for 
December 31 of Year 1 begins at 3 a.m. on December 31 of Year 1 and ends 
at 11:59 p.m. on December 31 of Year 1. The information reporting period 
for January 1 of Year 2 begins at 12 a.m. on January 1 of Year 2 and 
ends at 2:59 a.m. on January 2 of Year 2.
    Example 2. The facts are the same as Example 1, except Casino R uses 
a calendar day as its information reporting period for purposes of 
paragraph (b)(2) of this section during Year 1. Accordingly, the 
information reporting period for purpose of paragraph (g) of this 
section for each day during Year 1 begins at 12 a.m. and ends at 11:59 
p.m. on the same day.
    Example 3. Casino R uses the aggregate reporting method under 
paragraph (g) of this section to report certain reportable gambling 
winnings. For other regulatory purposes, Casino R uses a gaming day that 
begins at 9:00 p.m. and ends at 8:59 p.m. the following calendar day. 
Casino R chooses to use its gaming day as its information reporting 
period for purposes of paragraph (b)(2) of this section during Year 1. 
Accordingly, the information reporting period for purposes of paragraph 
(g) of this section for each day during Year 1 begins at 9:00 p.m. and 
ends at 8:59 p.m. the following day. The information reporting period 
for December 31 of Year 1 begins at 9:00 p.m. on December 30 and ends at 
8:59 p.m. on December 31. A second information reporting period for 
December 31 then begins at 9:00 p.m. on December 31 and ends at 11:59 
p.m. on December 31. The information reporting period for January 1 of 
Year 2 begins at 12:00 a.m. on January 1 and ends at 8:59 p.m. on 
January 1 of Year 2.
    Example 4. Casino R uses the aggregate reporting method under 
paragraph (g) of this section to report certain reportable gambling 
winnings. In Year 1, Casino R chooses to use a ``gaming day'' that 
begins at 3 a.m. and ends at 2:59 a.m. the following day as its 
information reporting period. During the course of Year 1, Casino R 
decides that it would like to change its information reporting period to 
instead begin at 5 a.m. and end at 4:59 a.m. the following day. Casino R 
must wait until January 1 of Year 2 to implement such a change. On 
January 1 of Year 2, Casino R's information reporting period will begin 
at 12 a.m. and end at 4:59 a.m. on January 2. On December 31 of Year 2, 
Casino R's information reporting period will begin at 5 a.m. and end at 
11:59 p.m.


[[Page 261]]


    (3) Slot machine. The term ``slot machine'' means a device that, by 
application of the element of chance, may deliver, or entitle the person 
playing or operating the device to receive cash, premiums, merchandise, 
or tokens whether or not the device is operated by insertion of a coin, 
token, or similar object.
    (c) Prescribed form; time and place for filing the return. The 
return described in paragraph (a) of this section is a Form W-2G, 
``Certain Gambling Winnings.'' The Form W-2G must be filed with the 
appropriate Internal Revenue Service location designated in the 
instructions to the form on or before February 28 (March 31, if filed 
electronically) of the year following the calendar year in which the 
reportable gambling winnings were paid. See section 6011 and Sec. 
1.6011-2 for requirements to file electronically.
    (d) Information included on the return--(1) In general. Each return 
required by paragraph (a) of this section must contain:
    (i) The name, address, and taxpayer identification number of the 
payor;
    (ii) The name, address, and taxpayer identification number of the 
payee;
    (iii) A general description of the two types of identification (as 
described in paragraph (e) of this section), one of which must have the 
payee's photograph on it (except in the case of tribal member 
identification cards in certain circumstances as described in paragraph 
(d)(2) of this section) that the payor relied on to verify the payee's 
name, address, and taxpayer identification number;
    (iv) The date and amount of payment;
    (v) The type of wagering transaction (bingo, keno, or slot machine 
play);
    (vi) In the case of a bingo or keno game, any number, color, or 
other designation assigned to the game for which the payment is made;
    (vii) In the case of slot machine play, the identification number of 
the slot machine(s) (for example, location and asset number);
    (viii) Any other information required by the forms, instructions, 
revenue procedures, or other applicable guidance published in the 
Internal Revenue Bulletin.
    (2) Special rule for tribal member identification cards. A tribal 
member identification card need not contain the payee's photograph to 
meet the identification requirement described in paragraph (d)(1)(iii) 
of this section if:
    (i) The payee is a member of a federally recognized Indian tribe;
    (ii) The payee presents the payor with a tribal member 
identification card issued by a federally recognized Indian tribe 
stating that the payee is a member of such tribe; and
    (iii) The payor is a gaming establishment (as described in paragraph 
(b)(2)(iv) of this section) owned or licensed (in accordance with 25 
U.S.C. 2710) by the tribal government that issued the tribal member 
identification card referred to in (d)(2)(ii).
    (3) Special rule for optional aggregate reporting method. In the 
case of aggregate reporting under paragraph (g) of this section, the 
amount of the payment in paragraph (d)(1)(iv) of this section is the 
aggregate amount of payments of reportable gambling winnings from the 
same type of game (bingo, keno, or slot machine play) made to the same 
payee during the same information reporting period (as defined in 
paragraph (b)(2) of this section). Unless otherwise provided in forms, 
instructions, or other guidance, in the case of aggregate reporting 
under paragraph (g) of this section, the information required by 
paragraphs (d)(1)(v) through (viii) of this section must be maintained 
by the payor as described in paragraph (g)(3) of this section.
    (e) Identification. The following items are treated as 
identification for purposes of paragraph (d)(1)(iii) of this section--
    (1) Government-issued identification (for example, a driver's 
license, passport, social security card, military identification card, 
tribal member identification card issued by a federally recognized 
Indian tribe, or voter registration card) in the name of the payee; and
    (2) A Form W-9, ``Request for Taxpayer Identification Number and 
Certification,'' signed by the payee, that includes the payee's name, 
address, taxpayer identification number, and other information required 
by the form. A Form W-9 is not acceptable for

[[Page 262]]

this purpose if the payee has modified the form (other than pursuant to 
instructions to the form) or if the payee has deleted the jurat or other 
similar provisions by which the payee certifies or affirms the 
correctness of the statements contained on the form.
    (f) Furnishing a statement to the payee. Every payor required to 
make a return under paragraph (a) of this section must also make and 
furnish to each payee, with respect to each payment of reportable 
gambling winnings, a written statement that contains the information 
that is required to be included on the return under paragraph (d) of 
this section. The payor must furnish the statement to the payee on or 
before January 31st of the year following the calendar year in which 
payment of the reportable gambling winnings is made. The statement will 
be considered furnished to the payee if it is provided to the payee at 
the time of payment or if it is mailed to the payee on or before January 
31st of the year following the calendar year in which payment was made.
    (g) Aggregate reporting of bingo, keno, and slot machine winnings--
(1) In general. In lieu of filing a separate information return for each 
payment of reportable gambling winnings as required by paragraph (a) of 
this section, a payor may use the aggregate reporting method (defined in 
paragraph (g)(2) of this section) to report reportable gambling winnings 
from bingo, keno, or slot machine play. A payor using the aggregate 
reporting method to file information returns under paragraph (a) of this 
section must also furnish statements to the payee under paragraph (f) of 
this section using the aggregate reporting method.
    (2) Aggregate reporting method defined. (i) The aggregate reporting 
method is a method of reporting more than one payment of reportable 
gambling winnings from the same type of game (bingo, keno, or slot 
machine play) made to the same payee during the same information 
reporting period (as defined in this paragraph (b)(2) of this section) 
on one information return or statement.
    (ii) A payor may use the aggregate reporting method for payments to 
some payees and not others, at its own discretion. In addition, with 
respect to a single payee, the payor may use the aggregate reporting 
method to report winnings from one type of game, but not for winnings 
from another type of game.
    (iii) Failure to report some reportable gambling winnings from a 
particular type of game during one information reporting period to a 
particular payee under the aggregate reporting method (for whatever 
reason, including because the winnings are not permitted to be reported 
using the aggregate reporting method under paragraph (g)(4) of this 
section) will not disqualify the payor from using the aggregate 
reporting method to report other reportable gambling winnings from that 
type of game during that information reporting period to that payee. The 
payor may stop using the aggregate reporting method for a particular 
payee or for all payees before the end of the payor's information 
reporting period for any reason.
    (3) Recordkeeping under the aggregate reporting method. A payor 
using the aggregate reporting method must maintain a record of every 
payment of reportable gambling winnings from the same type of game made 
to the same payee during the information reporting period that will be 
reported using the aggregate reporting method. Every individual that the 
payor has determined is responsible for an entry in the record must 
confirm the information in the entry by signing the record in a manner 
that will enable the signature to be associated with the relevant entry. 
Each payment of a reportable gambling winning made to the same payee and 
reported under the aggregate reporting method must have its own entry in 
the record, however, the information required by paragraphs (d)(1)(i) 
through (iii) of this section is not required to be recorded more than 
one time per information reporting period. A payor that uses the 
aggregate reporting method must retain a copy of the record in its 
files. The record (which may be electronic provided the requirements set 
forth in forms, instructions, or guidance published in the Internal 
Revenue Bulletin are met) must include the following information about 
each payment:

[[Page 263]]

    (i) The payee's signature confirming the information in the record;
    (ii) The information required under paragraph (d) of this section;
    (iii) The time of the win resulting in the reportable gambling 
winnings;
    (iv) The total amount of reportable gambling winnings with respect 
to all payments to the payee during the information reporting period;
    (v) The amount of reportable gambling winnings with respect to each 
particular payment;
    (vi) The method of payment to the payee (for example, cash, check, 
voucher, credit, token, or chips); and
    (vii) The name and unique identification number of the individual 
who the payor has determined is responsible for ensuring that the entry 
with respect to the reportable gambling winnings (including the general 
description of two types of identification used to verify the payee's 
name, address, and taxpayer identification number) is complete and 
accurate and who is authorized to perform that function by the 
applicable gaming regulatory control authority. Such individual may or 
may not be the same individual who prepared the entry.
    (4) When the aggregate reporting method may not be used. A payor 
cannot use the aggregate reporting method if--
    (i) The payment is to a foreign person, as described in section 
1.6041-10(h);
    (ii) The payor knows or has reason to know that the person making 
the wager is not the person entitled to the winnings or is not the only 
person entitled to the winnings (regardless of whether the person making 
the wager furnishes a Form 5754, ``Statement by Person(s) Receiving 
Gambling Winnings''); or
    (iii) Backup withholding under section 3406(a) applies to the 
payment.
    (5) Examples. The following examples illustrate the provisions of 
this section. For each example, assume that for purposes of the 
aggregate reporting method in paragraph (g) of this section, Casino R's 
``information reporting period'' for all calendar years is a gaming day 
that begins at 3 a.m. and ends at 2:59 a.m. the following day (except 
for January 1 and December 31) and that individuals C, D, and E are U.S. 
persons.

    Example 1. On Day 1, between 7 a.m. and 4 p.m., C places five wagers 
at casino R on five different slot machines. The first two wagers result 
in no win. The third wager results in a $1,500 win. The fourth wager 
results in a $2,500 win. The fifth wager results in an $800 win:
    (i) Under paragraph (b)(1)(i)(C) of this section, there are 
reportable gambling winnings from the slot machine play of $4,000 
($1,500 + $2,500). The $800 win is not a reportable gambling winning 
from slot machine play because it does not equal or exceed the $1,200 
threshold.
    (ii) Because all of the amounts were won on the same type of game 
(even though each of the winnings occurred on different machines) during 
the same information reporting period, R is permitted to use the 
aggregate reporting method under this paragraph (g). If R decides not to 
use the aggregate reporting method, a separate Form W-2G would have to 
be filed and furnished for the payment of reportable gambling winnings 
of $1,500 and for the payment of reportable gambling winnings of $2,500. 
However, if R decides to use the aggregate reporting method, R may 
report total reportable gambling winnings from slot machine play of 
$4,000 ($1,500 + $2,500) on one Form W-2G.
    Example 2. Assume the same facts as Example 1, except that in 
addition to the winnings described in Example 1, at 5 a.m. on Day 2, C 
wins $3,250 from one slot machine play at casino R. Even though C played 
the same type of game (slot machine play) on Day 1 and Day 2, under 
paragraph (b)(2) of this section, the win at 5 a.m. on Day 2 is a win 
during a separate information reporting period. Under paragraph 
(g)(2)(i) of this section, the $3,250 of reportable gambling winnings on 
Day 2 cannot be aggregated with the reportable gambling winnings of 
$4,000 from Day 1 on a single Form W-2G. Accordingly, if R uses the 
aggregate reporting method, R must file two Forms W-2G with respect to 
C's reportable gambling winnings on Day 1 and Day 2. R must report 
$4,000 of reportable gambling winnings from slot machine play paid to C 
on Day 1 on the first Form W-2G, and $3,250 of reportable gambling 
winnings from slot machine play paid to C on Day 2 on the second Form W-
2G.
    Example 3. On December 31 of Year 1 at 4:00 p.m., C wins $10,000 
from one slot machine play at casino R. At 12:30 a.m. on January 1 of 
Year 2, C wins $4,000 from one slot machine play at casino R. Under 
paragraphs (b)(2)(iii)(B) and (C) of this section, the win at 4 p.m. on 
December 31 of Year 1 and the win at 12:30 a.m. on January 1 of Year 2 
are wins during different information reporting periods. Under paragraph 
(g)(2)(i) of this section, the $4,000 of reportable gambling winnings on 
January 1 cannot be aggregated with the reportable gambling winnings of 
$10,000 from December 31 on a single Form

[[Page 264]]

W-2G. Accordingly, if R uses the aggregate reporting method, R must file 
two Forms W-2G with respect to C's reportable gambling winnings on Day 1 
and Day 2. R must report $10,000 of reportable gambling winnings from 
slot machine play paid to C on December 31 on the first Form W-2G and 
$4,000 of reportable gambling winnings from slot machine play paid to C 
on January 1 on the second Form W-2G.
    Example 4. Assume the same facts as example 3, except that C also 
wins $5,000 from one slot machine play at 3:30 p.m. on January 1 and 
$7,000 from one slot machine play at 1:30 a.m. on January 2. Under the 
special rule of paragraph (b)(2)(iii) of this section, the ``information 
reporting period'' begins at 12:00 a.m. on January 1 and extends until 
the start of the next information reporting period, in this case 2:59 
a.m. on January 2. Under paragraph (b)(1)(C) of this section, Casino R 
will pay C a total of $26,000 ($10,000 + $4,000 + $5,000 + $7,000) in 
reportable gambling winnings; however, $10,000 must be reported in Year 
1, and $16,000 must be reported in Year 2. Because all of the amounts 
won in Year 2 were won on the same type of game and during the same 
information reporting period, R is permitted to use the aggregate 
reporting method under this paragraph (g). If R decides to use the 
aggregate reporting method, R may report $10,000 of reportable gambling 
winnings from slot machine play paid to C on December 31 on the first 
Form W-2G and $16,000 of total reportable gambling winnings from slot 
machine play paid to C on January 1 on the second Form W-2G.
    Example 5. At 2 p.m. on Day 1, D won $2,000 (after reducing the 
amount of the win by the amount wagered) playing one keno game at casino 
R. D provides R with his driver's license. The driver's license has D's 
photograph on it, as well as D's name and address. The driver's license 
does not include D's social security number. D cannot remember his 
social security number and has no other identification at the time with 
his social security number on it. D does not provide R with his social 
security number before R pays the winnings to D. Because D cannot 
remember his social security number, D cannot complete and sign a Form 
W-9. R deducts and withholds $560 (28 percent of $2,000) under the 
backup withholding provisions of section 3406(a) and pays the remaining 
$1,440 in winnings to D. D returns to casino R and at 6 p.m. on Day 1 
wins $1,500 (after reducing the amount of the win by the amount wagered) 
in one keno game. D provides R with his driver's license as well as D's 
social security card. R generally uses the aggregate reporting method 
and in all cases where it is used, R complies with the requirements of 
this paragraph (g). At 8 p.m. and 10 p.m. on Day 1, D wins an additional 
$1,800 and $1,700 (after reducing the amount of the win by the amount 
wagered), respectively, from two different keno games. For each of these 
two wins, an employee of R obtains the information from D required by 
this paragraph (g):
    (i) Under paragraph (b)(1)(i)(B) of this section, each of D's wins 
from the four games of keno on Day 1 ($2,000, $1,500, $1,800, and 
$1,700) are reportable gambling winnings. Because D's first win on Day 1 
was at 2 p.m. and D's last win on Day 1 was at 10 p.m., all of D's 
reportable gambling winnings from keno are won during the same 
information reporting period. Because R satisfies the requirements of 
paragraph (g)(2)(i), R may use the aggregate reporting method to report 
D's reportable gambling winnings from keno. However, pursuant to 
paragraph (g)(4)(iii) of this section, the $2,000 payment made to D at 2 
p.m. cannot be reported under the aggregate reporting method because 
that payment was subject to backup withholding. Accordingly, if R uses 
the aggregate reporting method under this paragraph (g), R will have to 
file two Forms W-2G with respect to D's reportable gambling winnings 
from keno on Day 1. On the first Form W-2G, R will report $2,000 of 
reportable gambling winnings and $560 of backup withholding with respect 
to the 2 p.m. win from keno, and, on the second Form W-2G, R will report 
$5,000 of reportable gambling winnings from keno (representing the three 
payments of $1,500, $1,800, and $1,700 that D won between 6 p.m. and 10 
p.m. on Day 1).
    Example 6. In one information reporting period on Day 1, E won five 
reportable gambling winnings from five different bingo games at a casino 
R. R generally uses the aggregate reporting method and in all cases 
where it is used, R complies with the requirements of this paragraph 
(g). Although E signed the entry in the record R maintains for payment 
of the first four reportable gambling winnings, E refuses to sign the 
entry in the record for the fifth payment of reportable gambling 
winnings. R may use the aggregate reporting method for the first four 
payments of reportable gambling winnings to E. However, because the 
entry in the record for the fifth payment of reportable gambling 
winnings does not include E's signature, as required by paragraph 
(g)(3)(i) of this section, that payment may not be reported under the 
aggregate reporting method. Accordingly, if R uses the aggregate 
reporting method under paragraph (g) of this section, R must prepare two 
Forms W-2G as follows: On the first Form W-2G, R must report the first 
four payments of reportable gambling winnings from bingo made to E on 
Day 1. On the second Form W-2G, R must report the fifth payment of 
reportable gambling winnings from bingo made to E on Day 1.

    (h) Payments to foreign persons. See Sec. 1.6041-4 regarding 
payments to foreign

[[Page 265]]

persons. See Sec. 1.6049-5(d) for determining whether the payee is a 
foreign person.
    (i) Effective/applicability date. Section 1.6041-10(b)(2), 
concerning payor-selected ``information reporting periods,'' applies to 
payments of reportable gambling winnings from bingo, keno, or slot 
machine play made on or after January 1 of the year following the date 
these regulations are published in the Federal Register. All other 
sections contained herein apply to payments of reportable gambling 
winnings from bingo, keno, or slot machine play made on or after 
December 30, 2016.
    (j) Cross-references for certain gambling winnings. For provisions 
relating to backup withholding for winnings from bingo, keno, and slot 
machine play and other reportable gambling winnings, see Sec. 
31.3406(g)-2(d). For provisions relating to withholding and reporting 
for gambling winnings from lotteries, sweepstakes, wagering pools, and 
other wagering transactions, including a wagering transaction in a 
parimutuel pool with respect to horse races, dog races, or jai alai, see 
Sec. 31.3402(q)-1.

[T.D. 9807, 81 FR 96377, Dec. 30, 2016]



Sec. 1.6041A-1  Returns regarding payments of remuneration for 
services and certain direct sales.

    (a) through (c) [Reserved]
    (d) Exceptions to return requirement. [Reserved]
    (1) and (2) [Reserved]
    (3) Foreign transactions--(i) In general. No return shall be 
required under section 6041A with respect to payments described in this 
paragraph (d)(3).
    (A) Returns of information are not required for payments that a 
payor can, prior to payment, associate with documentation upon which it 
may rely to treat as made to a foreign beneficial owner in accordance 
with Sec. 1.1441-1(e)(1)(ii) or as made to a foreign payee in 
accordance with Sec. 1.6049-5(d)(1) or presumed to be made to a foreign 
payee under Sec. 1.6049-5(d)(2), (3), (4), or (5). However, such 
payments may be reportable under Sec. 1.1461-1(b) and (c). For purposes 
of this paragraph (d)(3)(i)(A), the provisions in Sec. 1.6049-5(c) 
(regarding rules applicable to documentation of foreign status and 
definition of U.S. payor and non-U.S. payor) shall apply. The provisions 
of Sec. 1.1441-1 shall apply by substituting the term payor for the 
term withholding agent.
    (B) Returns of information are not required for payments of 
remuneration for services from sources outside the United States 
(determined under the provisions of part I, subchapter N, chapter 1 of 
the Internal Revenue Code and the regulations under those provisions) if 
payments are made outside the United States by a non-U.S. payor or non 
U.S. middleman. For a definition of non U.S. payor or non-U.S. 
middleman, see Sec. 1.6049-5(c)(5). For circumstances in which a 
payment is considered to be made outside the United States, see Sec. 
1.6049-5(e).
    (C) Returns of information are not required under sections 6041 or 
6041A for amounts paid outside of the United States (within the meaning 
of Sec. 1.6049-5(e)) as remuneration for services as a direct seller 
(within the meaning of section 3508) performed outside of the United 
States or for sales described in section 6041A(b) made outside of the 
United States of consumer products for resale outside of the United 
States.
    (ii) Payor. The term payor has the same meaning as described in 
Sec. 1.6049-4(a)(2).
    (iii) Joint owners. Amounts paid to joint owners for which a 
certificate or documentation is required as a condition for being exempt 
from reporting under paragraph (d)(3)(i) of this section are presumed 
made to U.S. payees who are not exempt recipients if, prior to payment, 
the payor or middleman cannot reliably associate the payment either with 
a Form W-9 furnished by one of the joint owners in the manner required 
in Sec. Sec. 31.3406(d)-1 through 31.3406(d)-5 of this chapter, or with 
documentation described in paragraph (d)(3)(i)(A) of this section 
furnished by each joint owner upon which it can rely to treat each joint 
owner as a foreign payee or foreign beneficial owner.
    (iv) Conversion into United States dollars of amounts paid in 
foreign currency. For rules concerning foreign currency conversion, see 
Sec. 1.6049-4(d)(3)(i).
    (v) Effective date. The provisions of this paragraph (d)(3) apply to 
payments made after December 31, 2000.

[[Page 266]]

    (4) Information returns required under section 6050W for calendar 
years beginning after December 31, 2010. (i) For payments made by 
payment card (as defined in Sec. 1.6050W-1(b)(3)) or through a third 
party payment network (as defined in Sec. 1.6050W-1(c)(3)) after 
December 31, 2010, that are required to be reported on an information 
return under section 6050W (relating to payment card and third party 
network transactions), the following rule applies. Transactions that 
otherwise would be reportable under both sections 6041A(a) and 6050W are 
reported under section 6050W and not section 6041A(a). For provisions 
relating to information reporting for payment card transactions and 
third party network transactions, see Sec. 1.6050W-1. Solely for 
purposes of this paragraph, the de minimis threshold for third party 
network transactions in Sec. 1.6050W-1(c)(4) is disregarded in 
determining whether the transaction is subject to reporting under 
section 6050W.
    (ii) Examples. The provisions of paragraph (d)(4) of this section 
are illustrated by the following examples:

    Example 1. Service-recipient A, in the course of its business, pays 
remuneration of $600 to service provider B by credit card for services 
performed by B. B is one of a network of unrelated persons that has 
agreed to accept A's credit card as payment under an agreement that 
provides standards and mechanisms for settling the transactions between 
a merchant acquiring bank and the persons who accept the cards. Merchant 
acquiring bank Y is responsible for making the payment to B. Under 
paragraph (d)(4)(i) of this section, A is not required to file an 
information return under section 6041A(a) with respect to the 
transaction because Y, as the payment settlement entity for the payment 
card transaction, is required to file an information return under 
section 6050W.
    Example 2. Service-recipient A, in the course of business, pays $600 
of fixed or determinable income to B, a repairman, through a third party 
payment network. B is one of a substantial number of persons who have 
established accounts with Y, a third party settlement organization that 
provides standards and mechanisms for settling the transactions and 
guarantees payments to those persons for goods or services purchased 
through the network. Y is responsible for making the payment to B. Under 
paragraph (d)(4)(i) of this section, A is not required to file an 
information return under section 6041A(a) with respect to the 
transaction because the transaction is a third party network transaction 
that is subject to reporting under section 6050W. Solely for purposes of 
determining whether the transaction is subject to reporting under 
section 6050W, the de minimis threshold for third party network 
transactions in Sec. 1.6050W-1(c)(4) is disregarded.

    (iii) Effective/applicability date. Paragraph (d)(4) of this section 
applies to payments made by payment card or through a third party 
payment network after December 31, 2010.
    (e) [Reserved]
    (f) Statements to be furnished to persons with respect to whom 
information is required to be furnished--(1) [Reserved]
    (2) Time for furnishing statement. [Reserved]
    (3) Contents of statement. [Reserved]
    (g) [Reserved]
    (h) Cross-reference to penalties. For provisions relating to the 
penalty provided for failure to file timely a correct information return 
required under section 6041A(a) or (b), see Sec. 301.6721-1 of this 
chapter (Procedure and Administration Regulations). For provisions 
relating to the penalty provided for failure to furnish timely a correct 
payee statement required under section 6041A(e), see Sec. 301.6722-1 of 
this chapter. See Sec. 301.6724-1 of this chapter for the waiver of a 
penalty if the failure is due to reasonable cause and is not due to 
willful neglect.

[T.D. 8734, 62 FR 53474, Oct. 14, 1997, as amended by T.D. 8804, 63 FR 
72188, Dec. 31, 1998; T.D. 8856, 64 FR 73412, Dec. 30, 1999; T.D. 8881, 
65 FR 32205, May 22, 2000; T.D. 9496, 75 FR 49828, Aug. 16, 2010]



Sec. 1.6042-1  Return of information as to dividends paid in calendar
years before 1963.

    (a) Requirement of return--(1) In general. Except as provided in 
subparagraphs (2) and (3) of this paragraph, every domestic corporation, 
or foreign corporation engaged in business within the United States or 
having an office or place of business or a fiscal or paying agent in the 
United States, making payments during any calendar year before 1963 of 
$10 or more of dividends and distributions (other than distributions in 
liquidation) to any shareholder who is an individual (citizen or 
resident of the United States), a resident fiduciary, or a resident 
partnership any

[[Page 267]]

member of which is a citizen or resident shall file for the calendar 
year a return setting forth the amount of such payments for such 
calendar year. A separate return on Form 1099, showing the name and 
address of the payer and the shareholder, and the amount paid, shall be 
prepared with respect to each shareholder. These returns shall be 
accompanied by transmittal Form 1096.
    (2) Federal land bank associations and certain other corporations. A 
corporation described in section 501(c) (12), (15), or (16), or section 
521(b)(1), or a Federal land bank association or a production credit 
association, making a payment of a dividend, or a distribution, to any 
shareholder in any calendar year before 1963 shall file an information 
return with respect to such payments when they total $100 or more during 
the calendar year.
    (3) Savings and loan associations, etc. A savings and loan 
association, a cooperative bank, a homestead association, a credit 
union, or a building and loan association is required to file an 
information return with respect to distributions made to a shareholder 
during any calendar year before 1963 only if the amount thereof paid to 
the shareholder during the calendar year, or such amount when aggregated 
with other payments made to the shareholder during such year of 
interest, rents, royalties, annuities, pensions, and other gains, 
profits, and income, as described in paragraph (a)(2)(ii) of Sec. 
1.6041-1, totals $600 or more. For this purpose, the term 
``distributions to a shareholder'' includes periodical distributions of 
earnings on running installment shares of stock paid or credited by a 
building and loan association to its holders of that class of stock, and 
the sum received upon withdrawal from a building and loan association in 
excess of the amounts paid in on account of membership fees and stock 
subscriptions, consisting of accumulated profits.
    (b) Nontaxable or partly nontaxable distributions. In the case of a 
distribution which is made from a depletion or depreciation reserve, or 
which for any other reason is deemed by the corporation to be nontaxable 
or partly nontaxable to its shareholders, the corporation shall fill in 
the information on both sides of Form 1096.
    (c) Information as to actual owner--(1) In general. When the person 
receiving a payment with respect to which an information return is 
required under authority of the Code is not the actual owner of the 
income received, the name and address of the actual owner or payee shall 
be furnished upon demand of the person paying the income, and in default 
of a compliance with such demand the payee becomes liable for the 
penalties provided. See section 7203. Dividends on stock are prima facie 
the income of the record owner of the stock. If a record owner of stock 
who is not the actual owner thereof receives dividends on such stock in 
any calendar year before 1963, he shall file a Form 1087 disclosing the 
name and address of the actual owner or payee, the name of the issuing 
corporation, the number of shares of such stock, and the amount of 
dividends received with respect to such stock during the calendar year. 
(For the reporting by a nominee of dividends received by him on behalf 
of another person in any calendar year after 1962, see Sec. 1.6042-2.) 
Unless such a disclosure is made the record owner will be held liable 
for any tax based upon such dividends. A separate Form 1087 shall be 
filed by the record owner for each of the stockholdings of each actual 
owner for whom he acts as nominee. However, where the record owner is a 
banking institution, trust company, or brokerage firm, it may, provided 
it maintains such records as will permit a prompt substantiation of each 
payment of dividends made to the actual owner, file one Form 1087 for 
each actual owner for whom it acts as nominee and report thereon the 
total amount of the dividends paid to such actual owner (without 
itemization as to the issuing company, class of stock, etc.).
    (2) Exceptions. The filing of Form 1087 is not required if:
    (i) The record owner is required to file a fiduciary return on Form 
1041, or a withholding return on Form 1042, disclosing the name and 
address of the actual owner or payee;
    (ii) The actual owner or payee is a nonresident alien individual, 
foreign partnership, or foreign corporation and the tax has been 
withheld at the source

[[Page 268]]

before receipt of the dividends by the record owner;
    (iii) The record owner is a banking institution, a trust company, or 
a brokerage firm which prepares the individual income tax return of the 
actual owner, provided the verification on the return with respect to 
the preparation thereof is executed by such record owner;
    (iv) The record owner is a nominee of a banking institution or trust 
company exercising trust powers, and such banking institution or trust 
company is required to file a fiduciary return on Form 1041 which 
reflects the name and address of the actual owner or payee;
    (v) The actual owner is an organization exempt from taxation under 
section 501(a) and is exempt from the requirement of filing a return 
under section 6033 and paragraph (g) of Sec. 1.6033-1; or
    (vi) The record owner is a banking institution or trust company 
exercising trust powers, or a nominee thereof, and the actual owner is 
an organization exempt from taxation under section 501(a) for which such 
banking institution or trust company files an annual return.


See Sec. 1.1441-1, relating to withholding of tax on nonresident alien 
individuals, and Sec. 1.1442-1, relating to withholding of tax on 
nonresident foreign corporations.
    (d) Time and place for filing. Returns made under this section on 
Forms 1096 and 1099 and Form 1087 for any calendar year shall be filed 
on or before February 28 of the following year with any of the Internal 
Revenue Service Centers, the addresses of which are listed in the 
instructions for such forms.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6628, 27 FR 
12795, Dec. 28, 1962]



Sec. 1.6042-2  Returns of information as to dividends paid.

    (a) Requirement of reporting--(1) In general. An information return 
on Form 1099 shall be made under section 6042(a) by--
    (i) Every person who makes a payment of dividends (as defined in 
Sec. 1.6042-3) to any other person during a calendar year. The 
information return shall show the aggregate amount of the dividends, the 
name, address, and taxpayer identifying number of the person to whom 
paid, the amount of tax deducted and withheld under section 3406 from 
the dividends, if any, and such other information as required by the 
forms. An information return is generally not required if the amount of 
dividends paid to the other person during the calendar year aggregates 
less than $10 or if the payment is made to a person who is an exempt 
recipient described in Sec. 1.6049-4(c)(1)(ii) unless the payor backup 
withholds under section 3406 on such payment (because, for example, the 
payee has failed to furnish a Form W-9), in which case the payor must 
make a return under this section, unless the payor refunds the amount 
withheld pursuant to Sec. 31.6413(a)-3 of this chapter. Further, a 
return of information is not required under this section for--
    (A) Payments with respect to which a return is not required by 
applying the rules of Sec. 1.6049-4(c)(4) (by substituting the term 
``dividend'' for the term ``interest''); or
    (B) Payments made by a paying agent on behalf of a corporation 
described in section 1297(a) with respect to a shareholder of the 
corporation if--
    (1) The paying agent obtains from the corporation a written 
certification signed by a person authorized to sign on behalf of the 
corporation, that states that the corporation is described in section 
1297(a) for each calendar year during which the paying agent relies on 
the provisions of paragraph (a)(1)(i)(B) of this section, and the paying 
agent has no reason to know the written certification is unreliable or 
incorrect;
    (2) The paying agent identifies, prior to payment, the corporation 
as a participating FFI (including a reporting Model 2 FFI) (as defined 
in Sec. 1.6049-4(f)(10) or (14), respectively), or reporting Model 1 
FFI (as defined in Sec. 1.6049-4(f)(13)), in accordance with the 
requirements of Sec. 1.1471-3(d)(4) (substituting the terms ``paying 
agent'' and ``corporation'' for the terms ``withholding agent'' and 
``payee,'' respectively) and validates that status annually;
    (3) The paying agent obtains a written certification representing 
that the

[[Page 269]]

corporation shall report the payment as part of its reporting 
obligations under chapter 4 of the Code or an applicable IGA (as defined 
in Sec. 1.6049-4(f)(7)) with respect to its U.S. accounts and provided 
the paying agent does not know that the corporation is not reporting the 
payment as required. The paying agent may rely on the written 
certification until there is a change in circumstances or the paying 
agent knows or has reason to know that the statement is unreliable or 
incorrect. A paying agent that knows that the corporation is not 
reporting the payment as required under chapter 4 of the Code or an 
applicable IGA (as defined in Sec. 1.6049-4(f)(7)) must report all 
payments reportable under this section that it makes during the year in 
which it obtains such knowledge; and
    (4) The paying agent is not also acting in its capacity as a 
custodian, nominee, or other agent of the payee with respect to the 
payments.
    (ii) Every person, except to the extent that he acts as a nominee 
described in paragraph (a)(1)(iii) of this section, who receives 
payments of dividends as a nominee on behalf of another person shall 
make a return of information under this section for the calendar year of 
the payment . The information return shall show the aggregate amount of 
the dividends, the name, address, and taxpayer identification number of 
the person on whose behalf the dividends are received, the amount of tax 
deducted and withheld under section 3406 from the dividends, if any, and 
such other information as required by the forms. An information return 
is generally not required if the amount of the dividends received on 
behalf of the other person during the calendar year aggregates less than 
$10. However, a return of information is not required under this section 
if--
    (A) The record owner is, pursuant to section 6012(a) (3) or (4) and 
Sec. 1.6012-3, required to file a fiduciary return on Form 1041 that is 
filed for the estate or trust disclosing the name, address, and 
identifying number of both the record owner and actual owner and 
furnishes Form K-1 to each actual owner containing the information 
required to be shown on the form, including amounts withheld under 
section 3406;
    (B) The record owner is a nominee of a banking institution or trust 
company exercising trust powers, and such banking institution or trust 
company is, pursuant to section 6012(a) (3) or (4) and Sec. 1.6012-3, 
required to file a fiduciary return on Form 1041 that is filed for the 
estate or trust disclosing the name, address, and identifying number of 
both the record owner and the actual owner and furnishes Form K-1 to 
each actual owner containing the information required to be shown on the 
form, including amounts withheld under section 3406; or
    (C) The record owner is a banking institution or trust company 
exercising trust powers, or a nominee thereof, and the actual owner is 
an organization exempt from taxation under section 501(a) for which such 
banking institution or trust company files an annual return but only if 
the name, address, and identifying number of the record owner are 
included on or with the annual return filed for the tax exempt 
organization).
    (iii) Every person who is a nominee acting as a custodian of a unit 
investment trust described in section 851(f)(1) and paragraph (d) of 
Sec. 1.851-7 who, during a calendar year after 1968, receives payments 
of dividends in such capacity, shall make an information return on Forms 
1096 and 1099, for such calendar year showing the information required 
by such forms and instructions thereto and the name, address, and 
identifying number of the nominee identified as such. This subdivision 
shall not apply if the regulated investment company agrees with the 
nominee to satisfy the requirements of section 6042 and the regulations 
thereunder with respect to each holder of an interest in the unit 
investment trust whose shares are being held by the nominee as custodian 
and within the time limit for furnishing statements prescribed by Sec. 
1.6042-4, files with the Internal Revenue Service office where such 
company's return is to be filed for the taxable year, a statement that 
the holders of the unit investment trust with whom the agreement was 
made have been directly notified by the regulated investment company. 
Such statement shall include the name, sponsor, and custodian of each 
unit investment

[[Page 270]]

trust whose holders have been directly notified. The nominee's 
requirements under this subdivision shall be deemed met if the regulated 
investment company transmits a copy of such statement to the nominee 
within such period; provided, however, if the regulated investment 
company fails or is unable to satisfy the requirements of section 6042 
with respect to the holders of interest in the unit investment trust, it 
shall so notify the Internal Revenue Service within 45 days following 
the close of its taxable year. The custodian shall, upon notice by the 
Internal Revenue Service that the regulated investment company has 
failed to comply with the agreement, satisfy the requirements of this 
subdivision within 30 days of such notice.
    (2) Definitions. The term ``person'' when used in this section does 
not include the United States, a State, the District of Columbia, a 
foreign government, a political subdivision of a State or of a foreign 
government, or an international organization. Therefore, dividends paid 
by or to one of these entities need not be reported. For purposes of 
this section, a person who receives a dividend shall be considered to 
have received it as a nominee if he is not the actual owner of such 
dividend and if he was required under Sec. 1.6109-1 to furnish his 
identifying number to the payer of the dividend (or would have been so 
required if the total of such dividends for the year had been $10 or 
more), and such number was (or would have been) required to be included 
on an information return filed by the payer with respect to the 
dividend. However, a person shall not be considered to be a nominee as 
to any portion of a dividend which is actually owned by another person 
whose name is also shown on the information return filed by the payer or 
nominee with respect to such dividend. Thus, in the case of stock 
jointly owned by a husband and wife, the husband will not be considered 
as receiving any portion of a dividend on that stock as a nominee for 
his wife if his wife's name is included on the information return filed 
by the payer with respect to the dividend.
    (3) Determination of person to whom a dividend is paid or for whom 
it is received. For purposes of applying the provisions of this section, 
the person whose identifying number is required to be included by the 
payer of a dividend on an information return with respect to such 
dividend shall be considered the person to whom the dividend is paid. In 
the case of a dividend received by a nominee on behalf of another 
person, the person whose identifying number is required to be included 
on an information return made by the nominee with respect to such 
dividend shall be considered the person on whose behalf such dividend is 
received by the nominee. Thus, in the case of a dividend made payable to 
a person other than the record owner of the stock with respect to which 
the dividend is paid, the record owner of the stock shall be considered 
the person to whom the dividend is paid for purposes of applying the 
reporting requirements in this section, since his identifying number is 
required to be included on the information return filed under this 
section by the payer of the dividend. Similarly, if a stockbroker 
receives a dividend on stock held in street name for the joint account 
of a husband and wife, the dividend is considered as received on behalf 
of the husband since his identifying number should be shown on the 
information return filed by the nominee under this section. Thus, if the 
wife has a separate account with the same stockbroker, any dividends 
received by the stockbroker for her separate account should not be 
aggregated with the dividends received for the joint account for 
purposes of information reporting. For regulations relating to the use 
of identifying numbers, see Sec. 1.6109-1.
    (4) Inclusion of other payments. The Form 1099 filed by any person 
with respect to payments of dividends to another person during a 
calendar year may, at the election of the maker, include other payments 
made by him to such other person during such year which are required to 
be reported on Form 1099. Similarly, the Form 1099 filed by a nominee 
with respect to payments of dividends received by him on behalf of any 
other person during a calendar year may include payments of interest 
received by him on behalf of such person during such year which are 
required to be reported on Form 1099.

[[Page 271]]

    (b) When payment deemed made. For purposes of a return of 
information, an amount is deemed to have been paid when it is credited 
or set apart to a person without any substantial limitation or 
restriction as to the time or manner of payment or condition upon which 
payment is to be made, and is made available to him so that it may be 
drawn at any time, and its receipt brought within his own control and 
disposition.
    (c) Time and place for filing. The returns required under this 
section for any calendar year shall be filed after September 30 of such 
year, but not before the payer's final payment for the year, and on or 
before February 28 (March 31 if filed electronically) of the following 
year with any of the Internal Revenue Service Centers, the addresses of 
which are listed in the instructions for Form 1096. For extensions of 
time for filing returns under this section, see Sec. 1.6081-1.
    (d) Cross-reference to penalty. For provisions relating to the 
penalty provided for failure to file timely a correct information return 
required under section 6042(a), see Sec. 301.6721-1 of this chapter 
(Procedure and Administration Regulations). See Sec. 301.6724-1 of this 
chapter for the waiver of a penalty if the failure is due to reasonable 
cause and is not due to willful neglect.
    (e) Magnetic media requirement. For rules relating to permission to 
submit the information required by Form 1087 or 1099 on magnetic tape or 
other media, see Sec. 1.9101-1. For the requirement to submit the 
information required by Form 1099 on magnetic media for payments after 
December 31, 1983, see section 6011(e) and Sec. 301.6011-2 of this 
chapter (Procedure and Administration Regulations).
    (f) Effective/applicability date. This section applies to payments 
made on or after January 6, 2017. (For payments made after June 30, 
2014, and before January 6, 2017, see this section as in effect and 
contained in 26 CFR part 1, as revised April 1, 2016. For payments made 
after December 31, 2000, and before July 1, 2014, see this section as in 
effect and contained in 26 CFR part 1, as revised April 1, 2013.)

[T.D. 6628, 27 FR 12796, Dec. 29, 1962, as amended by T.D. 6677, 28 FR 
10147, Sept. 17, 1963; T.D. 6879, 31 FR 3493, Mar. 8, 1966; T.D. 6883, 
31 FR 6589, May 3, 1966; T.D. 7000, 34 FR 996, Jan. 23, 1969; T.D. 7187, 
37 FR 13258, July 6, 1972; T.D. 8734, 62 FR 53474, Oct. 14, 1997; T.D. 
8804, 64 FR 11378, Mar. 9, 1999; T.D. 8895, 65 FR 50406, Aug. 18, 2000; 
T.D. 9658, 79 FR 12794, Mar. 6, 2014; T.D. 9808, 82 FR 2106, Jan. 6, 
2017]



Sec. 1.6042-3  Dividends subject to reporting.

    (a) In general. Except as provided in paragraph (b) of this section, 
the term dividend for purposes of this section and Sec. Sec. 1.6042-2 
and 1.6042-4 means the amounts described in the following paragraphs (a) 
(1) through (3) of this section--
    (1) Any distribution made by a corporation to its shareholders which 
is a dividend as defined in section 316; and
    (2) Any payment made by a stockbroker to any person as a substitute 
for a dividend. Such a payment includes any payment made in lieu of a 
dividend to a person whose stock has been borrowed. See Sec. 1.6045-
2(h) for coordination of the reporting requirements under sections 6042 
and 6045(d) with respect to such payments; and
    (3) A distribution from a regulated investment company (irrespective 
of the fact that any part of the distribution may not represent ordinary 
income (i.e., may, for example, represent a capital gain dividend as 
defined in section 852(b)(3)(C)).
    (b) Exceptions--(1) In general. For purposes of Sec. Sec. 1.6042-2 
and 1.6042-4, the amounts described in paragraphs (b)(1)(i) through 
(vii) of this section are not dividends.
    (i) Amounts paid by an insurance company to a policyholder, other 
than a dividend upon its capital stock.
    (ii) Payments (however denominated) by a mutual savings bank, 
savings and loan association, or similar organization, in respect of 
deposits, investment certificates, or withdrawable or repurchasable 
shares. See, however, section 6049 and the regulations under that 
section for provisions requiring reporting of these payments.
    (iii) Distributions or payments that a payor can, prior to payment, 
reliably

[[Page 272]]

associate with documentation upon which it may rely to treat as made to 
a foreign beneficial owner in accordance with Sec. 1.1441-1(e)(1)(ii) 
or as made to a foreign payee in accordance with Sec. 1.6049-5(d)(1) or 
presumed to be made to a foreign payee under Sec. 1.6049-5(d)(2), (3), 
(4), or (5). Returns of information are also not required for payments 
that a payor or middleman can, prior to payment, reliably associate with 
documentation upon which it may rely to treat as made to a foreign 
intermediary in accordance with Sec. 1.1441-1(b) if it obtains from the 
intermediary entity a withholding statement (described in Sec. 1.6049-
5(b)(14)) that allocates the payment to a chapter 4 withholding rate 
pool (as defined in Sec. 1.6049-4(f)(5)) or to specific payees to which 
withholding under chapter 4 applies. Payments excepted from reporting 
under this paragraph (b)(1)(iii) may be reportable, for purposes of 
chapter 3 of the Internal Revenue Code (Code), under Sec. 1.1461-1(b) 
and (c) or, for chapter 4 purposes, under Sec. 1.1474-1(d)(2). The 
provisions in Sec. 1.6049-5(c) regarding documentation of foreign 
status shall apply for purposes of this paragraph (b)(1)(iii). The 
provisions in Sec. 1.6049-5(c) regarding the definitions of U.S. payor 
and non-U.S. payor shall also apply for purposes of this paragraph 
(b)(1)(iii). The provisions of Sec. 1.1441-1 shall apply by 
substituting the term payor for the term withholding agent and without 
regard to the fact that the provisions apply only to amounts subject to 
withholding under chapter 3 of the Code.
    (iv) Distributions or payments from sources outside the United 
States (as determined under the provisions of part I, subchapter N, 
chapter 1 of the Code and the regulations under those provisions) that 
are paid by a non-U.S. payor or non-U.S. middleman and that are paid and 
received outside the United States. For a definition of non-U.S. payor 
and non-U.S. middleman, see Sec. 1.6049-5(c)(5). For circumstances in 
which an amount is considered to be paid and received outside the United 
States, see Sec. 1.6049-4(f)(16).
    (v) Distributions or payments for the period that the amounts 
represent assets blocked as described in Sec. 1.1441-2(e)(3). The 
exemption in this paragraph (b)(1)(v) shall terminate when payment is 
deemed to occur in accordance with the rules of Sec. 1.1441-2(e)(3).
    (vi) If a foreign intermediary, as described in Sec. 1.1441-
1(c)(13), or a U.S. branch that is not treated as a U.S. person receives 
a payment from a payor, which payment the payor can reliably associate 
with a valid withholding certificate described in Sec. 1.1441-
1(e)(3)(ii) or (iii), or Sec. 1.1441-1(e)(3)(v), respectively, 
furnished by such intermediary or branch, then the intermediary or 
branch is not required to report such payment when it, in turn, pays the 
amount, unless, and to the extent, the intermediary or branch knows that 
the payment is required to be reported under this section and was not so 
reported. For example, if a U.S. branch described in Sec. 1.1441-
1(b)(2)(iv) fails to provide information regarding U.S. persons that are 
not exempt from reporting under Sec. 1.6049-4(c)(1)(ii) to the person 
from whom the U.S. branch receives the payment, the amount paid by the 
U.S. branch to such person is a dividend. See, however, Sec. 1.6042-
2(a)(1)(i)(A) for when reporting under section 6042 is coordinated with 
reporting under chapter 4 of the Code or an applicable IGA (as defined 
in Sec. 1.6049-4(f)(7)). The exception of this paragraph (b)(1)(vi) for 
amounts paid by a foreign intermediary shall not apply to a qualified 
intermediary that assumes reporting responsibility under chapter 61 of 
the Code with respect to amounts reportable under the agreement 
described in Sec. 1.1441-1(e)(5)(iii).
    (vii) With respect to amounts paid or credited after December 31, 
1982, any amount paid or credited to any person described in Sec. 
1.6049-4(c)(1)(ii), unless a tax is withheld under section 3406 and is 
not refunded by the payor in accordance with Sec. 31.6413(a)-3 of this 
chapter (Employment Tax Regulations).
    (2) Payor. The term payor has the same meaning as described in Sec. 
1.6049-4(a)(2).
    (3) Joint owners. Amounts paid to joint owners for which a 
certificate or documentation is required as a condition for being exempt 
from reporting under this paragraph (b) are presumed made to U.S. payees 
who are not exempt recipients if, prior to payment, the payor or 
middleman cannot reliably associate the payment either with

[[Page 273]]

a Form W-9 furnished by one of the joint owners in the manner required 
in Sec. Sec. 31.3406(d)-1 through 31.3406(d)-5 of this chapter, or with 
documentation described in paragraph (b)(1)(iii) of this section 
furnished by each joint owner upon which it can rely to treat each joint 
owner as a foreign payee or foreign beneficial owner. However in the 
case of a withholdable payment (as defined in Sec. 1.6049-4(f)(15)) 
made to joint payees, if any such joint payee does not appear to be an 
individual, the payment is presumed made to a foreign payee that is a 
nonparticipating FFI (as defined in Sec. 1.1471-1(b)(82)). See Sec. 
1.1471-3(f)(7). For purposes of applying this paragraph (b)(3), the 
grace period described in Sec. 1.6049-5(d)(2)(ii) shall apply only if 
each payee qualifies for such grace period.
    (4) Conversion into United States dollars of amounts paid in foreign 
currency. For rules concerning foreign currency conversion, see Sec. 
1.6049-4(d)(3)(i).
    (c) Special rule. If a person makes a payment which may be a 
dividend, or if a nominee receives a payment which may be a dividend, 
but such person or nominee is unable to determine the portion of the 
payment which is a dividend (as defined in paragraphs (a) and (b) of 
this section) at the time he files his return under Sec. 1.6042-2, he 
shall, for purposes of such section, treat the entire amount of such 
payment as a dividend.
    (d) Effective/applicability date. This section applies on or after 
January 6, 2017. (For payments made after June 30, 2014, and before 
January 6, 2017, see this section as in effect and contained in 26 CFR 
part 1, as revised April 1, 2016. For payments made after December 31, 
2000, and before July 1, 2014, see this section as in effect and 
contained in 26 CFR part 1, as revised April 1, 2013).

[T.D. 6628, 27 FR 12797, Dec. 28, 1962, as amended by T.D. 6908, 31 FR 
16774, Dec. 31, 1966; T.D. 7987, 49 FR 42719, Oct. 24, 1984; T.D. 8029, 
50 FR 23680, June 5, 1985; T.D. 8734, 62 FR 53475, Oct. 14, 1997; T.D. 
8804, 63 FR 72186, Dec. 31, 1998; 64 FR 73411, Dec. 30, 1999; T.D. 8881, 
65 FR 32205, May 22, 2000; T.D. 9658, 79 FR 12794, Mar. 6, 2014; T.D. 
9808, 82 FR 2107, Jan. 6, 2017]



Sec. 1.6042-4  Statements to recipients of dividend payments.

    (a) Requirement. A person required to make an information return 
under section 6042(a)(1) and Sec. 1.6042-2 must furnish a statement to 
each recipient whose identifying number is required to be shown on the 
related information return for dividend payments.
    (b) Form and content of the statement. The statement required by 
paragraph (a) of this section must be either the official Form 1099 
prescribed by the Internal Revenue Service for the respective calendar 
year or an acceptable substitute statement that contains provisions that 
are substantially similar to those of the official Form 1099 for the 
respective calendar year. For further guidance on how to prepare an 
acceptable substitute statement, see Rev. Proc. 2012-38, 2012-48 IRB 
575, also published as Publication 1179, ``General Rules and 
Specifications for Substitute Forms 1096, 1098, 1099, 5498, and Certain 
Other Information Returns,'' or any successor guidance. An IRS truncated 
taxpayer identifying number (TTIN) may be used as the identifying number 
of the recipient. For provisions relating to the use of TTINs, see Sec. 
301.6109-4 of this chapter (Procedure and Administration Regulations).
    (c) Aggregation of payments. A payor may aggregate on one Form 1099 
all payments made to a recipient with respect to each separate account 
during a calendar year.
    (d) Manner of providing statements to recipients--(1) In general. 
The Form 1099, or acceptable substitute statement, must be provided to 
the recipient either in person or by first-class mail to the recipient's 
last known address in a statement mailing.
    (2) Statement mailing requirement. The mailing required under 
section 6042(c) of a Form 1099 to a payee-recipient must qualify as a 
statement mailing. A statement mailing must contain the required Form 
1099 or acceptable substitute statement (written statement) and must 
comply with enclosure and envelope restrictions.
    (i) Enclosure restrictions. To qualify as a statement mailing, the 
mailing cannot contain any enclosures except those listed in this 
paragraph (d)(2)(i).

[[Page 274]]

Moreover, no promotional or advertising material is permitted in the 
mailing of the written statement. Even a de minimis amount of 
promotional or advertising material violates the statement mailing 
requirement. However, a logo on the envelope containing the written 
statement and on nontax enclosures described in paragraph (d)(2)(i) (A) 
through (D) of this section does not violate the written statement 
requirement. The written statement required under section 6042(c) and 
paragraph (a) of this section may be perforated to a check or to a 
statement of the recipient-payee's specific account with the payor 
described in paragraph (d)(2)(i) (A) or (C) of this section. The 
enclosure to which the written statement is perforated must contain, in 
a bold and conspicuous type, the legend: ``Important Tax Return Document 
Attached.'' The enclosures permitted in a mailing are limited to--
    (A) A check with respect to the account reported on the written 
statement;
    (B) A letter explaining why a check with respect to such account is 
not enclosed with the written statement (for example, because a dividend 
has not been declared payable);
    (C) A statement of the taxpayer-recipient's specific account with 
the payor if payments on such account are reflected on the written 
statement;
    (D) A letter limited to an explanation of the tax consequences of 
the information set forth on the enclosed written statement;
    (E) Payee statements related to other Forms 1099, Form 1098, and 
Form 5498 (or the account balance on a Form 5498), Forms W-2 and W-2G; 
and
    (F) Any document concerning the solicitation of the Form W-9, as 
described in Sec. 31.3406(h)-3(a) of this chapter, or of the Form W-8 
as described in Sec. 1.1441-1(e)(1).
    (ii) Envelope and delivery restrictions--(A) Envelope restrictions. 
The outside of the envelope in which the written statement is mailed and 
each nontax enclosure enclosed in the envelope must contain, in a bold 
and conspicuous type, the legend: ``Important Tax Return Document 
Enclosed.'' For purposes of this paragraph (d)(2)(ii), a nontax 
enclosure is any item listed in paragraphs (d)(2)(i)(A) through (C) of 
this section. However, a payor is not required to include the legend on 
the outside of an envelope containing only the enclosures in paragraph 
(d)(2)(i)(D) through (F) of this section.
    (B) Delivery restrictions. The requirement to provide the written 
statement in person or by first-class mail may be satisfied by sending 
the written statement and any enclosures described in paragraph 
(d)(2)(i) of this section by intra-office mail, provided that intra-
office mail is used by the payor in sending account activity, balance 
information, and other correspondence to the payee. If a payor does not 
personally deliver the written statement (i.e., the Form 1099 or its 
acceptable substitute) to the recipient or mail it to the recipient in a 
statement mailing as described in this paragraph (d), the payor is 
considered to have failed to mail the statement required under section 
6042(c) and will be subject to the penalty under section 6722.
    (e) Time for furnishing statements--(1) In general. Each statement 
required by section 6042(c) and this section to be furnished to any 
person for a calendar year must be furnished to such person after 
November 30 of the year and on or before January 31 (February 10 in the 
case of a nominee filing under Sec. 1.6042-2(a)(1)(iii)) of the 
following year, but no statement may be furnished before the final 
dividend for the calendar year has been paid. However, the statement may 
be furnished at any time after April 30 if it is furnished with the 
final dividend for the calendar year. For a statement required to be 
furnished after December 31, 2008, the February 15 due date under 
section 6045 applies to the statement if the statement is furnished in a 
consolidated reporting statement under section 6045. See Sec. Sec. 
1.6045-1(k)(3), 1.6045-2(d)(2), 1.6045-3(e)(2), 1.6045-4(m)(3), and 
1.6045-5(a)(3)(ii).

    (2) Extensions of time. For good cause upon written application of 
the person required to furnish statements under this section, the 
Director, Martinsburg Computing Center, may grant an extension of time 
not exceeding 30 days in which to furnish such statements. The 
application must be addressed to the Director, Martinsburg Computing 
Center, and must contain a full recital

[[Page 275]]

of the reasons for requesting the extension to aid the Director in 
determining the period of the extension, if any, that will be granted. 
Such a request in the form of a letter to the Director, Martinsburg 
Computing Center, signed by the applicant will suffice as an 
application. The application must be filed on or before the date 
prescribed in paragraph (e)(1) of this section.
    (3) Last day for furnishing statement. For provisions relating to 
the time for performance of an act when the last day prescribed for 
performance falls on Saturday, Sunday, or a legal holiday, see section 
7503 and Sec. 301.7503-1 of this chapter (Regulations on Procedure and 
Administration).
    (f) Cross-reference to penalty. For provisions relating to the 
penalty provided for failure to furnish timely a correct payee statement 
required under section 6042(c), see Sec. 301.6722-1 of this chapter 
(Procedure and Administration Regulations). See Sec. 301.6724-1 of this 
chapter for the waiver of a penalty if the failure is due to reasonable 
cause and is not due to willful neglect.
    (g) Effective/applicability date. This section is effective for 
payee statements due after December 31, 1995, without regard to 
extensions. The amendments to paragraph (b) are effective for payee 
statements due after December 31, 2014. For payee statements due before 
January 1, 2015, Sec. 1.6042-4(b) (as contained in 26 CFR part 1, 
revised April 2013) shall apply.

[T.D. 8637, 60 FR 66110, Dec. 21, 1995, as amended by T.D. 8734, 62 FR 
53476, Oct. 14, 1997; T.D. 9504, 75 FR 64090, Oct. 18, 2010; T.D. 9675, 
79 FR 41129, July 15, 2014]



Sec. 1.6042-5  Coordination with reporting rules for widely held fixed
investment trusts under Sec. 1.671-5.

    See Sec. 1.671-5 for the reporting rules for widely held fixed 
investment trusts (as defined under that section).

[T.D. 9241, 71 FR 4025, Jan. 24, 2006]



Sec. 1.6043-1  Return regarding corporate dissolution or liquidation.

    (a) Requirement of returns. Within 30 days after the adoption of any 
resolution or plan for or in respect of the dissolution of a corporation 
or the liquidation of the whole or any part of its capital stock, the 
corporation shall file a return on Form 966, containing the information 
required by paragraph (b) of this section and by such form. Such return 
shall be filed with the district director for the district in which the 
income tax return of the corporation is filed. Further, if after the 
filing of a Form 966 there is an amendment of or supplement to the 
resolution or plan, an additional Form 966, based on the resolution or 
plan as amended or supplemented, must be filed within 30 days after the 
adoption of such amendment or supplement. A return must be filed under 
section 6043 and this section in respect of a liquidation whether or not 
any part of the gain or loss to the shareholders upon the liquidation is 
recognized under the provisions of section 1002.
    (b) Contents of return--(1) In general. There shall be attached to 
and made a part of the return required by section 6043 and paragraph (a) 
of this section a certified copy of the resolution or plan, together 
with any amendments thereof or supplements thereto, and such return 
shall in addition contain the following information:
    (i) The name and address of the corporation;
    (ii) The place and date of incorporation;
    (iii) The date of the adoption of the resolution or plan and the 
dates of any amendments thereof or supplements thereto; and
    (iv) The internal revenue district in which the last income tax 
return of the corporation was filed and the taxable year covered 
thereby.
    (2) Returns in respect of amendments or supplements. If a return has 
been filed pursuant to section 6043 and this section, any additional 
return made necessary by an amendment of or a supplement to the 
resolution or plan will be deemed sufficient if it gives the date the 
prior return was filed and contains a duly certified copy of the 
amendment or supplement and all other information required by this 
section and by Form 966 which was not given in the prior return.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6949, 33 FR 
5531, Apr. 9, 1968; T.D. 7926, 48 FR 55847, Dec. 16, 1983]

[[Page 276]]



Sec. 1.6043-2  Return of information respecting distributions 
in liquidation.

    (a) Unless the distribution is one in respect of which information 
is required to be filed pursuant to Sec. 1.332-6(b), Sec. 1.368-3(a), 
or Sec. 1.1081-11, every corporation making any distribution of $600 or 
more during a calendar year to any shareholder in liquidation of the 
whole or any part of its capital stock shall file a return of 
information on Forms 1096 and 1099, giving all the information required 
by such form and by the regulations in this part. A separate Form 1099 
must be prepared for each shareholder to whom such distribution was 
made, showing the name and address of such shareholder, the number and 
class of shares owned by him in liquidation of which such distribution 
was made, and the total amount distributed to him on each class of 
stock. If the amount distributed to such shareholder on any class of 
stock consisted in whole or in part of property other than money, the 
return on such form shall in addition show the amount of money 
distributed, if any, and shall list separately each class of property 
other than money distributed, giving a description of the property in 
each such class and a statement of its fair market value at the time of 
the distribution. Such forms, accompanied by transmittal Form 1096 
showing the number of Forms 1099 filed therewith, shall be filed on or 
before February 28 (March 31 if filed electronically) of the year 
following the calendar year in which such distribution was made with any 
of the Internal Revenue Service Centers, the addresses of which are 
listed in the instructions for Form 1096.
    (b) If the distribution is in complete liquidation of a domestic 
corporation pursuant to a plan of liquidation in accordance with which 
all the capital stock of the corporation is cancelled or redeemed, and 
the transfer of all property under the liquidation occurs within some 
one calendar month pursuant to section 333, and any shareholder claims 
the benefit of such section, the return on Form 1096 shall show:
    (1) The amount of earnings and profits of the corporation 
accumulated after February 28, 1913, determined as of the close of such 
calendar month, without diminution by reason of distributions made 
during such calendar month, but including in such computation all items 
of income and expense accrued up to the date on which the transfer of 
all the property under the liquidation is completed;
    (2) The ratable share of such earnings and profits of each share of 
stock canceled or redeemed in the liquidation;
    (3) The date and circumstances of the acquisition by the corporation 
of any or securities distributed to shareholders in the liquidation;
    (4) If the liquidation is pursuant to section 333(g), a schedule 
showing the amount of earnings and profits to which the corporation has 
succeeded after December 31, 1963, pursuant to any corporate 
reorganization or pursuant to a liquidation to which section 332 
applies, except earnings and profits which on December 31, 1963, 
constituted earnings and profits of a corporation referred to in section 
333(g)(3), and except earnings and profits which were earned after such 
date by a corporation referred to in section 333(g)(3); and
    (5) If the liquidation occurs after December 31, 1966, and is 
pursuant to section 333(g)(2), the amount of earnings and profits of the 
corporation accumulated after February 28, 1913, and before January 1, 
1967, and the ratable share of such earnings and profits of each share 
of stock canceled or redeemed in the liquidation.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6949, 33 FR 
5531, Apr. 9, 1968; T.D. 8734, 62 FR 53476, Oct. 14, 1997; T.D. 8804, 63 
FR 72188, Dec. 31, 1998; T.D. 8895, 65 FR 50406, Aug. 18, 2000; T.D. 
9264, 71 FR 30608, May 30, 2006; T.D. 9329, 72 FR 32807, June 14, 2007]



Sec. 1.6043-3  Return regarding liquidation, dissolution, termination,
or substantial contraction of organizations exempt from taxation under
section 501(a).

    (a) In general--(1) Requirement to provide information. Except as 
provided in paragraph (b) of this section, for taxable years beginning 
after December 31, 1969, every organization which for any of its last 5 
taxable years preceding any liquidation, dissolution, termination, or 
substantial contraction of

[[Page 277]]

the organization was exempt from taxation under section 501(a) shall 
provide the information will respect to such liquidation, dissolution, 
termination, or substantial contraction required by the instructions 
accompanying the organization's annual return of information. The 
information required by this section shall be provided with, and at the 
time prescribed for filing, the organization's annual return of 
information for the period during which any liquidation, dissolution (or 
the adopting of a resolution or plan for the dissolution or liquidation 
in whole or part), termination or substantial contraction occurred with 
respect to the organization. An organization which is no longer exempt 
from taxation under section 501(a) shall use the annual return of 
information it would have been required to file when the organization 
was exempt.
    (2) Transitional rule. In the case of an annual return of 
information of an organization which was filed before September 11, 
1978, if the organization had failed to provide the information with 
such return in accordance with paragraph (a)(1) of this section, the 
organization may comply with this section by providing the information 
with the organization's first annual return of information filed after 
such date.
    (b) Exceptions. The following organizations are not required to 
provide the information under paragraph (a) of this section:
    (1) Churches, their integrated auxiliaries, or conventions or 
associations of churches;
    (2) Any organization which is not a private foundation (as defined 
in section 509(a)) and the gross receipts of which in each taxable year 
are normally not more than $5,000;
    (3) Any organization which has terminated its private foundation 
status under section 507(b)(1)(B) with respect to a liquidation, 
dissolution, termination, or substantial contraction which is in 
connection with the termination under section 507(b)(1)(B);
    (4) Any organization described in section 401(a) if the employer who 
established such organization files a return which provides the 
information under paragraph (a) of this section;
    (5) Any organization described in section 501(c)(1) and any 
corporation described in section 501(c)(2) which holds title to property 
for such 501(c)(1) organizations;
    (6) Any organization described in section 501(c)(14)(A) subject to a 
group exemption letter issued to a state regulatory body; and
    (7) Any subordinate unit of a central organization (other than a 
private foundation) which established its exempt status under the group 
ruling procedure of regulations Sec. 601.201 (n)(7), if the central or 
parent organization files an annual information return for the group in 
accordance withSec. 1.6033-2(d); and
    (8) Any organization no longer exempt from taxation under section 
501(a) and that during the period of its exemption under such section 
was not an organization described in section 501(c)(3), a corporation 
described in section 501(c)(2) that held title to property for an 
organization described in section 501(c)(3), or an organization 
described in such other section as prescribed by publication, form, or 
instructions.

    (9) The Commissioner may relieve any organization or class or 
organizations from filing the return required by section 6043(b) of this 
section, where it is determined that such information is not necessary 
for the efficient administration of the internal revenue laws.
    (c) Penalties. For provisions relating to the penalty provided for 
failure to furnish any information required by this section, see section 
6652(d) and the regulations thereunder.
    (d) Definitions. (1) For the definition of the term ``normally'' as 
used in paragraph (b)(2) of this section, see Sec. 1.6033-2(g)(3).
    (2) For the definition of the term ``integrated auxiliaries'' as 
used in paragraph (b)(1) of this section, see Sec. 1.6033-2(h).
    (3) For returns filed for taxable years beginning before January 1, 
2008, for purposes of this section the definition of the term 
``substantial contraction'' set forth in Sec. 1.6043-3(d)(1) (as 
contained in 26 CFR part 1 revised April 1, 2008) may be used.
    (e) Effective/applicability date--(1) Generally. The provisions of 
this section shall apply with respect to returns

[[Page 278]]

filed for taxable years beginning after December 31, 1969.
    (2) Paragraphs (b)(8) and (d) of this section shall apply for 
taxable years beginning on or after January 1, 2008. For taxable years 
beginning before January 1, 2008, Sec. Sec. 1.6043-3(b)(8) and 1.6043-
3(d) (as contained in 26 CFR part 1 revised April 1, 2008) shall apply.

[T.D. 7563, 43 FR 40221, Sept. 11, 1978, as amended by T.D. 9423, 73 FR 
52555, Sept. 9, 2008; T.D. 9549, 76 FR 55771, Sept. 8, 2011]



Sec. 1.6043-4  Information returns relating to certain acquisitions
of control and changes in capital structure.

    (a) Information returns for an acquisition of control or a 
substantial change in capital structure--(1) General rule. If there is 
an acquisition of control (as defined in paragraph (c) of this section) 
or a substantial change in the capital structure (as defined in 
paragraph (d) of this section) of a domestic corporation (reporting 
corporation), the reporting corporation must file a completed Form 8806, 
``Information Return for Acquisition of Control or Substantial Change in 
Capital Structure,'' in accordance with the instructions to that form. 
The Form 8806 will request information with respect to the following and 
such other information specified in the instructions:
    (i) Reporting corporation. The name, address, and taxpayer 
identification number (TIN) of the reporting corporation.
    (ii) Common parent, if any, of the reporting corporation. If the 
reporting corporation was a subsidiary member of an affiliated group 
filing a consolidated return immediately prior to the acquisition of 
control or the substantial change in capital structure, the name, 
address, and TIN of the common parent of that affiliated group.
    (iii) Acquiring corporation. The name, address and TIN of any 
corporation that acquired control of the reporting corporation within 
the meaning of paragraph (c) of this section or combined with or 
received assets from the reporting corporation pursuant to a substantial 
change in capital structure within the meaning of paragraph (d) of this 
section (acquiring corporation) and whether the acquiring corporation 
was newly formed prior to its involvement in the transaction.
    (iv) Information about acquisition of control or substantial change 
in capital structure. (A) A description of the transaction or 
transactions that gave rise to the acquisition of control or the 
substantial change in capital structure of the corporation;
    (B) The date or dates of the transaction or transactions that gave 
rise to the acquisition of control or the substantial change in capital 
structure; and
    (C) A description of and a statement of the fair market value of any 
stock and other property, if any, provided to the reporting 
corporation's shareholders in exchange for their stock.
    (2) Consent election. Form 8806 will provide the reporting 
corporation with the ability to elect to permit the Internal Revenue 
Service (IRS) to publish information that will inform brokers of the 
transaction and enable brokers to satisfy their reporting obligations 
under Sec. 1.6045-3. The information to be published, whether on the 
IRS Web site or in an IRS publication, would be limited to the name and 
address of the corporation, the date of the transaction, a description 
of the shares affected by the transaction, and the amount of cash and 
the fair market value of stock or other property provided to each class 
of shareholders in exchange for a share.
    (3) Time for making return. Form 8806 must be filed on or before the 
45th day following the acquisition of control or substantial change in 
capital structure of the corporation, or, if earlier, on or before 
January 5th of the year following the calendar year in which the 
acquisition of control or substantial change in capital structure 
occurs.
    (4) Exception where transaction is reported under section 6043(a). 
No reporting is required under this paragraph (a) with respect to a 
transaction for which information is required to be reported pursuant to 
section 6043(a), provided the transaction is properly reported in 
accordance with that section.
    (5) Exception where shareholders are exempt recipients. No reporting 
is required under this paragraph (a) if the reporting corporation 
reasonably determines that all of its shareholders

[[Page 279]]

who receive cash, stock, or other property pursuant to the acquisition 
of control or substantial change in capital structure are exempt 
recipients under paragraph (b)(5) of this section.
    (b) Information returns regarding shareholders--(1) General rule. A 
corporation that is required to file Form 8806 pursuant to paragraph 
(a)(1) of this section shall file a return of information on Forms 1096, 
``Annual Summary and Transmittal of U.S. Information Returns,'' and 
1099-CAP, ``Changes in Corporate Control and Capital Structure,'' with 
respect to each shareholder of record in the corporation (before or 
after the acquisition of control or the substantial change in capital 
structure) who receives cash, stock, or other property pursuant to the 
acquisition of control or the substantial change in capital structure 
and who is not an exempt recipient as defined in paragraph (b)(5) of 
this section. A corporation is not required to file a Form 1096 or 1099-
CAP with respect to a clearing organization if the corporation makes the 
election described in paragraph (a)(2) of this section.
    (2) Time for making information returns. Forms 1096 and 1099-CAP 
must be filed on or before February 28 (March 31 if filed 
electronically) of the year following the calendar year in which the 
acquisition of control or the substantial change in capital structure 
occurs.
    (3) Contents of return. A separate Form 1099-CAP must be filed with 
respect to amounts received by each shareholder (who is not an exempt 
recipient as defined in paragraph (b)(5) of this section). The Form 
1099-CAP will request information with respect to the following and such 
other information as may be specified in the instructions:
    (i) The name, address, telephone number and TIN of the reporting 
corporation;
    (ii) The name, address and TIN of the shareholder;
    (iii) The number and class of shares in the reporting corporation 
exchanged by the shareholder; and
    (iv) The aggregate amount of cash and the fair market value of any 
stock or other property provided to the shareholder in exchange for its 
stock.
    (4) Furnishing of forms to shareholders. The Form 1099-CAP filed 
with respect to each shareholder must be furnished to such shareholder 
on or before January 31 of the year following the calendar year in which 
the shareholder receives cash, stock, or other property as part of the 
acquisition of control or the substantial change in capital structure. 
The Form 1099-CAP filed with respect to a clearing organization must be 
furnished to the clearing organization on or before January 5th of the 
year following the calendar year in which the acquisition of control or 
substantial change in capital structure occurred. A Form 1099-CAP is not 
required to be furnished to a clearing organization if the reporting 
corporation makes the election described in paragraph (a)(2) of this 
section. An IRS truncated taxpayer identifying number (TTIN) may be used 
as the identifying number of the shareholder in lieu of the identifying 
number appearing on the Form 1099-CAP filed with the Internal Revenue 
Service. For provisions relating to the use of TTINs, see Sec. 
301.6109-4 of this chapter (Procedure and Administration Regulations).
    (5) Exempt recipients. A corporation is not required to file a Form 
1099-CAP pursuant to this paragraph (b) with respect to any of the 
following shareholders that is not a clearing organization:
    (i) Any shareholder who receives stock in an exchange that is not 
subject to gain recognition under section 367(a) and the regulations.
    (ii) Any shareholder if the corporation reasonably determines that 
the total amount of cash and the fair market value of stock and other 
property received by the shareholder does not exceed $1,000.
    (iii) Any shareholder described in paragraphs (b)(5)(iii)(A) through 
(M) of this section if the corporation has actual knowledge that the 
shareholder is described in one of paragraphs (b)(5)(iii)(A) through (M) 
of this section or if the corporation has a properly completed exemption 
certificate from the shareholder (as provided in Sec. 31.3406(h)-3 of 
this chapter). The corporation also may treat a shareholder as described 
in paragraphs (b)(5)(iii)(A) through (M) of this section based on the 
applicable indicators described in Sec. 1.6049-4(c)(1)(ii).

[[Page 280]]

    (A) A corporation, as described in Sec. 1.6049-4(c)(1)(ii)(A) 
(except for corporations for which an election under section 1362(a) is 
in effect).
    (B) A tax-exempt organization, as described in Sec. 1.6049-
4(c)(1)(ii)(B)(1).
    (C) An individual retirement plan, as described in Sec. 1.6049-
4(c)(1)(ii)(C).
    (D) The United States, as described in Sec. 1.6049-4(c)(1)(ii)(D).
    (E) A state, as described in Sec. 1.6049-4(c)(1)(ii)(E).
    (F) A foreign government, as described in Sec. 1.6049-
4(c)(1)(ii)(F).
    (G) An international organization, as described in Sec. 1.6049-
4(c)(1)(ii)(G).
    (H) A foreign central bank of issue, as described in Sec. 1.6049-
4(c)(1)(ii)(H).
    (I) A securities or commodities dealer, as described in Sec. 
1.6049-4(c)(1)(ii)(I).
    (J) A real estate investment trust, as described in Sec. 1.6049-
4(c)(1)(ii)(J).
    (K) An entity registered under the Investment Company Act of 1940 
(15 U.S.C. 80a-1), as described in Sec. 1.6049-4(c)(1)(ii)(K).
    (L) A common trust fund, as described in Sec. 1.6049-
4(c)(1)(ii)(L).
    (M) A financial institution such as a bank, mutual savings bank, 
savings and loan association, building and loan association, cooperative 
bank, homestead association, credit union, industrial loan association 
or bank, or other similar organization.
    (iv) Any shareholder that the corporation, prior to the transaction, 
associates with documentation upon which the corporation may rely in 
order to treat payments to the shareholder as made to a foreign 
beneficial owner in accordance with Sec. 1.1441-1(e)(1)(ii) or as made 
to a foreign payee in accordance with Sec. 1.6049-5(d)(1) or presumed 
to be made to a foreign payee under Sec. 1.6049-5(d)(2) or (3). For 
purposes of this paragraph (b)(5)(iv), the provisions in Sec. 1.6049-
5(c) (regarding rules applicable to documentation of foreign status and 
definition of U.S. payor and non-U.S. payor) shall apply. The provisions 
of Sec. 1.1441-1 shall apply by using the terms ``corporation'' and 
``shareholder'' in place of the terms ``withholding agent'' and 
``payee'' and without regard to the fact that the provisions apply only 
to amounts subject to withholding under chapter 3 of the Internal 
Revenue Code. The provisions of Sec. 1.6049-5(d) shall apply by using 
the terms ``corporation'' and ``shareholder'' in place of the terms 
``payor'' and ``payee''. Nothing in this paragraph (b)(5)(iv) shall be 
construed to relieve a corporation of its withholding obligations under 
section 1441.
    (v) Any shareholder if, on January 31 of the year following the 
calendar year in which the shareholder receives cash, stock, or other 
property, the corporation did not know and did not have reason to know 
that the shareholder received such cash, stock, or other property in a 
transaction or series of related transactions that would result in an 
acquisition of control or a substantial change in capital structure 
within the meaning of this section.
    (6) Coordination with other sections. In general, no reporting is 
required under this paragraph (b) with respect to amounts that are 
required to be reported under sections 6042 or 6045, unless the 
corporation knows or has reason to know that such amounts are not 
properly reported in accordance with those sections. A corporation must 
satisfy the requirements under this paragraph (b) with respect to any 
shareholder of record that is a clearing organization.
    (c) Acquisition of control of a corporation--(1) In general. For 
purposes of this section, an acquisition of control of a corporation 
(first corporation) occurs if, in a transaction or series of related 
transactions--
    (i) Before an acquisition of stock of the first corporation 
(directly or indirectly) by a second corporation, the second corporation 
does not have control of the first corporation;
    (ii) After the acquisition, the second corporation has control of 
the first corporation;
    (iii) The fair market value of the stock acquired in the transaction 
and in any related transactions as of the date or dates on which such 
stock was acquired is $100 million or more;
    (iv) The shareholders of the first corporation receive stock or 
other property pursuant to the acquisition; and
    (v) The first corporation or any shareholder of the first 
corporation is required to recognize gain (if any) under section 367(a) 
and the regulations, as a result of the transaction.

[[Page 281]]

    (2) Control. For purposes of this section, control is determined in 
accordance with the first sentence of section 304(c)(1). For these 
purposes the rules of section 318 as modified by the rules of section 
958(b) shall apply in determining the ownership of stock.
    (d) Substantial change in capital structure of a corporation--(1) In 
general. A corporation has a substantial change in capital structure if 
it has a change in capital structure (as defined in paragraph (d)(2) of 
this section) and the amount of any cash and the fair market value of 
any property (including stock) provided to the shareholders of such 
corporation pursuant to the change in capital structure, as of the date 
or dates on which the cash or other property is provided, is $100 
million or more.
    (2) Change in capital structure. For purposes of this section, a 
corporation has a change in capital structure if--
    (i) The corporation in a transaction or series of transactions--
    (A) Merges, consolidates or otherwise combines with another 
corporation or transfers all or substantially all of its assets to one 
or more corporations;
    (B) Transfers all or part of its assets to another corporation in a 
title 11 or similar case and, in pursuance of the plan, distributes 
stock or securities of that corporation; or
    (C) Changes its identity, form or place of organization; and
    (ii) The corporation or any shareholder is required to recognize 
gain (if any) under section 367(a) and the regulations, as a result of 
the transaction.
    (e) Reporting by successor entity. If a corporation (transferor) 
transfers all or substantially all of its assets to another entity 
(transferee) in a transaction that constitutes a substantial change in 
the capital structure of transferor, transferor must satisfy the 
reporting obligations in paragraph (a) and (b) of this section. If 
transferor does not satisfy one or both of those reporting obligations, 
then transferee must do so. If neither transferor nor transferee 
satisfies the reporting obligations in paragraphs (a) and (b) of this 
section, then transferor and transferee shall be jointly and severally 
liable for any applicable penalties (see paragraph (g) of this section).
    (f) Receipt of property. For purposes of this section, a shareholder 
is treated as receiving property (or as having property provided to it) 
pursuant to an acquisition of control or a substantial change in capital 
structure if a liability of the shareholder is assumed in the 
transaction and, as a result of the transaction, an amount is realized 
by the shareholder from the sale or exchange of stock.
    (g) Penalties for failure to file. For penalties for failure to file 
as required under this section, see section 6652(l). The information 
returns required to be filed under paragraphs (a) and (b) of this 
section shall be treated as one return for purposes of section 6652(l) 
and, accordingly, the penalty shall not exceed $500 for each day the 
failure continues (up to a maximum of $100,000) with respect to any 
acquisition of control or any substantial change in capital structure. 
Failure to file as required under this section also includes the failure 
to satisfy the requirement to file on magnetic media as required by 
section 6011(e) and Sec. 1.6011-2. In addition, criminal penalties 
under sections 7203, 7206 and 7207 may apply in appropriate cases.
    (h) Examples. The following examples illustrate the application of 
the rules of this section. For purposes of these examples, assume the 
transaction is not reported under sections 6042, 6043(a), or 6045, 
unless otherwise specified, and assume that the fair market value of the 
consideration provided to the shareholders exceeds $100 million. The 
examples are as follows:

    Example 1. The shareholders of X, a domestic corporation and parent 
of an affiliated group, exchange their X stock for stock in Y, a foreign 
corporation, pursuant to sections 351 and 354. After the transaction, Y 
owns all the outstanding X stock. Assume that, under section 367(a) and 
the regulations, the X shareholders must recognize gain (if any) on the 
exchange of their stock. Because the transaction results in an 
acquisition of control of X, X must comply with the rules in paragraphs 
(a) and (b) of this section. X must file Form 8806 reporting the 
transaction. X must also file a Form 1099-CAP with respect to each 
shareholder who is not an exempt recipient showing the fair market value 
of the Y stock received by that shareholder, and X must furnish a copy 
of the Form 1099-CAP to that shareholder. If X elects on the Form

[[Page 282]]

8806 to permit the IRS to publish information regarding the transaction, 
X is not required to file or furnish Forms 1099-CAP with respect to 
shareholders that are clearing organizations.
    Example 2. The facts are the same as in Example 1, except X hires a 
transfer agent to effectuate the exchange. The transfer agent is treated 
as a broker under section 6045 and is required to report the fair market 
value of the Y stock received by X's shareholders under Sec. 1.6045-3. 
Under paragraph (b)(6) of this section, X is not required to file 
information returns under paragraph (b) of this section with respect to 
a shareholder of record, unless X knows or has reason to know that the 
transfer agent does not satisfy its information reporting obligation 
under Sec. 1.6045-3 with respect to that shareholder. Thus, if the 
transfer agent satisfies its information reporting requirements under 
Sec. 1.6045-3 with respect to shareholder I, an individual who receives 
X stock, X is not required to file a Form 1099-CAP with respect to I. 
Conversely, if the transfer agent does not have an information reporting 
obligation under Sec. 1.6045-3 with respect to one of X's shareholders 
of record (for example, a clearing organization that is an exempt 
recipient under Sec. 1.6045-3(b)(2)), or if X knows or has reason to 
know that the transfer agent has not satisfied its information reporting 
requirement with respect to a shareholder, then X must provide a Form 
1099-CAP to that shareholder.

    (i) Effective/applicability date. This section applies to 
transactions occurring after December 5, 2005. The amendments to 
paragraph (b)(4) are effective for any Form 1099-CAP required to be 
furnished after December 31, 2014. For any Form 1099-CAP required to be 
furnished before January 1, 2015, Sec. 1.6043-4(b) (as contained in 26 
CFR part 1, revised April 2013) shall apply.

[T.D. 9230, 70 FR 72378, Dec. 5, 2005, as amended by T.D. 9675, 79 FR 
41129, July 15, 2014]



Sec. 1.6044-1  Returns of information as to patronage dividends with
respect to patronage occurring in taxable years beginning before 1963.

    (a) Requirement--(1) In general. Except as provided in subparagraph 
(2) of this paragraph, any corporation allocating to any patron in 
respect of patronage occurring in any taxable year of the corporation 
beginning before January 1, 1963, amounts aggregating $100 or more 
during a calendar year as patronage dividends, rebates, or refunds 
(whether in cash, merchandise, capital stock, revolving fund 
certificates, retain certificates, letters of advice, or in some other 
manner that discloses to each patron the amount of such dividend, 
rebate, or refund) shall for each such calendar year file a return of 
information with respect to such allocation on Forms 1096 and 1099. A 
separate Form 1099 shall be prepared for each patron showing the name 
and address of the patron to whom such allocation is made, and the 
amount of the allocation. The allocation shall be reported for the 
calendar year during which the allocation is made, regardless of whether 
the allocation is deemed for the purpose of section 522 to be made at 
the close of a preceding taxable year of the corporation.
    (2) Exception. A return is not required under this section in the 
case of any corporation (including any cooperative or nonprofit 
corporation engaged in rural electrification) described in section 
501(c) (12) or (15) which is exempt from tax under section 501(a), or in 
the case of any corporation subject to a tax imposed by subchapter L, 
chapter 1, of the Code.
    (b) Time and place for filing. Returns made under this section on 
Forms 1096 and 1099 for any calendar year shall be filed on or before 
February 28 of the following year with any of the Internal Revenue 
Service Centers, the addresses of which are listed in the instructions 
for such forms.
    (c) Definitions. The terms ``cooperative association'', ``patron'', 
``patronage dividends, rebates, and refunds'', and ``allocation'' are 
defined, for the purpose of this section, in paragraph (b) of Sec. 
1.522-1.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6628, 27 FR 
12798, Dec. 28, 1962]



Sec. 1.6044-2  Returns of information as to payments of patronage 
dividends.

    (a) Requirement of reporting--(1) In general. Except as provided in 
Sec. 1.6044-4, every organization described in paragraph (b) of this 
section which makes payments with respect to patronage occurring on or 
after the first day of the first taxable year of the organization 
beginning after December 31, 1962, of amounts described in Sec. 1.6044-
3 aggregating $10 or more to any person during any calendar year shall 
make an

[[Page 283]]

information return on Forms 1096 and 1099 for the calendar year showing 
the aggregate amount of such payments, the name and address of the 
person to whom paid, the total of such payments for all persons, and 
such other information as is required by the forms. The organization is 
required to make an information return regardless of the amount of the 
payment if the tax imposed by section 3406 is required to be withheld. 
Thus, in the case of any amount subject to backup withholding under 
section 3406 and not refunded by the payor before the due date of the 
information return in accordance with the regulations under section 
3406, an information return shall be made even if the payment is not 
generally reportable because it is made to an exempt recipient described 
in Sec. 1.6049-4(c)(1)(ii) or the amount paid during the calendar year 
to the recipient aggregates less than $10.
    (2) Definitions. The term ``person'' when used in this section does 
not include the United States, a State, the District of Columbia, a 
foreign government, a political subdivision of a State or of a foreign 
government, or an international organization. Therefore, payment of 
amounts described in Sec. 1.6044-3 to one of these entities need not be 
reported.
    (3) Determination of person to whom a patronage dividend is paid. 
For purposes of applying the provisions of this section, the person 
whose identifying number is required to be included by the cooperative 
on an information return with respect to a patronage dividend shall be 
considered the person to whom such dividend is paid. For regulations 
relating to the use of identifying numbers, see Sec. 1.6109-1.
    (4) Inclusion of other payments. The Form 1099 filed by an 
organization with respect to payments of patronage dividends made to any 
person during a calendar year may, at the election of the organization, 
include other payments made by it to such person during such year which 
are required to be reported on Form 1099.
    (b) Organizations subject to reporting requirement. The 
organizations subject to the reporting requirements of paragraph (a) of 
this section are:
    (1) Any organization exempt from tax under section 521 (relating to 
exemption of farmers' cooperatives from tax), and
    (2) Any corporation operating on a cooperative basis other than an 
organization:
    (i) Which is exempt from tax under chapter 1 (other than section 
521), or
    (ii) Which is subject to the provisions of part II of subchapter H 
of chapter 1 (relating to mutual savings banks, etc.), or subchapter L 
of chapter 1 (relating to insurance companies), or
    (iii) Which is engaged in furnishing electric energy, or providing 
telephone service, to persons in rural areas.
    (c) When payment deemed made. For purposes of this section, money or 
other property (except written notices of allocation) is deemed to have 
been paid when it is credited or set apart to a person without any 
substantial limitation or restriction as to the time or manner of 
payment or condition upon which payment is to be made, and is made 
available to him so that it may be drawn at any time, and its receipt 
brought within his own control and disposition. A written notice of 
allocation is considered to have been paid when it is issued by the 
organization to the distributee. Similarly, a qualified check (as 
defined in section 1388(d)(4)) is considered to have been paid when it 
is issued to the distributee.
    (d) Time and place for filing. The return required under this 
section on Forms 1096 and 1099 for any calendar year shall be filed 
after September 30 of such year, but not before the payer's final 
payment for the year, and on or before February 28 (March 31 if filed 
electronically) of the following year, with any of the Internal Revenue 
Service Centers, the addresses of which are listed in the instructions 
for such forms. For extensions of time for filing returns under this 
section, see Sec. 1.6081-1.
    (e) Cross-reference to penalty. For provisions relating to the 
penalty provided for failure to file timely a correct information return 
required under section 6044(a), see Sec. 301.6721-1 of this chapter 
(Procedure and Administration Regulations). See Sec. 301.6724-1 of this 
chapter for the waiver of a penalty if

[[Page 284]]

the failure is due to reasonable cause and is not due to willful 
neglect.
    (f) Magnetic media requirement. For the requirement to submit the 
information required by Form 1099 on magnetic media for payments after 
December 31, 1983, see section 6011(e) and Sec. 301.6011-2 of this 
chapter (Procedure and Administration Regulations). For rules relating 
to permission to submit the information required by Form 1099 on 
magnetic tape or other media, see Sec. 1.9101-1.

[T.D. 6628, 27 FR 12798, Dec. 28, 1962, as amended by T.D. 6677, 28 FR 
10147, Sept. 17, 1963; T.D. 6879, 31 FR 3493, Mar. 8, 1966; T.D. 6883, 
31 FR 6589, May 3, 1966; T.D. 8734, 62 FR 53476, Oct. 14, 1997; T.D. 
8895, 65 FR 50407, Aug. 18, 2000]



Sec. 1.6044-3  Amounts subject to reporting.

    (a) In general. Except as provided in paragraph (c) of this section, 
the amounts subject to reporting under Sec. 1.6044-2 are:
    (1) Payments by all organizations subject to such reporting 
requirements of:
    (i) Patronage dividends (as defined in section 1388(a)) paid in 
money, qualified written notices of allocation (as defined in section 
1388(c)), or other property (except nonqualified written notices of 
allocation as defined in section 1388(d)); and
    (ii) Amounts described in section 1382(b)(2) (relating to redemption 
of nonqualified written notices of allocation previously paid as 
patronage dividends) paid in money or property (except written notices 
of allocation); and
    (2) Payments by farmers' cooperatives exempt from tax under section 
521 of:
    (i) Amounts described in section 1382(c)(2)(A) (relating to 
distributions with respect to earnings derived from sources other than 
patronage) paid in money, qualified written notices of allocation, or 
other property (except nonqualified written notices of allocation); and
    (ii) Amounts described in section 1382(c)(2)(B) (relating to 
redemption of nonqualified written notices of allocation previously paid 
as distributions with respect to earnings derived from sources other 
than patronage) paid in money or other property (except written notices 
of allocation).
    (b) Special rules. (1) If an organization makes a distribution 
consisting in whole or in part of a written notice of allocation and a 
qualified check and, at the time it files its return under Sec. 1.6044-
2, is unable to determine whether such written notice of allocation and 
such check constitute nonqualified written notices of allocation, such 
organization shall for purposes of such return treat such written notice 
of allocation as a qualified written notice of allocation and such 
qualified check as a payment in money.
    (2) An amount described in paragraph (a) of this section is subject 
to reporting even though the organization paying such amount is allowed 
no deduction for it because it was not paid within the time prescribed 
in section 1382. Thus, a patronage dividend of $25 paid by a marketing 
cooperative must be reported even though it is paid after the end of the 
payment period (see section 1382(d)) for the organization's taxable year 
in which the patronage occurred.
    (c) Exceptions. An amount described in paragraph (a) of this section 
does not include--
    (1) Any amount described in Sec. 1.6042-3(b); or
    (2) With respect to amounts paid or credited after December 31, 
1982, any amount paid or credited to any person described in Sec. 
1.6049-4(c)(1)(ii).
    (d) Determination of amount paid. For purposes of Sec. 1.6044-2 and 
this section, in determining the amount of any payment subject to 
reporting under paragraph (a) of this section:
    (1) Property (other than a qualified written notice of allocation) 
shall be taken into account at its fair market value, and
    (2) A qualified written notice of allocation shall be taken into 
account at its stated dollar amount.

[T.D. 6628, 27 FR 12798, Dec. 28, 1962, as amended by T.D. 8734, 62 FR 
53476, Oct. 14, 1997]



Sec. 1.6044-4  Exemption for certain consumer cooperatives.

    (a) In general--(1) Determination of exemption. Exemption from the 
reporting requirements of Sec. 1.6044-2 shall, upon application 
therefor, be granted by the

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district director to any cooperative which he determines is primarily 
engaged in selling at retail goods or services of a type which is 
generally for personal, living, or family use. A cooperative is not 
exempt from the reporting requirements merely because it is an 
organization of a type to which section 6044(c) and this section relate. 
In order for the exemption from reporting to apply, it is necessary that 
the cooperative file an application in accordance with this section and 
obtain a determination of exemption.
    (2) Basis for exemption. For a cooperative to qualify for the 
exemption from reporting provided by section 6044(c) and this section 85 
percent of its gross receipts for the preceding taxable year, or 85 
percent of its aggregate gross receipts for the preceding three taxable 
years, must have been derived from the sale at retail of goods or 
services of a type which is generally for personal, living, or family 
use. In determining whether an item is of a type that is generally for 
personal, living, or family use, an item which may be purchased either 
for such use or for business use and which when acquired for business 
purposes is generally purchased at wholesale will, when sold by a 
cooperative at retail, be treated as goods or services of a type 
generally for personal, living, or family use.
    (3) Period of exemption. A determination of exemption from reporting 
shall apply beginning with the payments made during the calendar year in 
which the determination is made and shall automatically cease to be 
effective beginning with payments made after the close of the first 
taxable year of the cooperative in which less than 70 percent of its 
gross receipts is derived from the sale at retail of goods or services 
of a type which is generally for personal, living, or family use.
    (b) Application for exemption. Application for exemption from the 
reporting requirements of section 6044 shall be made on Form 3491, and 
shall be filed with the district director for the internal revenue 
district in which the cooperative has its principal place of business.

[T.D. 6628, 27 FR 12799, Dec. 28, 1962]



Sec. 1.6044-5  Statements to recipients of patronage dividends.

    (a) Requirement. A person required to make an information return 
under section 6044(a)(1) and Sec. 1.6044-2 must furnish a statement to 
each recipient whose identifying number is required to be shown on the 
related information return for patronage dividends paid.
    (b) Form, manner, and time for providing statements to recipients. 
The statement required by paragraph (a) of this section must be either 
the official Form 1099 prescribed by the Internal Revenue Service for 
the respective calendar year or an acceptable substitute statement. The 
rules under Sec. 1.6042-4 (relating to statements with respect to 
dividends) apply comparably in determining the form of an acceptable 
substitute statement permitted by this section. Those rules also apply 
for purposes of determining the manner of and time for providing the 
Form 1099 or its acceptable substitute to a recipient under this 
section. However, each Form 1099 or acceptable substitute statement 
required by this section must be furnished on or before January 31 of 
the following year, but no statement may be furnished before the final 
payment has been made for the calendar year. For a statement required to 
be furnished after December 31, 2008, the February 15 due date under 
section 6045 applies to the statement if the statement is furnished in a 
consolidated reporting statement under section 6045. See Sec. Sec. 
1.6045-1(k)(3), 1.6045-2(d)(2), 1.6045-3(e)(2), 1.6045-4(m)(3), and 
1.6045-5(a)(3)(ii). An IRS truncated taxpayer identifying number (TTIN) 
may be used as the identifying number of the recipient in lieu of the 
identifying number appearing on the corresponding information return 
filed with the Internal Revenue Service. For provisions relating to the 
use of TTINs, see Sec. 301.6109-4 of this chapter (Procedure and 
Administration Regulations).
    (c) Cross-reference to penalty. For provisions relating to the 
penalty provided for failure to furnish timely a correct payee statement 
required under section 6044(e), see Sec. 301.6722-1 of this chapter 
(Procedure and Administration Regulations). See Sec. 301.6724-1 of this 
chapter

[[Page 286]]

for the waiver of a penalty if the failure is due to reasonable cause 
and is not due to willful neglect.
    (d) Effective/applicability date. This section is effective for 
payee statements due after December 31, 1995, without regard to 
extensions. The amendments to paragraph (b) are effective for payee 
statements due after December 31, 2014. For payee statements due before 
January 1, 2015, Sec. 1.6044-5(b) (as contained in 26 CFR part 1, 
revised April 2013) shall apply.

[T.D. 8637, 60 FR 66111, Dec. 21, 1995, as amended by T.D. 8734, 62 FR 
53476, Oct. 14, 1997; T.D. 9504, 75 FR 64090, Oct. 18, 2010; T.D. 9675, 
79 FR 41129, July 15, 2014]



Sec. 1.6045-1  Returns of information of brokers and barter exchanges.

    (a) Definitions. The following definitions apply for purposes of 
this section and Sec. 1.6045-2:
    (1) The term broker means any person (other than a person who is 
required to report a transaction under section 6043), U.S. or foreign, 
that, in the ordinary course of a trade or business during the calendar 
year, stands ready to effect sales to be made by others. A broker 
includes an obligor that regularly issues and retires its own debt 
obligations or a corporation that regularly redeems its own stock. 
However, with respect to a sale (including a redemption or retirement) 
effected at an office outside the United States, a broker includes only 
a person described as a U.S. payor or U.S. middleman in Sec. 1.6049-
5(c)(5). In addition, a broker does not include an international 
organization described in Sec. 1.6049-4(c)(1)(ii)(G) that redeems or 
retires an obligation of which it is the issuer.
    (2) The term customer means, with respect to a sale effected by a 
broker, the person (other than such broker) that makes the sale, if the 
broker acts as:
    (i) An agent for such person in the sale;
    (ii) A principal in the sale; or
    (iii) The participant in the sale responsible for paying to such 
person or crediting to such person's account the gross proceeds on the 
sale.
    (3) The term security means:
    (i) A share of stock in a corporation (foreign or domestic);
    (ii) An interest in a trust;
    (iii) An interest in a partnership;
    (iv) A debt obligation;
    (v) An interest in or right to purchase any of the foregoing in 
connection with the issuance thereof from the issuer or an agent of the 
issuer or from an underwriter that purchases any of the foregoing from 
the issuer;
    (vi) An interest in a security described in paragraph (a)(3)(i) or 
(iv) of this section (but not including executory contracts that require 
delivery of such type of security);
    (vii) An option described in paragraph (m)(2) of this section; or
    (viii) A securities futures contract.
    (4) The term barter exchange means any person with members or 
clients that contract either with each other or with such person to 
trade or barter property or services either directly or through such 
person. The term does not include arrangements that provide solely for 
the informal exchange of similar services on a noncommercial basis.
    (5) The term commodity means:
    (i) Any type of personal property or an interest therein (other than 
securities as defined in paragraph (a)(3)) the trading of regulated 
futures contracts in which has been approved by the Commodity Futures 
Trading Commission;
    (ii) Lead, palm oil, rapeseed, tea, tin, or an interest in any of 
the foregoing; or
    (iii) Any other personal property or an interest therein that is of 
a type the Secretary determines is to be treated as a ``commodity'' 
under this section, from and after the date specified in a notice of 
such determination published in the Federal Register.
    (6) The term regulated futures contract means a regulated futures 
contract within the meaning of section 1256(b).
    (7) The term forward contract means:
    (i) An executory contract that requires delivery of a commodity in 
exchange for cash and which contract is not a regulated futures 
contract; or
    (ii) An executory contract that requires delivery of personal 
property or an interest therein in exchange for cash, or a cash 
settlement contract, if such executory contract or cash settlement 
contract is of a type the Secretary determines is to be treated as a

[[Page 287]]

``forward contract'' under this section, from and after the date 
specified in a notice of such determination published in the Federal 
Register.
    (8) The term closing transaction means a lapse, expiration, 
settlement, abandonment, or other termination of a position. For 
purposes of the preceding sentence, a position includes a right or an 
obligation under a forward contract, a regulated futures contract, a 
securities futures contract, or an option.
    (9) The term sale means any disposition of securities, commodities, 
options, regulated futures contracts, securities futures contracts, or 
forward contracts, and includes redemptions of stock, retirements of 
debt instruments (including a partial retirement attributable to a 
principal payment received on or after January 1, 2014), and enterings 
into short sales, but only to the extent any of these actions are 
conducted for cash. In the case of an option, a regulated futures 
contract, a securities futures contract, or a forward contract, a sale 
includes any closing transaction. When a closing transaction for a 
contract described in section 1256(b)(1)(A) involves making or taking 
delivery, there are two sales, one resulting in profit or loss on the 
contract, and a separate sale on the delivery. When a closing 
transaction for a contract described in section 988(c)(5) involves 
making delivery, there are two sales, one resulting in profit or loss on 
the contract, and a separate sale on the delivery. For purposes of the 
preceding sentence, a broker may assume that any customer's functional 
currency is the U.S. dollar. When a closing transaction in a forward 
contract involves making or taking delivery, the broker may treat the 
delivery as a sale without separating the profit or loss on the contract 
from the profit or loss on the delivery, except that taking delivery for 
United States dollars is not a sale. The term sale does not include 
entering into a contract that requires delivery of personal property or 
an interest therein, the initial grant or purchase of an option, or the 
exercise of a purchased call option for physical delivery (except for a 
contract described in section 988(c)(5)). For purposes of this section 
only, a constructive sale under section 1259 and a mark to fair market 
value under section 475 or 1296 are not sales.
    (10) The term effect means, with respect to a sale, to act as:
    (i) An agent for a party in the sale wherein the nature of the 
agency is such that the agent ordinarily would know the gross proceeds 
from the sale; or
    (ii) A principal in such sale.


Acting as an agent or principal with respect to grants or purchases of 
options, exercises of call options, or enterings into contracts that 
require delivery of personal property or an interest therein is not of 
itself effecting a sale. A broker that has on its books a forward 
contract under which delivery is made effects such delivery.
    (11) The term foreign currency means currency of a foreign country.
    (12) The term cash means United States dollars or any convertible 
foreign currency.
    (13) The term person includes any governmental unit and any agency 
or instrumentality thereof.
    (14) The term specified security means:
    (i) Any share of stock (or any interest treated as stock, including, 
for example, an American Depositary Receipt) in an entity organized as, 
or treated for Federal tax purposes as, a corporation, either foreign or 
domestic (provided that, solely for purposes of this paragraph 
(a)(14)(i), a security classified as stock by the issuer is treated as 
stock, and if the issuer has not classified the security, the security 
is not treated as stock unless the broker knows that the security is 
reasonably classified as stock under general Federal tax principles);
    (ii) Any debt instrument described in paragraph (a)(17) of this 
section, other than a debt instrument subject to section 1272(a)(6) 
(certain interests in or mortgages held by a REMIC, certain other debt 
instruments with payments subject to acceleration, and pools of debt 
instruments the yield on which may be affected by prepayments) or a 
short-term obligation described in section 1272(a)(2)(C);
    (iii) Any option described in paragraph (m)(2) of this section; or
    (iv) Any securities futures contract.

[[Page 288]]

    (15) The term covered security means a specified security described 
in this paragraph (a)(15).
    (i) In general. Except as provided in paragraph (a)(15)(iv) of this 
section, the following securities are covered securities:
    (A) A specified security described in paragraph (a)(14)(i) of this 
section acquired for cash in an account on or after January 1, 2011, 
except stock for which the average basis method is available under Sec. 
1.1012-1(e).
    (B) Stock for which the average basis method is available under 
Sec. 1.1012-1(e) acquired for cash in an account on or after January 1, 
2012.
    (C) A specified security described in paragraphs (a)(14)(ii) and 
(n)(2)(i) of this section (not including the debt instruments described 
in paragraph (n)(2)(ii) of this section) acquired for cash in an account 
on or after January 1, 2014.
    (D) A specified security described in paragraphs (a)(14)(ii) and 
(n)(3) of this section acquired for cash in an account on or after 
January 1, 2016.
    (E) An option described in paragraph (a)(14)(iii) of this section 
granted or acquired for cash in an account on or after January 1, 2014.
    (F) A securities futures contract described in paragraph (a)(14)(iv) 
of this section entered into in an account on or after January 1, 2014.
    (G) A specified security transferred to an account if the broker or 
other custodian of the account receives a transfer statement (as 
described in Sec. 1.6045A-1) reporting the security as a covered 
security.
    (ii) Acquired in an account. For purposes of this paragraph (a)(15), 
a security is considered acquired in a customer's account at a broker or 
custodian if the security is acquired by the customer's broker or 
custodian or acquired by another broker and delivered to the customer's 
broker or custodian. Acquiring a security in an account includes 
granting an option and entering into a short sale.
    (iii) Corporate actions and other events. For purposes of this 
paragraph (a)(15), a security acquired due to a stock dividend, stock 
split, reorganization, redemption, stock conversion, recapitalization, 
corporate division, or other similar action is considered acquired for 
cash in an account.
    (iv) Exceptions. Notwithstanding paragraph (a)(15)(i) of this 
section, the following securities are not covered securities:
    (A) Stock acquired in 2011 that is transferred to a dividend 
reinvestment plan (as described in Sec. 1.1012-1(e)(6)) in 2011. 
However, a covered security acquired in 2011 that is transferred to a 
dividend reinvestment plan after 2011 remains a covered security.
    (B) A security acquired through an event described in paragraph 
(a)(15)(iii) of this section if the basis of the acquired security is 
determined from the basis of a noncovered security.
    (C) A security that is excepted at the time of its acquisition from 
reporting under paragraph (c)(3) or (g) of this section. However, a 
broker cannot treat a security as acquired by an exempt foreign person 
under paragraph (g)(1)(i) of this section at the time of acquisition if, 
at that time, the broker knows or should have known (including by reason 
of information that the broker is required to collect under section 1471 
or 1472) that the customer is not a foreign person.
    (D) A security for which reporting under this section is required by 
Sec. 1.6049-5(d)(3)(ii) (certain securities owned by a foreign 
intermediary or flow-through entity).
    (16) The term noncovered security means any security that is not a 
covered security.
    (17) For purposes of this section, the terms debt instrument, bond, 
debt obligation, and obligation mean a debt instrument as defined in 
Sec. 1.1275-1(d) and any instrument or position that is treated as a 
debt instrument under a specific provision of the Internal Revenue Code 
(for example, a regular interest in a REMIC as defined in section 
860G(a)(1) and Sec. 1.860G-1). Solely for purposes of this section, a 
security classified as debt by the issuer is treated as debt. If the 
issuer has not classified the security, the security is not treated as 
debt unless the broker knows that the security is reasonably classified 
as debt under general Federal tax principles or that the instrument or 
position is treated as a debt instrument under a

[[Page 289]]

specific provision of the Internal Revenue Code.
    (18) For purposes of this section, the term securities futures 
contract means a contract described in section 1234B(c) whose underlying 
asset is described in paragraph (a)(14)(i) of this section and which is 
entered into on or after January 1, 2014.
    (b) Examples. The following examples illustrate the definitions in 
paragraph (a):

    Example 1. The following persons generally are brokers within the 
meaning of paragraph (a)(1):
    (i) A mutual fund, an underwriter of the mutual fund, or an agent 
for the mutual fund, any of which stands ready to redeem or repurchase 
shares in such mutual fund.
    (ii) A professional custodian (such as a bank) that regularly 
arranges sales for custodial accounts pursuant to instructions from the 
owner of the property.
    (iii) A depositary trust or other person who regularly acts as an 
escrow agent in corporate acquisitions, if the nature of the activities 
of the agent is such that the agent ordinarily would know the gross 
proceeds from sales.
    (iv) A stock transfer agent for a corporation, which agent records 
transfers of stock in such corporation, if the nature of the activities 
of the agent is such that the agent ordinarily would know the gross 
proceeds from sales.
    (v) A dividend reinvestment agent for a corporation that stands 
ready to purchase or redeem shares.
    Example 2. The following persons are not brokers within the meaning 
of paragraph (1)(a) in the absence of additional facts that indicate the 
person is a broker:
    (i) A stock transfer agent for a corporation, which agent daily 
records transfers of stock in such corporation, if the nature of the 
activities of the agent is such that the agent ordinarily would not know 
the gross proceeds from sales.
    (ii) A person (such as a stock exchange) that merely provides 
facilities in which others effect sales.
    (iii) An escrow agent or nominee if such agency is not in the 
ordinary course of a trade or business.
    (iv) An escrow agent, otherwise a broker, which agent effects no 
sales other than such transactions as are incidental to the purpose of 
the escrow (such as sales to collect on collateral).
    (v) A floor broker on a commodities exchange, which broker maintains 
no records with respect to the terms of sales.
    (vi) A corporation that issues and retires long-term debt on an 
irregular basis.
    (vii) A clearing organization.
    Example 3. A, B, and C belong to a carpool in which they commute to 
and from work. Every third day, each member of the carpool provides 
transportation for the other two members. Because the carpool 
arrangement provides solely for the informal exchange of similar 
services on a noncommercial basis, the carpool is not a barter exchange 
within the meaning of paragraph (a)(4).
    Example 4. X is an organization whose members include retail 
merchants, wholesale merchants, and persons in the trade or business of 
performing services. X's members exchange property and services among 
themselves using credits on the books of X as a medium of exchange. Each 
exchange through X is reflected on the books of X by crediting the 
account of the member providing property or services and debiting the 
account of the member receiving such property or services. X also 
provides information to its members concerning property and services 
available for exchange through X. X charges its members a commission on 
each transaction in which credits on its books are used as a medium of 
exchange. X is a barter exchange within the meaning of paragraph (a)(4) 
of this section.
    Example 5. A warehouse receipt is an interest in personal property 
for purposes of paragraph (a). Consequently, a warehouse receipt for a 
quantity of lead is a commodity under paragraph (a)(5)(ii). Similarly an 
executory contract that requires delivery of a warehouse receipt for a 
quantity of lead is a forward contract under paragraph (a)(7)(ii).
    Example 6. The only customers of a depository trust acting as an 
escrow agent in corporate acquisitions which trust is a broker, are 
shareholders to whom the trust makes payments or shareholders for whom 
the trust is acting as an agent.
    Example 7. The only customers of a stock transfer agent, which agent 
is a broker are shareholders to whom the agent makes payments or 
shareholders for whom the agent is acting as an agent,
    Example 8. D, an individual not otherwise exempt from reporting, is 
the holder of an obligation issued by P, a corporation. R, a broker, 
acting as an agent for P, retires such obligation held by D. Such 
obligor payments from R represent obligor payments by P. (See paragraph 
(c)(3)(v)). D, the person to whom the gross proceeds are paid or 
credited by R, is the customer of R.
    Example 9. E, an individual not otherwise exempt from reporting, 
maintains an account with S, a broker. On June 1, 2012, E instructs S to 
purchase stock that is a specified security for cash. S places an order 
to purchase the stock with T, another broker. E does not maintain an 
account with T. T executes the purchase. Custody of the purchased stock 
is transferred to E's account at S. Under paragraph (a)(15)(ii) of this 
section, the stock is considered acquired for cash in

[[Page 290]]

E's account at S. Because the stock is acquired on or after January 1, 
2012, under paragraph (a)(15)(i) of this section, it is a covered 
security.
    Example 10. F, an individual not otherwise exempt from reporting, is 
granted 100 shares of stock in F's employer by F's employer. Because F 
does not acquire the stock for cash or through a transfer to an account 
with a transfer statement (as described in Sec. 1.6045A-1), under 
paragraph (a)(15) of this section, the stock is not a covered security.
    Example 11. G, an individual not otherwise exempt from reporting, 
owns 400 shares of stock in Q, a corporation, in an account with U, a 
broker. Of the 400 shares, 100 are covered securities and 300 are 
noncovered securities. Q takes a corporate action to split its stock in 
a 2-for-1 split. After the stock split, G owns 800 shares of stock. 
Because the adjusted basis of 600 of the 800 shares that G owns is 
determined from the basis of noncovered securities, under paragraphs 
(a)(15)(iii) and (a)(15)(iv)(B) of this section, these 600 shares are 
not covered securities and the remaining 200 shares are covered 
securities.

    (c) Reporting by brokers--(1) Requirement of reporting. Any broker 
shall, except as otherwise provided, report in the manner prescribed in 
this section.
    (2) Sales required to be reported. Except as provided in paragraphs 
(c)(3), (c)(5), and (g) of this section, a broker is required to make a 
return of information for each sale by a customer of the broker if, in 
the ordinary course of a trade or business in which the broker stands 
ready to effect sales to be made by others, the broker effects the sale 
or closes the short position opened by the sale.
    (3) Exceptions--(i) Sales effected for exempt recipients--
    (A) In general. No return of information is required with respect to 
a sale effected for a customer that is an exempt recipient under 
paragraph (c)(3)(i)(B) of this section.
    (B) Exempt recipient defined. The term exempt recipient means--
    (1) A corporation as defined in section 7701(a)(3), whether domestic 
or foreign, except that this exclusion does not apply to sales of 
covered securities acquired on or after January 1, 2012, by an S 
corporation as defined in section 1361(a);
    (2) An organization exempt from taxation under section 501(a) or an 
individual retirement plan;
    (3) The United States or a State, the District of Columbia, a 
possession of the United States, a political subdivision of any of the 
foregoing, a wholly owned agency or instrumentality of any one or more 
of the foregoing, or a pool or partnership composed exclusively of any 
of the foregoing;
    (4) A foreign government, a political subdivision thereof, an 
international organization, or any wholly owned agency or 
instrumentality of the foregoing;
    (5) A foreign central bank of issue as defined in Sec. 1.895-
1(b)(1) (i.e., a bank that is by law or government sanction the 
principal authority, other than the government itself, issuing 
instruments intended to circulate as currency);
    (6) A dealer in securities or commodities registered as such under 
the laws of the United States or a State;
    (7) A futures commission merchant registered as such with the 
Commodity Futures Trading Commission;
    (8) A real estate investment trust (as defined in section 856);
    (9) An entity registered at all times during the taxable year under 
the Investment Company Act of 1940 (15 U.S.C. 80a-1, et seq.);
    (10) A common trust fund (as defined in section 584(a)); or
    (11) A financial institution such as a bank, mutual savings bank, 
savings and loan association, building and loan association, cooperative 
bank, homestead association, credit union, industrial loan association 
or bank, or other similar organization.
    (C) Exemption certificate--(1) In general. Except as provided in 
paragraph (c)(3)(i)(C)(2) of this section, a broker may treat a person 
described in paragraph (c)(3)(i)(B) of this section as an exempt 
recipient based on a properly completed exemption certificate (as 
provided in Sec. 31.3406(h)-3 of this chapter); the broker's actual 
knowledge that the customer is a person described in paragraph 
(c)(3)(i)(B) of this section; or the applicable indicators described in 
Sec. 1.6049-4(c)(1)(ii)(A) through (M). A broker may require an exempt 
recipient to file a properly completed exemption certificate and may 
treat an exempt recipient that fails to do so as a recipient that is not 
exempt.

[[Page 291]]

    (2) Limitation for corporate customers. For sales of covered 
securities acquired on or after January 1, 2012, a broker may not treat 
a customer as an exempt recipient described in paragraph (c)(3)(i)(B)(1) 
of this section based on the indicators of corporate status described in 
Sec. 1.6049-4(c)(1)(ii)(A). However, for sales of all securities, a 
broker may treat a customer as an exempt recipient if one of the 
following applies:
    (i) The name of the customer contains the term ``insurance 
company,'' ``indemnity company,'' ``reinsurance company,'' or 
``assurance company.''
    (ii) The name of the customer indicates that it is an entity listed 
as a per se corporation under Sec. 301.7701-2(b)(8)(i) of this chapter.
    (iii) The broker receives a properly completed exemption certificate 
(as provided in Sec. 31.3406(h)-3 of this chapter) that asserts that 
the customer is not an S corporation as defined in section 1361(a).
    (iv) The broker receives a withholding certificate described in 
Sec. 1.1441-1(e)(2)(i) that includes a certification that the person 
whose name is on the certificate is a foreign corporation.
    (ii) Excepted sales. No return of information is required with 
respect to a sale effected by a broker for a customer if the sale is an 
excepted sale. For this purpose, a sale is an excepted sale if it is--
    (A) So designated by the Internal Revenue Service in a revenue 
ruling or revenue procedure (see Sec. 601.601(d)(2) of this chapter); 
or
    (B) A sale with respect to which a return is not required by 
applying the rules of Sec. 1.6049-4(c)(4) (by substituting the term ``a 
sale subject to reporting under section 6045'' for the term ``an 
interest payment'').
    (iii) Multiple brokers. If a broker is instructed to initiate a sale 
by a person that is an exempt recipient described in paragraph 
(c)(3)(i)(B)(6), (7), or (11) of this section, no return of information 
is required with respect to the sale by that broker. In a redemption of 
stock or retirement of securities, only the broker responsible for 
paying the holder redeemed or retired, or crediting the gross proceeds 
on the sale to that holder's account, is required to report the sale.
    (iv) Cash on delivery transactions. In the case of a sale of 
securities through a cash on delivery account, a delivery versus payment 
account, or other similar account or transaction, only the broker that 
receives the gross proceeds from the sale against delivery of the 
securities sold is required to report the sale. If, however, the 
broker's customer is another broker (second-party broker) that is an 
exempt recipient, then only the second-party broker is required to 
report the sale.
    (v) Fiduciaries and partnerships. No return of information is 
required with respect to a sale effected by a custodian or trustee in 
its capacity as such or a redemption of a partnership interest by a 
partnership, provided the sale is otherwise reported by the custodian or 
trustee on a properly filed Form 1041, or the redemption is otherwise 
reported by the partnership on a properly filed Form 1065, and all 
Schedule K-1 reporting requirements are satisfied.
    (vi) Money market funds--(A) In general. No return of information is 
required with respect to a sale of shares in a regulated investment 
company that is permitted to hold itself out to investors as a money 
market fund under Rule 2a-7 under the Investment Company Act of 1940 (17 
CFR 270.2a-7).
    (B) Effective/applicability date. Paragraph (c)(3)(vi)(A) of this 
section applies to sales of shares in calendar years beginning on or 
after July 8, 2016. Taxpayers and brokers (as defined in Sec. 1.6045-
1(a)(1)), however, may rely on paragraph (c)(3)(vi)(A) of this section 
for sales of shares in calendar years beginning before July 8, 2016.
    (vii) Obligor payments on certain obligations. No return of 
information is required with respect to payments representing obligor 
payments on--
    (A) Nontransferable obligations (including savings bonds, savings 
accounts, checking accounts, and NOW accounts);
    (B) Obligations as to which the entire gross proceeds are reported 
by the broker on Form 1099 under provisions of the Internal Revenue Code 
other than section 6045 (including stripped coupons issued prior to July 
1, 1982); or
    (C) Retirement of short-term obligations (i.e., obligations with a 
fixed maturity date not exceeding 1 year from

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the date of issue) that have original issue discount, as defined in 
section 1273(a)(1), with or without application of the de minimis rule. 
The preceding sentence does not apply to a debt instrument issued on or 
after January 1, 2014. For a short-term obligation issued on or after 
January 1, 2014, see paragraph (c)(3)(xiii) of this section.
    (D) Demand obligations that also are callable by the obligor and 
that have no premium or discount. The preceding sentence does not apply 
to a debt instrument issued on or after January 1, 2014.
    (viii) Foreign currency. No return of information is required with 
respect to a sale of foreign currency other than a sale pursuant to a 
forward contract or regulated futures contract that requires delivery of 
foreign currency.
    (ix) Fractional share. No return of information is required with 
respect to a sale of a fractional share of stock if the gross proceeds 
on the sale of the fractional share are less than $20.
    (x) Certain retirements. No return of information is required from 
an issuer or its agent with respect to the retirement of book entry or 
registered form obligations as to which the relevant books and records 
indicate that no interim transfers have occurred. The preceding sentence 
does not apply to a debt instrument issued on or after January 1, 2014.
    (xi) Short sales--(A) In general. A broker may not make a return of 
information under this section for a short sale of a security entered 
into on or after January 1, 2011, until the year a customer delivers a 
security to satisfy the short sale obligation. The return must be made 
without regard to the constructive sale rule in section 1259 or to 
section 1233(h). In general, the broker must report on a single return 
the information required by paragraph (d)(2)(i) of this section for the 
short sale except that the broker must report the date the short sale 
was closed in lieu of the sale date. In applying paragraph (d)(2)(i) of 
this section, the broker must report the relevant information regarding 
the security sold to open the short sale and the adjusted basis of the 
security delivered to close the short sale and whether any gain or loss 
on the closing of the short sale is long-term or short-term (within the 
meaning of section 1222).
    (B) Short sale closed by delivery of a noncovered security. A broker 
is not required to report adjusted basis and whether any gain or loss on 
the closing of the short sale is long-term or short-term if the short 
sale is closed by delivery of a noncovered security and the return so 
indicates. A broker that chooses to report this information is not 
subject to penalties under section 6721 or 6722 for failure to report 
this information correctly if the broker indicates on the return that 
the short sale was closed by delivery of a noncovered security.
    (C) Short sale obligation transferred to another account. If a short 
sale obligation is satisfied by delivery of a security transferred into 
a customer's account accompanied by a transfer statement (as described 
in Sec. 1.6045A-1(b)(7)) indicating that the security was borrowed, the 
broker receiving custody of the security may not file a return of 
information under this section. The receiving broker must furnish a 
statement to the transferor that reports the amount of gross proceeds 
received from the short sale, the date of the sale, the quantity of 
shares, units, or amounts sold, and the Committee on Uniform Security 
Identification Procedures (CUSIP) number of the sold security (if 
applicable) or other security identifier number that the Secretary may 
designate by publication in the Federal Register or in the Internal 
Revenue Bulletin (see Sec. 601.601(d)(2) of this chapter). The 
statement to the transferor also must include the transfer date, the 
name and contact information of the receiving broker, the name and 
contact information of the transferor, and sufficient information to 
identify the customer. If the customer subsequently closes the short 
sale obligation in the transferor's account with non-borrowed 
securities, the transferor must make the return of information required 
by this section. In that event, the transferor must take into account 
the information furnished under this paragraph (c)(3)(xi)(C) on the 
return unless the transferor knows that the information furnished under 
this paragraph is incorrect or incomplete. A failure to report correct 
information that arises

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solely from this reliance is deemed to be due to reasonable cause for 
purposes of penalties under sections 6721 and 6722. See Sec. 301.6724-
1(a)(1) of this chapter.
    (xii) Cross reference. For an exception for certain sales of 
agricultural commodities and certificates issued by the Commodity Credit 
Corporation after January 1, 1993, see paragraph (c)(7) of this section.
    (xiii) Short-term obligations issued on or after January 1, 2014. No 
return of information is required under this section with respect to a 
sale (including a retirement) of a short-term obligation, as described 
in section 1272(a)(2)(C), that is issued on or after January 1, 2014.
    (xiv) Certain redemptions. No return of information is required 
under this section for payments made by a stock transfer agent (as 
described in Sec. 1.6045-1(b)(iv)) with respect to a redemption of 
stock of a corporation described in section 1297(a) with respect to a 
shareholder in the corporation if--
    (A) The stock transfer agent obtains from the corporation a written 
certification signed by a person authorized to sign on behalf of the 
corporation, that states that the corporation is described in section 
1297(a) for each calendar year during which the stock transfer agent 
relies on the provisions of paragraph (c)(3)(xiv) of this section, and 
the stock transfer agent has no reason to know that the written 
certification is unreliable or incorrect;
    (B) The stock transfer agent identifies, prior to payment, the 
corporation as a participating FFI (including a reporting Model 2 FFI) 
(as defined in Sec. 1.6049-4(f)(10) or (f)(14), respectively), or 
reporting Model 1 FFI (as defined in Sec. 1.6049-4(f)(13)), in 
accordance with the requirements of Sec. 1.1471-3(d)(4) (substituting 
the terms ``stock transfer agent'' and ``corporation'' for the terms 
``withholding agent'' and ``payee,'' respectively) and validates that 
status annually;
    (C) The stock transfer agent obtains a written certification 
representing that the corporation shall report the payment as part of 
its account holder reporting obligations under chapter 4 of the Code or 
an applicable IGA (as defined in Sec. 1.6049-4(f)(7)) and provided the 
stock transfer agent does not know that the corporation is not reporting 
the payment as required. The paying agent may rely on the written 
certification until there is a change in circumstances or the paying 
agent knows or has reason to know that the statement is unreliable or 
incorrect. A stock transfer agent that knows that the corporation is not 
reporting the payment as required under chapter 4 of the Code or an 
applicable IGA must report all payments reportable under this section 
that it makes during the year in which it obtains such knowledge; and
    (D) The stock transfer agent is not also acting in its capacity as a 
custodian, nominee, or other agent of the payee with respect to the 
payment.
    (4) Examples. The following examples illustrate the application of 
the rules in paragraph (c)(3) of this section:

    Example 1. P, an individual who is not an exempt recipient, places 
an order with B, a person generally known in the investment community to 
be a federally registered broker/dealer, to effect a sale of P's stock 
in a publicly traded corporation. B, in turn, places an order to sell 
the stock with C, a second broker, who will execute the sale. B 
discloses to C the identity of the customer placing the order. C is not 
required to make a return of information with respect to the sale 
because C was instructed by B, an exempt recipient as defined in 
paragraph (c)(3)(i)(B)(6) of this section, to initiate the sale. B is 
required to make a return of information with respect to the sale 
because P is B's customer and is not an exempt recipient.
    Example 2. Assume the same facts as in Example 1 except that B has 
an omnibus account with C so that B does not disclose to C whether the 
transaction is for a customer of B or for B's own account. C is not 
required to make a return of information with respect to the sale 
because C was instructed by B, an exempt recipient as defined in 
paragraph (c)(3)(i)(B)(6) of this section, to initiate the sale. B is 
required to make a return of information with respect to the sale 
because P is B's customer and is not an exempt recipient.
    Example 3. D, an individual who is not an exempt recipient, enters 
into a cash on delivery stock transaction by instructing K, a federally 
registered broker/dealer, to sell stock owned by D, and to deliver the 
proceeds to L, a custodian bank. Concurrently with the above 
instructions, D instructs L to deliver D's stock to K (or K's designee) 
against delivery of the proceeds from K. The records of both K and L 
with respect to this transaction show an account in the name of

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D. Pursuant to paragraph (h)(1) of this section, D is considered the 
customer of K and L. Under paragraph (c)(3)(iv) of this section, K is 
not required to make a return of information with respect to the sale 
because K will pay the gross proceeds to L against delivery of the 
securities sold. L is required to make a return of information with 
respect to the sale because D is L's customer and is not an exempt 
recipient.
    Example 4. Assume the same facts as in Example 3 except that E, a 
federally registered investment advisor, instructs K to sell stock owned 
by D and to deliver the proceeds to L. Concurrently with the above 
instructions, E instructs L to deliver D's stock to K (or K's designee) 
against delivery of the proceeds from K. The records of both K and L 
with respect to the transaction show an account in the name of D. 
Pursuant to paragraph (h)(1) of this section, D is considered the 
customer of K and L. Under paragraph (c)(3)(iv) of this section, K is 
not required to make a return of information with respect to the sale 
because K will pay the gross proceeds to L against delivery of the 
securities sold. L is required to make a return of information with 
respect to the sale because D is L's customer and is not an exempt 
recipient.
    Example 5. Assume the same facts as in Example 4 except that the 
records of both K and L with respect to the transaction show an account 
in the name of E. Pursuant to paragraph (h)(1) of this section, E is 
considered the customer of K and L. Under paragraph (c)(3)(iv) of this 
section, K is not required to make a return of information with respect 
to the sale because K will pay the gross proceeds to L against delivery 
of the securities sold. L is required to make a return of information 
with respect to the sale because E is L's customer and is not an exempt 
recipient. E is required to make a return of information with respect to 
the sale because D is E's customer and is not an exempt recipient.
    Example 6. F, an individual who is not an exempt recipient, owns 
bonds that are held by G, a federally registered broker/dealer, in an 
account for F with G designated as nominee for F. Upon the retirement of 
the bonds, the gross proceeds are automatically credited to the account 
of F. G is required to make a return of information with respect to the 
retirement because G is the broker responsible for making payments of 
the gross proceeds to F.
    Example 7. On June 24, 2010, H, an individual who is not an exempt 
recipient, opens a short sale of stock in an account with M, a broker. 
Because the short sale is entered into before January 1, 2011, paragraph 
(c)(3)(xi) of this section does not apply. Under paragraphs (c)(2) and 
(j) of this section, M must make a return of information for the year of 
the sale regardless of when the short sale is closed.
    Example 8. (i) On August 25, 2011, H opens a short sale of stock in 
an account with M, a broker. H closes the short sale with M on January 
25, 2012, by purchasing stock of the same corporation in the account in 
which H opened the short sale and delivering the stock to satisfy H's 
short sale obligation. The stock H purchased is a covered security.
    (ii) Because the short sale is entered into on or after January 1, 
2011, under paragraphs (c)(2) and (c)(3)(xi) of this section, the broker 
closing the short sale must make a return of information reporting the 
sale for the year in which the short sale is closed. Thus, M is required 
to report the sale for 2012. M must report on a single return the 
relevant information for the sold stock, the adjusted basis of the 
purchased stock, and whether any gain or loss on the closing of the 
short sale is long-term or short-term (within the meaning of section 
1222). Thus, M must report the information about the short sale opening 
and closing transactions on a single return for taxable year 2012.
    Example 9. (i) Assume the same facts as in Example 8 except that H 
also has an account with N, a broker, and satisfies the short sale 
obligation with M by borrowing stock of the same corporation from N and 
transferring custody of the borrowed stock from N to M. N indicates on 
the transfer statement that the transferred stock was borrowed in 
accordance with Sec. 1.6045A-1(b)(7).
    (ii) Under paragraph (c)(3)(xi)(C) of this section, M may not file 
the return of information required under this section. M must furnish a 
statement to N that reports the gross proceeds from the short sale on 
August 25, 2011, the date of the sale, the quantity of shares sold, the 
CUSIP number or other security identifier number of the sold stock, the 
transfer date, the name and contact information of M and N, and 
information identifying H such as H's name and the account number from 
which H transferred the borrowed stock.
    (iii) N must report the gross proceeds from the short sale, the date 
the short sale was closed, the adjusted basis of the stock acquired to 
close the short sale, and whether any gain or loss on the closing of the 
short sale is long-term or short-term (within the meaning of section 
1222) on the return of information N is required to file under paragraph 
(c)(2) of this section when H closes the short sale in the account with 
N.

    (5) Form of reporting for regulated futures contracts--(i) In 
general. A broker effecting closing transactions in regulated futures 
contracts shall report information with respect to regulated futures 
contracts solely in the manner prescribed in this paragraph (c)(5). In 
the case of a sale that involves making

[[Page 295]]

delivery pursuant to a regulated futures contract, only the profit or 
loss on the contract is reported as a transaction with respect to 
regulated futures contracts under this paragraph (c)(5); such sales are, 
however, subject to reporting under paragraph (d)(2). The information 
required under this paragraph (c)(5) must be reported on a calendar year 
basis, unless the broker is advised in writing by an account's owner 
that the owner's taxable year is other than a calendar year and the 
broker elects to report with respect to regulated futures contracts in 
such account on the basis of the owner's taxable year. The following 
information must be reported as required by Form 1099 with respect to 
regulated futures contracts held in a customer's account:
    (A) The name, address, and taxpayer identification number of the 
customer.
    (B) The net realized profit or loss from all regulated futures 
contracts closed during the calendar year.
    (C) The net unrealized profit or loss in all open regulated futures 
contracts at the end of the preceding calendar year.
    (D) The net unrealized profit or loss in all open regulated futures 
contracts at the end of the calendar year.
    (E) The aggregate profit or loss from regulated futures contracts 
((b) + (d)-(c)).
    (F) Any other information required by Form 1099. See 17 CFR 1.33. 
For this purpose, the end of a year is the close of business of the last 
business day of such year. In reporting under this paragraph (c)(5), the 
broker shall make such adjustments for commissions that have actually 
been paid and for option premiums as are consistent with the books of 
the broker. No additional returns of information with respect to 
regulated futures contracts so reported are required.
    (ii) Determination of profit or loss from foreign currency 
contracts. A broker effecting a closing transaction in foreign currency 
contracts (as defined in section 1256(g)) shall report information with 
respect to such contracts in the manner prescribed in paragraph 
(c)(5)(i) of this section. If a foreign currency contract is closed by 
making or taking delivery, the net realized profit or loss for purposes 
of paragraph (c)(5)(i)(B) of this section is determined by comparing the 
contract price to the spot price for the contract currency at the time 
and place specified in the contract. If a foreign currency contract is 
closed by entry into an offsetting contract, the net realized profit or 
loss for purposes of paragraph (c)(5)(i)(B) of this section is 
determined by comparing the contract price to the price of the 
offsetting contract. The net unrealized profit or loss in a foreign 
currency contract for purposes of paragraphs (c)(5)(i) (C) and (D) of 
this section is determined by comparing the contract price to the 
broker's price for similar contracts at the close of business of the 
relevant year.
    (iii) Examples. The following examples illustrate the application of 
the rules in this paragraph (c)(5):

    Example 1. On October 30, 1984, A, an individual who is a calendar 
year taxpayer not otherwise exempt from reporting, buys one March 1985 
put on Treasury Bond futures (i.e. A purchases an option to enter into a 
short regulated futures contract of $100,000 face value U.S. Treasury 
bonds). A pays $500 for the option. On December 19, 1984, A, through B, 
exercises the option and enters into the futures contract. On February 
15, 1985, A, through B, enters into a closing transaction with respect 
to the futures contract. These are A's only transactions in the account. 
Since B's books list A's regulated futures contract on December 31, 
1984, B must report for A, for 1984, the unrealized profit or loss in 
the contract as of December 31, 1984. For 1985, B will report the same 
amount for A as the unrealized profit or loss at the beginning of 1985. 
The return of information for 1985 will also include the gain or loss 
from the contract in the net realized profit or loss from all regulated 
futures contracts sales during 1985.
    Example 2. The facts are the same as in Example (1) except that A 
does not enter into the closing transaction, but instead, on March 20, 
1985, B informs A that A will make delivery under the contract. On March 
22, 1985, A does so; consequently, A becomes entitled to the gross 
proceeds. B enters the closing transaction on its books on March 20, 
1985. In addition to the returns of information required by paragraph 
(c)(5), as described in Example (1), B must report the March 22, 1985 
delivery as a separate transaction. B may use as the sale date for the 
delivery either March 20, 1985, the date the transaction is entered on 
the books of B, or March 22, 1985, the date A becomes entitled to the 
gross proceeds. B may not deduct the

[[Page 296]]

$500 premium from the gross proceeds with respect to the March 22, 1985 
delivery.
    Example 3. The facts are the same as in Example (2) except that A 
buys a call on Treasury bond futures and takes delivery. B will supply 
the returns of information required by paragraph (c)(5), as described in 
Example (1). B is not required to make a return of information with 
respect to A's taking delivery.
    Example 4. C, an individual who is a calendar year taxpayer not 
otherwise exempt from reporting, has an account with D, a broker. C 
trades both regulated futures contracts and forward contracts through 
C's account with D. D must report C's regulated futures contracts on an 
annual basis as required by paragraph (c)(5). With respect to C's 
forward contracts, D may elect to use the calendar month, quarter, or 
year as D's reporting period as provided in paragraph (c)(6).

    (6) Reporting periods and filing groups--(i) Reporting period--(A) 
In general. A broker may elect to use the calendar month, quarter, or 
year as the broker's reporting period. A broker may separately elect a 
reporting period for each filing group.
    (B) Election. For each calendar year, a broker shall elect a 
reporting period by filing Forms 1096 and 1099 in the manner elected. A 
different reporting period may be subsequently elected by filing in the 
manner subsequently elected, provided no duplication of reported 
transactions results.
    (ii) Filing group--(A) In general. A broker may elect to group 
customers or customer accounts by office, branch, department or other 
method of operational classification and separately file Forms 1096 and 
1099 for each filing group.
    (B) Election. For each calendar year, a broker shall elect filing 
groups by filing Forms 1096 and 1099 in the manner elected. Different 
filing groups may be subsequently elected by filing in the manner 
subsequently elected, provided no duplication of reported transactions 
results.
    (iii) Example. The following example illustrates the rules of this 
paragraph (c)(6):

    Example. The A department of C, a broker, files a separate report 
for each month of 1984, whereas the B department of C files one report 
for all of 1984. C makes no other reports or returns of information 
under section 6045 for 1984. C had thereby elected two filing groups for 
1984, the A department and the B department. The A department has the 
calendar month as its 1984 reporting period, whereas the B department 
has the calendar year as its 1984 reporting period. The same result 
would occur if A and B were offices or branches of C.

    (7) Exception for certain sales of agricultural commodities and 
commodity certificates--(i) Agricultural commodities. No return of 
information is required under section 6045 for a spot or forward sale of 
an agricultural commodity. This paragraph (c)(7)(i) does not except from 
reporting sales of agricultural commodities pursuant to regulated 
futures contracts, sales of derivative interests in agricultural 
commodities, or sales described in paragraph (c)(7)(iii) of this 
section.
    (ii) Commodity Credit Corporation certificates. Except as otherwise 
provided in a revenue ruling or revenue procedure, no return of 
information is required under section 6045 with respect to a sale of a 
commodity certificate issued by the Commodity Credit Corporation under 7 
CFR 1470.4 (1990).
    (iii) Sales involving designated warehouses. Paragraph (c)(7)(i) of 
this section does not apply to any sale involving a warehouse receipt 
for an agricultural commodity issued by a designated warehouse for an 
agricultural commodity of the type for which the warehouse is a 
designated warehouse.
    (iv) Definitions. For purposes of this paragraph (c)(7):
    (A) Agricultural commodity. An ``agricultural commodity'' includes, 
but is not limited to, a commodity within the meaning of paragraph 
(a)(5) of this section that is a grain, feed, livestock, meat, oil seed, 
timber, or fiber.
    (B) Spot sale. A spot sale is a sale that results in the 
substantially contemporaneous delivery of a commodity.
    (C) Forward sale. A forward sale is a sale pursuant to a forward 
contract within the meaning of paragraph (a)(7) of this section.
    (D) Designated warehouse. A designated warehouse is a warehouse, 
depository, or other similar entity, designated by a commodity exchange 
under 7 CFR 1.43 (1992), in which or out of which a particular type of 
agricultural commodity is deliverable in satisfaction of a regulated 
futures contract.

[[Page 297]]

    (d) Information required--(1) In general. A broker that is required 
to make a return of information under paragraph (c) of this section 
during a reporting period is required to report for each filing group on 
a separate Form 1096, ``Annual Summary and Transmittal of U.S. 
Information Returns,'' or any successor form, the information required 
by the form in the manner and number of copies required by the form.
    (2) Transactional reporting--(i) Required information. Except as 
provided in paragraph (c)(5) of this section, for each sale for which a 
broker is required to make a return of information under this section, 
the broker must report on Form 1099-B, ``Proceeds From Broker and Barter 
Exchange Transactions,'' or any successor form the name, address, and 
taxpayer identification number of the customer, the property sold, the 
CUSIP number of the security sold (if applicable) or other security 
identifier number that the Secretary may designate by publication in the 
Federal Register or in the Internal Revenue Bulletin (see Sec. 
601.601(d)(2) of this chapter), the adjusted basis of the security sold, 
whether any gain or loss with respect to the security sold is long-term 
or short-term (within the meaning of section 1222), the gross proceeds 
of the sale, the sale date, and other information required by the form 
in the manner and number of copies required by the form. In addition, 
for a sale of a covered security on or after January 1, 2014, a broker 
must report on Form 1099-B whether any gain or loss is ordinary. See 
paragraph (m) of this section for additional rules related to options 
and paragraph (n) of this section for additional rules related to debt 
instruments.
    (ii) Specific identification of securities. Except as provided in 
Sec. 1.1012-1(e)(7)(ii), for a specified security described in 
paragraph (a)(14)(i) of this section sold on or after January 1, 2011, 
or for a specified security described in paragraph (a)(14)(ii) of this 
section sold on or after January 1, 2014, a broker must report a sale of 
less than the entire position in an account of a specified security that 
was acquired on different dates or at different prices consistently with 
a customer's adequate and timely identification of the security to be 
sold. See Sec. 1.1012-1(c). If the customer does not provide an 
adequate and timely identification for the sale, the broker must first 
report the sale of securities in the account for which the broker does 
not know the acquisition or purchase date followed by the earliest 
securities purchased or acquired, whether covered securities or 
noncovered securities.
    (iii) Sales of noncovered securities. A broker is not required to 
report adjusted basis and the character of any gain or loss for the sale 
of a noncovered security if the return identifies the sale as a sale of 
a noncovered security. A broker that chooses to report this information 
for a noncovered security is not subject to penalties under section 6721 
or 6722 for failure to report this information correctly if the return 
identifies the sale as a sale of a noncovered security. For purposes of 
this paragraph (d)(2)(iii), a broker must treat a security for which a 
broker makes the single-account election described in Sec. 1.1012-
1(e)(11)(i) as a covered security.
    (iv) Information from other parties and other accounts--(A) Transfer 
and issuer statements. When reporting a sale of a covered security, a 
broker must take into account all information, other than the 
classification of the security (such as stock), furnished on a transfer 
statement (as described in Sec. 1.6045A-1) and all information 
furnished or deemed furnished on an issuer statement (as described in 
Sec. 1.6045B-1), unless the statement is incomplete or the broker has 
actual knowledge that it is incorrect. A broker may treat a customer as 
a minority shareholder when taking the information on an issuer 
statement into account unless the broker knows that the customer is a 
majority shareholder and the issuer statement reports the action's 
effect on the basis of majority shareholders. A failure to report 
correct information that arises solely from reliance on information 
furnished on a transfer statement or issuer statement is deemed to be 
due to reasonable cause for purposes of penalties under sections 6721 
and 6722. See Sec. 301.6724-1(a)(1) of this chapter.
    (B) Other information. A broker is permitted, but not required, to 
take into account information about a covered

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security other than what is furnished on a transfer statement or issuer 
statement, including any information the broker has about securities 
held by the same customer in other accounts with the broker. For 
purposes of penalties under sections 6721 and 6722, a broker that takes 
into account information received from a customer or third party other 
than information furnished on a transfer statement or issuer statement 
is deemed to have relied upon this information in good faith if the 
broker neither knows nor has reason to know that the information is 
incorrect. See Sec. 301.6724-1(c)(6) of this chapter.
    (v) Failure to receive a complete transfer statement. A broker that 
has not received a complete transfer statement as required under Sec. 
1.6045A-1(a)(3) for a transfer of a specified security must request a 
complete statement from the applicable person effecting the transfer 
unless, under Sec. 1.6045A-1(a), the transferor has no duty to furnish 
a transfer statement for the transfer. The broker is only required to 
make this request once. If the broker does not receive a complete 
transfer statement after requesting it, the broker may treat the 
security as a noncovered security upon its subsequent sale or transfer. 
A transfer statement for a covered security is complete if, in the view 
of the receiving broker, it provides sufficient information to comply 
with this section when reporting the sale of the security. A transfer 
statement for a noncovered security is complete if it indicates that the 
security is a noncovered security.
    (vi) Reporting by other parties after a sale--(A) Transfer 
statements. If a broker receives a transfer statement indicating that a 
security is a covered security after the broker reports the sale of the 
security, the broker must file a corrected return within thirty days of 
receiving the statement unless the broker reported the required 
information on the original return consistently with the transfer 
statement.
    (B) Issuer statements. If a broker receives or is deemed to receive 
an issuer statement after the broker reports the sale of a covered 
security, the broker must file a corrected return within thirty days of 
receiving the issuer statement unless the broker reported the required 
information on the original return consistently with the issuer 
statement.
    (C) Exception. A broker is not required to file a corrected return 
under this paragraph (d)(2)(vi) if the broker receives the transfer 
statement or issuer statement more than three years after the broker 
filed the return.
    (vii) Examples. The following examples illustrate the rules of this 
paragraph (d)(2):

    Example 1. (i) On February 22, 2012, K sells 100 shares of stock of 
C, a corporation, at a loss in an account held with F, a broker. On 
March 15, 2012, K purchases 100 shares of C stock for cash in an account 
with G, a different broker. Because K acquires the stock purchased on 
March 15, 2012, for cash in an account after January 1, 2012, under 
paragraph (a)(15) of this section, the stock is a covered security. K 
asks G to increase K's adjusted basis in the stock to account for the 
application of the wash sale rules under section 1091 to the loss 
transaction in the account held with F.
    (ii) Under paragraph (d)(2)(iv)(B) of this section, G is not 
required to take into account the information provided by K when 
subsequently reporting the adjusted basis and whether any gain or loss 
on the sale is long-term or short-term. If G chooses to take this 
information into account, under paragraph (d)(2)(iv)(B) of this section, 
G is deemed to have relied upon the information received from K in good 
faith for purposes of penalties under sections 6721 and 6722 if G 
neither knows nor has reason to know that the information provided by K 
is incorrect.
    Example 2. (i) L purchases shares of stock of a single corporation 
in an account with F, a broker, on April 17, 1969, April 17, 2012, April 
17, 2013, and April 17, 2014. In January 2015, L sells all the stock.
    (ii) Under paragraph (d)(2)(i) of this section, F must separately 
report the gross proceeds and adjusted basis attributable to the stock 
purchased in 2014, for which the gain or loss on the sale is short-term, 
and the combined gross proceeds and adjusted basis attributable to the 
stock purchased in 2012 and 2013, for which the gain or loss on the sale 
is long-term. Under paragraph (d)(2)(iii) of this section, F must also 
separately report the gross proceeds attributable to the stock purchased 
in 1969 as the sale of noncovered securities in order to avoid treatment 
of this sale as the sale of covered securities.

    (3) Sales between interest payment dates. For each sale of a debt 
instrument prior to maturity with respect to which a broker is required 
to make a return of information under this section, a broker must show 
separately on

[[Page 299]]

Form 1099 the amount of accrued and unpaid qualified stated interest as 
of the sale date that must be reported by the customer as interest 
income under Sec. 1.61-7(d). See Sec. 1.1273-1(c) for the definition 
of qualified stated interest. Such interest information must be shown in 
the manner and at the time required by Form 1099 and section 6049.
    (4) Sale date. With respect to sales of property that are reportable 
under this section, a broker must report a sale as occurring on the date 
the sale is entered on the books of the broker.
    (5) Gross proceeds. For purposes of this section, gross proceeds on 
a sale are the total amount paid to the customer or credited to the 
customer's account as a result of the sale reduced by the amount of any 
qualified stated interest reported under paragraph (d)(3) of this 
section and increased by any amount not paid or credited by reason of 
repayment of margin loans. In the case of a closing transaction (other 
than a closing transaction related to an option) that results in a loss, 
gross proceeds are the amount debited from the customer's account. For 
sales before January 1, 2014, a broker may, but is not required to, 
reduce gross proceeds by the amount of commissions and transfer taxes, 
provided the treatment chosen is consistent with the books of the 
broker. For sales on or after January 1, 2014, a broker must reduce 
gross proceeds by the amount of commissions and transfer taxes related 
to the sale of the security. For securities sold pursuant to the 
exercise of an option granted or acquired before January 1, 2014, a 
broker may, but is not required to, take the option premiums into 
account in determining the gross proceeds of the securities sold, 
provided the treatment chosen is consistent with the books of the 
broker. For securities sold pursuant to the exercise of an option 
granted or acquired on or after January 1, 2014, or for the treatment of 
an option granted or acquired on or after January 1, 2014, see paragraph 
(m) of this section. A broker must report the gross proceeds of 
identical stock (within the meaning of Sec. 1.1012-1(e)(4)) by 
averaging the proceeds of each share if the stock is sold at separate 
times on the same calendar day in executing a single trade order and the 
broker executing the trade provides a single confirmation to the 
customer that reports an aggregate total price or an average price per 
share. However, a broker may not average the proceeds if the customer 
notifies the broker in writing of an intent to determine the proceeds of 
the stock by the actual proceeds per share and the broker receives the 
notification by January 15 of the calendar year following the year of 
the sale. A broker may extend the January 15 deadline but not beyond the 
due date for filing the return required under this section.
    (6) Adjusted basis--(i) In general. For purposes of this section, 
the adjusted basis of a security is determined from the initial basis 
under paragraph (d)(6)(ii) of this section as of the date the security 
is acquired in an account, increased by the commissions and transfer 
taxes related to its sale to the extent not accounted for in gross 
proceeds as described in paragraph (d)(5) of this section. A broker is 
not required to consider transactions or events occurring outside the 
account except for an organizational action taken by an issuer during 
the period the broker holds custody of the security (beginning with the 
date that the broker receives a transferred security) reported on an 
issuer statement (as described in Sec. 1.6045B-1) furnished or deemed 
furnished to the broker. Except as otherwise provided in paragraph (n) 
of this section, a broker is not required to consider customer 
elections. For rules related to the adjusted basis of a debt instrument, 
see paragraph (n) of this section.
    (ii) Initial basis--(A) Cost basis. For a security acquired for 
cash, the initial basis generally is the total amount of cash paid by 
the customer or credited against the customer's account for the 
security, increased by the commissions and transfer taxes related to its 
acquisition. A broker may, but is not required to, take option premiums 
into account in determining the initial basis of securities purchased or 
acquired pursuant to the exercise of an option granted or acquired 
before January 1, 2014. For rules related to options granted or acquired 
on or after January 1, 2014, see paragraph (m) of this section. A broker 
may, but is not

[[Page 300]]

required to, increase initial basis for income recognized upon the 
exercise of a compensatory option or the vesting or exercise of other 
equity-based compensation arrangements, granted or acquired before 
January 1, 2014. A broker may not increase initial basis for income 
recognized upon the exercise of a compensatory option or the vesting or 
exercise of other equity-based compensation arrangements, granted or 
acquired on or after January 1, 2014.A broker must report the basis of 
identical stock (within the meaning of Sec. 1.1012-1(e)(4)) by 
averaging the basis of each share if the stock is purchased at separate 
times on the same calendar day in executing a single trade order and the 
broker executing the trade provides a single confirmation to the 
customer that reports an aggregate total price or an average price per 
share. However, a broker may not average the basis if the customer 
timely notifies the broker in writing of an intent to determine the 
basis of the stock by the actual cost per share in accordance with Sec. 
1.1012-1(c)(1)(ii).
    (B) Basis of transferred securities--(1) In general. The initial 
basis of a security transferred to an account is generally the basis 
reported on the transfer statement (as described in Sec. 1.6045A-1).
    (2) Securities acquired by gift. If a transfer statement indicates 
that the security is acquired as a gift, a broker must apply the 
relevant basis rules for property acquired by gift in determining the 
initial basis, but is not required to adjust basis for gift tax. A 
broker must treat the initial basis as equal to the gross proceeds from 
the sale determined under paragraph (d)(5) of this section if the 
relevant basis rules for property acquired by gift prevent recognizing 
both gain and loss, or if the relevant basis rules treat the initial 
basis of the security as its fair market value as of the date of the 
gift and the broker neither knows nor can readily ascertain this value. 
If the transfer statement did not report a date for the gift, the broker 
must treat the settlement date for the transfer as the date of the gift.
    (iii) Adjustments for wash sales--(A) In general. A broker must 
apply the wash sale rules under section 1091 if both the sale and 
purchase transactions are of covered securities with the same CUSIP 
number or other security identifier number that the Secretary may 
designate by publication in the Federal Register or in the Internal 
Revenue Bulletin (see Sec. 601.601(d)(2) of this chapter). When 
reporting the sale transaction that triggered the wash sale, the broker 
must report the amount of loss that is disallowed by section 1091 in 
addition to gross proceeds and adjusted basis. The broker must increase 
the basis of the purchased security by the amount of loss disallowed on 
the sale transaction.
    (B) Securities in different accounts. A broker is not required to 
apply paragraph (d)(6)(iii)(A) of this section if the securities are 
purchased and sold from different accounts, if the purchased security is 
transferred to another account before the wash sale, or if the 
securities are treated as held in separate accounts under Sec. 1.1012-
1(e). A security is not purchased in an account if it is purchased in 
another account and transferred into the account.
    (C) Effect of election under section 475(f)(1). A broker is not 
required to apply paragraph (d)(6)(iii)(A) of this section to securities 
in an account if a customer has in writing both informed the broker that 
the customer has made a valid and timely election under section 
475(f)(1) and identified the account as solely containing securities 
subject to the election. For purposes of this paragraph (d)(6)(iii)(C), 
a writing may be in electronic format. If a customer subsequently 
informs a broker that the election no longer applies to the customer or 
the account, the broker must prospectively apply paragraph 
(d)(6)(iii)(A) of this section but is not required to apply paragraph 
(d)(6)(iii)(A) of this section for the period covered by the customer's 
prior instruction to the broker. A taxpayer that is not a trader in 
securities within the meaning of section 475(f)(1) does not become a 
trader in securities, or create an inference that it is a trader in 
securities, by notifying a broker that it has made a valid and timely 
election under section 475(f)(1).
    (D) Reporting at or near the time of sale. If a wash sale occurs 
after a

[[Page 301]]

broker has completed a return or statement reporting a sale of a covered 
security, the broker must redetermine adjusted basis under this 
paragraph (d)(6)(iii) and, if the return or statement included 
information inconsistent with this redetermination, correct the return 
or statement by the applicable original due date set forth in this 
section for the return or statement.
    (iv) Certain adjustments not taken into account. A broker is not 
required to apply section 1259 (regarding constructive sales), section 
475 (regarding the mark-to-market method of accounting), section 1296 
(regarding the mark-to-market method of accounting for marketable stock 
in a passive foreign investment company), or section 1092 (regarding 
straddles) when reporting adjusted basis.
    (v) Average basis method adjustments. For a covered security for 
which basis may be determined by the average basis method, a broker must 
compute basis using the average basis method if a customer validly 
elects that method for the securities sold or, in the absence of any 
instruction from the customer, if the broker chooses that method as its 
default basis determination method. See Sec. 1.1012-1(e).
    (vi) Regulated investment company and real estate investment trust 
adjustments. A broker must adjust the basis of a covered security issued 
by a regulated investment company or real estate investment trust for 
the effects of undistributed capital gains reported to or by the broker 
under section 852(b)(3)(D) or section 857(b)(3)(D).
    (vii) Examples. The following examples, in which all the securities 
are covered securities, illustrate the rules of this paragraph (d)(6):

    Example 1. (i) On September 21, 2012, P purchases 100 shares of 
stock in an account with J, a broker. On December 14, 2012, P purchases 
100 shares of stock with the same CUSIP number in the same account. On 
January 4, 2013, P sells the 100 shares purchased on September 21, 2012, 
at a loss.
    (ii) Because the sale of stock on January 4, 2013, and the purchase 
of stock on December 14, 2012, are of covered securities with the same 
CUSIP number, under paragraph (d)(6)(iii)(A) of this section, J must 
report the amount of loss disallowed by section 1091 in addition to the 
gross proceeds of the sale and the adjusted basis of the September 21, 
2012, stock.
    (iii) P later sells the stock acquired on December 14, 2012. When 
reporting the sale of the stock, under paragraph (d)(6)(iii)(A) of this 
section, J must increase the adjusted basis of the stock acquired on 
December 14, 2012, by the amount of loss disallowed on the January 4, 
2013, sale.
    Example 2. Assume the same facts as in Example 1 except that the 
December 14, 2012, purchase occurs in another account P maintains with 
J. Because the December 14, 2012, purchase does not occur in the same 
account as the sale of the September 21, 2012, stock, under paragraph 
(d)(6)(iii)(B) of this section, J is not required to apply the wash sale 
rules in reporting the sale of stock acquired on September 21, 2012, or 
December 14, 2012. Under paragraphs (d)(2)(iii) and (d)(2)(iv)(B) of 
this section, J may choose to apply the wash sale rules as if the 
transactions occurred in the same account. The result is the same 
whether P keeps the stock purchased on December 14, 2012, in the other 
account or transfers the stock into the account from which P sells the 
stock sold on January 4, 2013.
    Example 3. (i) K, a regulated investment company, offers two funds 
for sale, Fund D and Fund E. On April 22, 2012, Q purchases shares of 
Fund D and pays a separate load charge. By paying the load charge, Q 
acquires a reinvestment right in shares of Fund E. On April 23, 2012, at 
the request of Q, Fund D redeems the shares. Q uses the proceeds to 
purchase shares of Fund E in a separate account. As a result of the 
reinvestment right, Q pays no load charge in purchasing the Fund E 
shares.
    (ii) Under paragraph (d)(6)(i) of this section, when reporting 
adjusted basis of the Fund D and Fund E shares at the time of their 
redemption, K is not required to adjust basis for any deferral of the 
load charge under section 852(f), because the transactions concerning 
Fund D and Fund E occur in separate accounts. Under paragraph 
(d)(2)(iv)(B) of this section, K may choose to apply the provisions of 
section 852(f).
    Example 4. R, an employee of C, a corporation, participates in C's 
stock option plan. On April 2, 2014, C grants R a nonstatutory option 
under the plan to buy 100 shares of stock. The option becomes 
substantially vested on April 2, 2015. On October 2, 2015, R exercises 
the option and purchases 100 shares. On December 2, 2015, R sells the 
100 shares. Under paragraph (d)(6)(ii)(A) of this section, C is required 
to determine adjusted basis from the amount R pays under the terms of 
the option. Under paragraph (d)(6)(ii)(A) of this section, C is not 
permitted to adjust basis for any amount R must include as wage income 
with respect to the October 2, 2015, stock purchase.


[[Page 302]]


    (7) Long-term or short-term gain or loss--(i) In general. In 
determining whether any gain or loss on the sale of a security is long-
term or short-term within the meaning of section 1222 for purposes of 
this section, a broker must consider the information reported on a 
transfer statement (as described in Sec. 1.6045A-1) and apply the 
relevant rules for property acquired from a decedent or by gift. A 
broker is not required to consider transactions, elections, or events 
occurring outside the account except for an organizational action taken 
by an issuer during the period the broker holds custody of the security 
(beginning with the date that the broker receives a transferred 
security) reported on an issuer statement (as described in Sec. 
1.6045B-1) furnished or deemed furnished to the broker.
    (ii) Adjustments for wash sales--(A) In general. A broker must apply 
the wash sale rules under section 1091 if both the sale and purchase 
transactions are of covered securities with the same CUSIP number or 
other security identifier number that the Secretary may designate by 
publication in the Federal Register or in the Internal Revenue Bulletin 
(see Sec. 601.601(d)(2) of this chapter).
    (B) Securities in different accounts. A broker is not required to 
apply paragraph (d)(7)(ii)(A) of this section if the securities are 
purchased and sold from different accounts, if the purchased security is 
transferred to another account before the wash sale, or if the 
securities are treated as held in separate accounts under Sec. 1.1012-
1(e). A security is not purchased in an account if it is purchased in 
another account and transferred into the account.
    (C) Effect of election under section 475(f)(1). A broker is not 
required to apply paragraph (d)(7)(ii)(A) of this section to securities 
in an account if a customer has in writing both informed the broker that 
the customer has made a valid and timely election under section 
475(f)(1) and identified the account as solely containing securities 
subject to the election. For purposes of this paragraph (d)(7)(ii)(C), a 
writing may be in electronic format. If a customer subsequently informs 
a broker that the election no longer applies to the customer or the 
account, the broker must prospectively apply paragraph (d)(7)(ii)(A) of 
this section but is not required to apply paragraph (d)(7)(ii)(A) of 
this section for the period covered by the customer's prior instruction 
to the broker. A taxpayer that is not a trader in securities within the 
meaning of section 475(f)(1) does not become a trader in securities, or 
create an inference that it is a trader in securities, by notifying a 
broker that it has made a valid and timely election under section 
475(f)(1).
    (D) Reporting at or near the time of sale. If a wash sale occurs 
after a broker has completed a return or statement reporting a sale of a 
covered security, the broker must redetermine whether gain or loss on 
the sale is long-term or short-term under this paragraph (d)(7)(ii) and, 
if the return or statement included information inconsistent with this 
redetermination, correct the return or statement by the applicable 
original due date set forth in this section for the return or statement.
    (iii) Constructive sale and mark-to-market adjustments. A broker is 
not required to apply section 1259 (regarding constructive sales), 
section 475 (regarding the mark-to-market method of accounting), or 
section 1296 (regarding the mark-to-market method of accounting for 
marketable stock in a passive foreign investment company) when 
determining whether any gain or loss on the sale of a security is long-
term or short-term.
    (iv) Regulated investment company and real estate investment trust 
adjustments. A broker is not required to apply sections 852(b)(4)(A) and 
857(b)(8) (regarding effect of distributed and undistributed capital 
gain dividends on a loss on sale of regulated investment company or real 
estate investment trust shares held six months or less) or section 
852(b)(4)(B) (regarding loss disallowance on sale of regulated 
investment company shares held six months or less due to receipt of tax-
exempt dividends) when determining whether any gain or loss on the sale 
of a security is long-term or short-term.
    (v) No adjustments for hedging transactions or offsetting positions. 
A broker is not required to apply section 1092 (regarding straddles), 
section 1233(b)(2)

[[Page 303]]

(regarding effect of short sale on holding period of substantially 
identical property), or Sec. 1.1221-2(b) (regarding hedging 
transactions) when determining whether any gain or loss on the sale of a 
security is long-term or short-term.
    (8) Conversion into United States dollars of amounts paid or 
received in foreign currency--(i) Conversion rules. (A) When a payment 
other than a payment of interest is made in a foreign currency, a broker 
must determine the U.S. dollar amount of the payment by converting the 
foreign currency into U.S. dollars on the date it receives, credits, or 
makes the payment, as applicable, at the spot rate (as defined in Sec. 
1.988-1(d)(1)) or pursuant to a reasonable spot rate convention. (For 
interest payments, see paragraph (n)(4)(v) of this section concerning a 
customer's spot rate election.) When reporting the sale of a security 
traded on an established securities market, however, a broker must 
determine the U.S. dollar amounts at the spot rate or pursuant to a 
reasonable spot rate convention as of the settlement date of the 
purchase or sale, as applicable.
    (B) A reasonable spot rate convention includes a month-end spot rate 
or a monthly average spot rate. A spot rate convention must be used 
consistently for all non-dollar amounts reported and from year to year. 
The convention may not be changed without the consent of the 
Commissioner or his or her delegate.
    (ii) Effect of identification under Sec. 1.988-5(a), (b), or (c) 
when the taxpayer effects a sale and a hedge through the same broker. In 
lieu of the amounts reportable under paragraph (d)(8)(i) of this 
section, the gross proceeds and adjusted basis must each be the 
integrated amount computed under Sec. 1.988-5(a), (b) or (c) if--
    (A) A taxpayer effects through a broker a sale or exchange of 
nonfunctional currency (as defined in Sec. 1.988-1(c)) and hedges all 
or a part of the sale as provided in Sec. 1.988-5(a), (b) or (c) with 
the same broker; and
    (B) The taxpayer complies with the requirements of Sec. 1.988-5(a), 
(b) or (c) and so notifies the broker prior to the end of the calendar 
year in which the sale occurs.
    (iii) Example. The following example illustrates the rules of this 
paragraph (d)(8):

    Example. (i) Z, an individual, is a U.S. citizen. On July 4, 2012, Z 
purchases stock of C, SA, a French corporation traded on an established 
securities market, in an account with Q, a broker. Q uses a daily spot 
rate for converting euro and U.S. dollars. Z pays [euro]1,200 for the 
stock. On the settlement date for the purchase, the spot rate is [euro]1 
= $1.30. On October 4, 2012, Z sells the stock for [euro]1,000. On the 
settlement date for the sale, the spot rate is [euro]1 = $1.35. On 
October 5, 2012, Z purchases additional shares of C, SA, that cause the 
[euro]200 loss on the stock sold on October 4, 2012, to be disallowed 
under section 1091.
    (ii) Under paragraph (d)(8)(i)(A) of this section, Q must determine 
adjusted basis by converting the [euro]1,200 paid on behalf of Z into 
U.S. dollars using the [euro]1 = $1.30 spot rate on the settlement date 
of the purchase. Q must convert the [euro]1,000 gross proceeds into U.S. 
dollars using the [euro]1 = $1.35 spot rate on the settlement date for 
the sale. Thus, Q must report adjusted basis equal to $1,560, gross 
proceeds equal to $1,350, and $210 in loss disallowed by section 1091.

    (9) Coordination with the reporting rules for widely held fixed 
investment trusts under Sec. 1.671-5. Information required to be 
reported under section 6045(a) for a sale of a security in a widely held 
fixed investment trust (WHFIT) (as defined under Sec. 1.671-5) and the 
sale of an interest in a WHFIT must be reported as provided by this 
section unless the information is also required to be reported under 
Sec. 1.671-5. To the extent that this section requires additional 
information under section 6045(g), those requirements are deemed to be 
met through compliance with the rules in Sec. 1.671-5.
    (e) Reporting of barter exchanges--(1) Requirement of reporting. A 
barter exchange shall, except as otherwise provided, report in the 
manner prescribed in this section.
    (2) Exchanges required to be reported--(i) In general. Except as 
provided in paragraphs (e)(2)(ii) and (g) of this section, a barter 
exchange must make a return of information for exchanges of personal 
property or services through the barter exchange during the calendar 
year among its members or clients or between these persons and the 
barter exchange. For this purpose, property or services are exchanged 
through a barter exchange if payment

[[Page 304]]

for property or services is made by means of a credit on the books of 
the barter exchange or scrip issued by the barter exchange or if the 
barter exchange arranges a direct exchange of property or services among 
its members or clients or exchanges property or services with a member 
or client.
    (ii) Exemption. A barter exchange through which there are fewer than 
100 exchanges during the calendar year is not required to report for, or 
make a return of information with respect to exchanges during, such 
calendar year. The Commissioner may require multiple barter exchanges to 
be combined for purposes of the proceeding sentence upon a determination 
that a material purpose for the formation or continuation of one or more 
of the barter exchanges to be combined was to receive one or more 
exemptions pursuant to this subparagraph.
    (f) Information required--(1) In general. A person that is a barter 
exchange during a calendar year shall report on Form 1096 showing the 
information required thereon for such year.
    (2) Transactional reporting--(i) In general. As to each exchange for 
which a barter exchange is required to make a return of information 
under this section, the barter exchange must show on Form 1099-B, 
``Proceeds From Broker and Barter Exchange Transactions,'' or any 
successor form the name, address, and taxpayer identification number of 
each member or client providing property or services in the exchange, 
the property or services provided, the amount received by the member or 
client for the property or services, the date on which the exchange 
occurred, and other information required by the form in the manner and 
number of copies required by the form.
    (ii) Exception for corporate member or client. As to each corporate 
member or client providing property or services in an exchange for which 
a return of information is required under this section, the barter 
exchange may report the name, address, and taxpayer identification 
number of the corporate member or client, the aggregate amount received 
by the corporate member or client during the reporting period for 
property or services provided by such corporate member or client in 
exchange for which a return of information is required, and such other 
information as may be required by Form 1099, in the form, manner, and 
number of copies required by Form 1099.
    (iii) Definition. For purposes of paragraph (f)(2)(ii) of this 
section, the term ``corporate member or client'' means a member or 
client of a barter exchange which is a corporation as defined in section 
7701(a)(3) (including an insurance company). The term corporation 
includes a pool, syndicate, partnership, or unincorporated association 
composed exclusively of corporations. A barter exchange may treat a 
member or client as a corporation (and therefore as a corporate member 
or client) if such member or client provides an exemption certificate as 
described in Sec. 31.3406(h)-3(a) of this chapter or provided that--
    (A) The name of the member or client contains the term ``insurance 
company,'' ``indemnity company,'' ``reinsurance company,'' or 
``assurance company'';
    (B) The name of the member or client contains one of the following 
unambiguous expressions of corporate status: Incorporated, Inc., 
Corporation, Corp., or P.C., but not Company or Co.; or
    (C) The member or client is known to the barter exchange to be a 
corporation through a corporate resolution or similar document on file 
with the barter exchange clearly indicating corporate status.
    (3) Exchange date. For purposes of this section an exchange is 
considered to occur with respect to a member or client of a barter 
exchange on the date cash, property, a credit, or scrip is actually or 
constructively received by the member or client as a result of the 
exchange. (See Sec. 1.451-2 for rules pertaining to constructive 
receipt.)
    (4) Amount received. The amount received by a member or client in an 
exchange includes cash received, the fair market value of any property 
or services received, and the fair market value of any credits to the 
account of the member or client on the books of the barter exchange or 
scrip issued to the member or client by the barter exchange, but does 
not include any amount received by the member or client in a subsequent 
exchange of credits

[[Page 305]]

or scrip. For purposes of this section, the fair market value of a 
credit or scrip is the value assigned to such credit or scrip by the 
issuing barter exchange for the purpose of exchanges unless the 
Commissioner requires the use of a different value that the Commissioner 
determines more accurately reflects fair market value.
    (5) Meaning of terms. For purposes of this paragraph (f)--
    (i) A credit is an amount on the books of the barter exchange that 
is transferable from one member or client of the barter exchange to 
another such member or client, or to the barter exchange in payment for 
property or services;
    (ii) Scrip is a token issued by the barter exchange that is 
transferable from one member or client, of the barter exchange to 
another such member or client, or to the barter exchange, in payment for 
property or services; and
    (iii) Property does not include a credit or scrip.
    (6) Reporting period. A barter exchange shall use the calendar year 
as the reporting period.
    (g) Exempt foreign persons--(1) Brokers. No return of information is 
required to be made by a broker with respect to a customer who is 
considered to be an exempt foreign person under this paragraph (g)(1). A 
broker may treat a customer as an exempt foreign person under the 
circumstances described in paragraphs (g)(1)(i) through (iii) of this 
section.
    (i) With respect to a sale effected at an office of a broker either 
inside or outside the United States, the broker may treat the customer 
as an exempt foreign person if the broker can, prior to the payment, 
reliably associate the payment with documentation upon which it can rely 
in order to treat the customer as a foreign beneficial owner in 
accordance with Sec. 1.1441-1(e)(1)(ii), as made to a foreign payee in 
accordance with Sec. 1.6049-5(d)(1), or presumed to be made to a 
foreign payee under Sec. 1.6049-5(d)(2) or (3). For purposes of this 
paragraph (g)(1)(i), the provisions in Sec. 1.6049-5(c) regarding rules 
applicable to documentation of foreign status shall apply with respect 
to a sale when the broker completes the acts necessary to effect the 
sale at an office outside the United States, as described in paragraph 
(g)(3)(iii)(A) of this section, and no office of the same broker within 
the United States negotiated the sale with the customer or received 
instructions with respect to the sale from the customer. The provisions 
in Sec. 1.6049-5(c) regarding the definitions of U.S. payor, U.S. 
middleman, non-U.S. payor, and non-U.S. middleman shall also apply for 
purposes of this paragraph (g)(1)(i). The provisions of Sec. 1.1441-1 
shall apply by substituting the terms ``broker'' and ``customer'' for 
the terms ``withholding agent'' and ``payee,'' respectively, and without 
regard for the fact that the provisions apply to amounts subject to 
withholding under chapter 3 of the Code. The provisions of Sec. 1.6049-
5(d) shall apply by substituting the terms ``broker'' and ``customer'' 
for the terms ``payor'' and ``payee,'' respectively. For purposes of 
this paragraph (g)(1)(i), a broker that is required to obtain, or 
chooses to obtain, a beneficial owner withholding certificate described 
in Sec. 1.1441-1(e)(2)(i) from an individual may rely on the 
withholding certificate only to the extent the certificate includes a 
certification that the beneficial owner has not been, and at the time 
the certificate is furnished, reasonably expects not to be present in 
the United States for a period aggregating 183 days or more during each 
calendar year to which the certificate pertains. The certification is 
not required if a broker receives documentary evidence under Sec. 
1.6049-5(c)(1) or (4).
    (ii) With respect to a redemption or retirement of stock or an 
obligation (the interest or original issue discount on, which is 
described in Sec. 1.6049-5(b) (6), (7), (10), or (11) or the dividends 
on, which are described in Sec. 1.6042-3(b)(1)(iv)) that is effected at 
an office of a broker outside the United States by the issuer (or its 
paying or transfer agent), the broker may treat the customer as an 
exempt foreign person if the broker is not also acting in its capacity 
as a custodian, nominee, or other agent of the payee.
    (iii) With respect to a sale effected by a broker at an office of 
the broker either inside or outside the United

[[Page 306]]

States, the broker may treat the customer as an exempt foreign person 
for the period that those proceeds are assets blocked, as described in 
Sec. 1.1441-2(e)(3). For purposes of this paragraph (g)(1)(iii) and 
section 3406, a sale is deemed to occur in accordance with paragraph 
(d)(4) of this section. The exemption in this paragraph (g)(1)(iii) 
shall terminate when payment of the proceeds is deemed to occur in 
accordance with the provisions of Sec. 1.1441-2(e)(3).
    (2) Barter exchange. No return of information is required by a 
barter exchange with respect to a client or a member that the barter 
exchange may treat as a foreign person pursuant to the procedures 
described in paragraph (g)(1) of this section.
    (3) Applicable rules--(i) Joint owners. Amounts paid to joint owners 
for which a certificate or documentation is required as a condition for 
being exempt from reporting under paragraph (g) (1)(i) or (2) of this 
section are presumed made to U.S. payees who are not exempt recipients 
if, prior to payment, the broker or barter exchange cannot reliably 
associate the payment either with a Form W-9 furnished by one of the 
joint owners in the manner required in Sec. Sec. 31.3406(d)-1 through 
31.3406(d)-5 of this chapter, or with documentation described in 
paragraph (g)(1)(i) of this section furnished by each joint owner upon 
which it can rely to treat each joint owner as a foreign payee or 
foreign beneficial owner. For purposes of applying this paragraph 
(g)(3)(i), the grace period described in Sec. 1.6049-5(d)(2)(ii) shall 
apply only if each payee qualifies for such grace period.
    (ii) Special rules for determining who the customer is. For purposes 
of this paragraph (g), the determination of who the customer is shall be 
made on the basis of the provisions in Sec. 1.6049-5(d) by substituting 
in that section the terms payor and payee with the terms broker and 
customer.
    (iii) Place of effecting sale--(A) Sale outside the United States. 
For purposes of this paragraph (g), a sale is considered to be effected 
by a broker at an office outside the United States if, in accordance 
with instructions directly transmitted to such office from outside the 
United States by the broker's customer, the office completes the acts 
necessary to effect the sale outside the United States. The acts 
necessary to effect the sale may be considered to have been completed 
outside the United States without regard to whether--
    (1) Pursuant to instructions from an office of the broker outside 
the United States, an office of the same broker within the United States 
undertakes one or more steps of the sale in the United States; or
    (2) The gross proceeds of the sale are paid by a draft drawn on a 
United States bank account or by a wire or other electronic transfer 
from a United States account.
    (B) Sale inside the United States. For purposes of this paragraph 
(g), a sale that is considered to be effected by a broker at an office 
outside the United States under paragraph (g)(3)(iii)(A) of this section 
shall nevertheless be considered to be effected by a broker at an office 
inside the United States if either--
    (1) The customer has opened an account with a United States office 
of that broker;
    (2) The customer has transmitted instructions concerning this and 
other sales to the foreign office of the broker from within the United 
States by mail, telephone, electronic transmission or otherwise (unless 
the transmissions from the United States have taken place in isolated 
and infrequent circumstances);
    (3) The gross proceeds of the sale are paid to the customer by a 
transfer of funds into an account (other than an international account 
as defined in Sec. 1.6049-5(e)(4)) maintained by the customer in the 
United States or mailed to the customer at an address in the United 
States;
    (4) The confirmation of the sale is mailed to a customer at an 
address in the United States; or
    (5) An office of the same broker within the United States negotiates 
the sale with the customer or receives instructions with respect to the 
sale from the customer.
    (iv) Special rules where the customer is a foreign intermediary or 
certain U.S.

[[Page 307]]

branches. A foreign intermediary, as defined in Sec. 1.1441-1(c)(13), 
is an exempt foreign person, except when the broker has actual knowledge 
(within the meaning of Sec. 1.6049-5(c)(3)) that the person for whom 
the intermediary acts is a U.S. person that is not exempt from reporting 
under paragraph (c)(3) of this section or the broker is required to 
presume under Sec. 1.6049-5(d)(3) that the payee is a U.S. person that 
is not an exempt recipient. If a foreign intermediary, as described in 
Sec. 1.1441-1(c)(13), or a U.S. branch that is not treated as a U.S. 
person receives a payment from a payor or middleman, which payment the 
payor or middleman can reliably associate with a valid withholding 
certificate described in Sec. 1.1441-1(e)(3)(ii) or (iii) or Sec. 
1.1441-1(e)(3)(v), respectively, furnished by such intermediary or 
branch, then the intermediary or branch is not required to report such 
payment when it, in turn, pays the amount, unless, and to the extent, 
the intermediary or branch knows that the payment is required to be 
reported under this section and was not so reported. For example, if a 
U.S. branch described in Sec. 1.1441-1(b)(2)(iv) fails to provide 
information regarding U.S. persons that are not exempt from reporting 
under paragraph (c)(3) of this section to the person from whom the U.S. 
branch receives the payment, the U.S. branch must report the payment on 
an information return. See, however, paragraph (c)(3)(ii) of this 
section for when reporting under section 6045 is coordinated with 
reporting under chapter 4 of the Code or an applicable IGA (as defined 
in Sec. 1.6049-4(f)(7)). The exception of this paragraph (g)(3)(iv) for 
amounts paid by a foreign intermediary shall not apply to a qualified 
intermediary that assumes reporting responsibility under chapter 61 of 
the Code except as provided under the agreement described in Sec. 
1.1441-1(e)(5)(iii).
    (4) Examples. The application of the provisions of this paragraph 
(g) may be illustrated by the following examples:

    Example 1. FC is a foreign corporation that is not a U.S. payor or 
U.S. middleman described in Sec. 1.6049-5(c)(5) that regularly issues 
and retires its own debt obligations. A is an individual whose residence 
address is inside the United States, who holds a bond issued by FC that 
is in registered form (within the meaning of section 163(f) and the 
regulations under that section). The bond is retired by FP, a foreign 
corporation that is a broker within the meaning of paragraph (a)(1) of 
this section and the designated paying agent of FC. FP mails the 
proceeds to A at A's U.S. address. The sale would be considered to be 
effected at an office outside the United States under paragraph 
(g)(3)(iii)(A) of this section except that the proceeds of the sale are 
mailed to a U.S. address. For that reason, the sale is considered to be 
effected at an office of the broker inside the United States under 
paragraph (g)(3)(iii)(B) of this section. Therefore, FC is a broker 
under paragraph (a)(1) of this section with respect to this transaction 
because, although it is not a U.S. payor or U.S. middleman, as described 
in Sec. 1.6049-5(c)(5), it is deemed to effect the sale in the United 
States. FP is a broker for the same reasons. However, under the multiple 
broker exception under paragraph (c)(3)(iii) of this section, FP, rather 
than FC, is required to report the payment because FP is responsible for 
paying the holder the proceeds from the retired obligations. Under 
paragraph (g)(1)(i) of this section, FP may not treat A as an exempt 
foreign person and must make an information return under section 6045 
with respect to the retirement of the FC bond, unless FP obtains the 
certificate or documentation described in paragraph (g)(1)(i) of this 
section.
    Example 2. The facts are the same as in Example 1 except that FP 
mails the proceeds to A at an address outside the United States. Under 
paragraph (g)(3)(iii)(A) of this section, the sale is considered to be 
effected at an office of the broker outside the United States. 
Therefore, under paragraph (a)(1) of this section, neither FC nor FP is 
a broker with respect to the retirement of the FC bond. Accordingly, 
neither is required to make an information return under section 6045.
    Example 3. The facts are the same as in Example 2 except that FP is 
also the agent of A. The result is the same as in Example 2. Neither FP 
nor FC are brokers under paragraph (a)(1) of this section with respect 
to the sale since the sale is effected outside the United States and 
neither of them are U.S. payors (within the meaning of Sec. 1.6049-
5(c)(5)).
    Example 4. The facts are the same as in Example 1 except that the 
registered bond held by A was issued by DC, a domestic corporation that 
regularly issues and retires its own debt obligations. Also, FP mails 
the proceeds to A at an address outside the United States. Interest on 
the bond is not described in paragraph (g)(1)(ii) of this section. The 
sale is considered to be effected at an office outside the United States 
under paragraph (g)(3)(iii)(A) of this section. DC is a broker under 
paragraph (a)(1)(i)(B) of this section. DC is not required to report the 
payment under the multiple broker exception under

[[Page 308]]

paragraph (c)(3)(iii) of this section. FP is not required to make an 
information return under section 6045 because FP is not a U.S. payor 
described in Sec. 1.6049-5(c)(5) and the sale is effected outside the 
United States. Accordingly, FP is not a broker under paragraph (a)(1) of 
this section.
    Example 5. The facts are the same as in Example 4 except that FP is 
also the agent of A. DC is a broker under paragraph (a)(1) of this 
section. DC is not required to report under the multiple broker 
exception under paragraph (c)(3)(iii) of this section. FP is not 
required to make an information return under section 6045 because FP is 
not a U.S. payor described in Sec. 1.6049-5(c)(5) and the sale is 
effected outside the United States and therefore FP is not a broker 
under paragraph (a)(1) of this section.
    Example 6. The facts are the same as in Example 4 except that the 
bond is retired by DP, a broker within the meaning of paragraph (a)(1) 
of this section and the designated paying agent of DC. DP is a U.S. 
payor under Sec. 1.6049-5(c)(5). DC is not required to report under the 
multiple broker exception under paragraph (c)(3)(iii) of this section. 
DP is required to make an information return under section 6045 because 
it is the person responsible for paying the proceeds from the retired 
obligations unless DP obtains the certificate or documentary evidence 
described in paragraph (g)(1)(i) of this section.
    Example 7. Customer A owns U.S. corporate bonds issued in registered 
form after July 18, 1984, and carrying a stated rate of interest. The 
bonds are held through an account with foreign bank, X, and are held in 
street name. X is a wholly-owned subsidiary of a U.S. company and is not 
a qualified intermediary within the meaning of Sec. 1.1441-1(e)(5)(ii). 
X has no documentation regarding A. A instructs X to sell the bonds. In 
order to effect the sale, X acts through its agent in the United States, 
Y. Y sells the bonds and remits the sales proceeds to X. X credits A's 
account in the foreign country. X does not provide documentation to Y 
and has no actual knowledge that A is a foreign person but it does 
appear that A is an entity (rather than an individual).
    (i) Y's obligations to withhold and report. Y treats X as the 
customer, and not A, because Y cannot treat X as an intermediary because 
it has received no documentation from X. Y is not required to report the 
sales proceeds under the multiple broker exception under paragraph 
(c)(3)(iii) of this section, because X is an exempt recipient. Further, 
Y is not required to report the amount of accrued interest paid to X on 
Form 1042-S under Sec. 1.1461-1(c)(2)(ii) because accrued interest is 
not an amount subject to reporting under chapter 3 unless the 
withholding agent knows that the obligation is being sold with a primary 
purpose of avoiding tax.
    (ii) X's obligations to withhold and report. Although X has 
effected, within the meaning of paragraph (a)(1) of this section, the 
sale of a security at an office outside the United States under 
paragraph (g)(3)(iii) of this section, X is treated as a broker, under 
paragraph (a)(1) of this section, because as a wholly-owned subsidiary 
of a U.S. corporation, X is a controlled foreign corporation and 
therefore is a U.S. payor. See Sec. 1.6049-5(c)(5). Under the 
presumptions described in Sec. 1.6049-5(d)(2) (as applied to amounts 
not subject to withholding under chapter 3), X must apply the 
presumption rules of Sec. 1.1441-1(b)(3)(i) through (iii), with respect 
to the sales proceeds, to treat A as a partnership that is a U.S. non-
exempt recipient because the presumption of foreign status for offshore 
obligations under Sec. 1.1441-1(b)(3)(iii)(D) does not apply. See 
paragraph (g)(1)(i) of this section. Therefore, unless X is an FFI (as 
defined in Sec. 1.1471-1(b)(47)) that is excepted from reporting the 
sales proceeds under paragraph (c)(3)(ii) of this section, the payment 
of proceeds to A by X is reportable on a Form 1099 under paragraph 
(c)(2) of this section. X has no obligation to backup withhold on the 
payment based on the exemption under Sec. 31.3406(g)-1(e) of this 
chapter, unless X has actual knowledge that A is a U.S. person that is 
not an exempt recipient. X is also required to separately report the 
accrued interest (see paragraph (d)(3) of this section) on Form 1099 
under section 6049 because A is also presumed to be a U.S. person who is 
not an exempt recipient with respect to the payment because accrued 
interest is not an amount subject to withholding under chapter 3 and, 
therefore, the presumption of foreign status for offshore obligations 
under Sec. 1.1441-1(b)(3)(iii)(D) does not apply. See Sec. 1.6049-
5(d)(2)(i).
    Example 8. The facts are the same as in Example 7, except that X is 
a foreign corporation that is not a U.S. payor under Sec. 1.6049-5(c).
    (i) Y's obligations to withhold and report. Y is not required to 
report the sales proceeds under the multiple broker exception under 
paragraph (c)(3)(iii) of this section, because X is the person 
responsible for paying the proceeds from the sale to A.
    (ii) X's obligations to withhold and report. Although A is presumed 
to be a U.S. payee under the presumptions of Sec. 1.6049-5(d)(2), X is 
not considered to be a broker under paragraph (a)(1) of this section 
because it is a not a U.S. payor under Sec. 1.6049-5(c)(5). Therefore X 
is not required to report the sale under paragraph (c)(2) of this 
section.

    (h) Identity of customer--(1) In general. For purposes of this 
section, a broker or barter exchange shall treat the person who appears 
on the books and

[[Page 309]]

records of the broker or barter exchange with respect to property or 
services as the principals with respect thereto.
    (2) Examples. The following examples illustrate the rule of this 
paragraph (h):

    Example 1. The records of A, a broker, show an account in the name 
of ``B''. B is a nominee for C. All reporting with respect to such 
account shall treat B as the customer.
    Example 2. J, an individual, places an order with H, a broker, to 
sell J's stock that is held by P, a broker/dealer, in an account for J 
with P designated as nominee for J, and to credit the gross proceeds 
from the sale to J's account with P. The account is in the name of P, so 
that H's customer is P.

    (i) [Reserved]
    (j) Time and place for filing; cross-reference to penalty. Forms 
1096 and 1099 required under this section shall be filed after the last 
calendar day of the reporting period elected by the broker or barter 
exchange and on or before February 28 of the following calendar year 
with the appropriate Internal Revenue Service Center, the address of 
which is listed in the instructions for Form 1096. See paragraph (l) of 
this section for the requirement to file certain returns on magnetic 
media. For provisions relating to the penalty provided for the failure 
to file timely a correct information return under section 6045(a), see 
Sec. 301.6721-1 of this chapter. See Sec. 301.6724-1 of this chapter 
for the waiver of a penalty if the failure is due to reasonable cause 
and is not due to willful neglect.
    (k) Requirement and time for furnishing statement; cross-reference 
to penalty--(1) General requirements. A broker or barter exchange making 
a return of information under this section must furnish to the person 
whose identifying number is (or is required to be) shown on the return a 
written statement showing the information required by paragraph (c)(5), 
(d), or (f) of this section and containing a legend stating that the 
information is being reported to the Internal Revenue Service. If the 
return of information is not made on magnetic media, this requirement 
may be satisfied by furnishing to the person a copy of all Forms 1099 or 
any successor form for the person filed with the Internal Revenue 
Service Center. A statement is considered to be furnished to a person to 
whom a statement is required to be made under this paragraph (k) if it 
is mailed to the person at the last address of the person known to the 
broker or barter exchange.
    (2) Time for furnishing statements. A broker or barter exchange may 
furnish the statements required under this paragraph (k) yearly, 
quarterly, monthly, or on any other basis, without regard to the 
reporting period the broker or barter exchange elects; however, all 
statements required to be furnished under this paragraph (k) for a 
calendar year must be furnished on or before February 15 of the 
following calendar year.
    (3) Consolidated reporting. (i) The term consolidated reporting 
statement means a grouping of statements the same broker or barter 
exchange furnishes to the same customer or group of customers on the 
same date for the same reporting year that includes a statement required 
under this section. A consolidated reporting statement is limited to 
statements based on the same relationship of broker or barter exchange 
to customer as the statement required to be furnished under this 
section. For purposes of this paragraph (k)(3)(i), a broker may treat a 
shareholder of a broker as a customer of the broker and may treat a 
grouping of statements for a customer as including a statement required 
to be furnished under this section if the customer has an account with 
the broker for which a statement would be required to be furnished under 
this section if the customer purchased and sold stock in a corporation 
in the account during the year.
    (ii) A consolidated reporting statement must be furnished on or 
before February 15 of the year following the calendar year reported. Any 
statement that otherwise must be furnished on or before January 31 must 
be furnished on or before February 15 if it is furnished in the 
consolidated reporting statement.
    (iii) Examples. The following examples illustrate the rules of this 
paragraph (k)(3):

    Example 1. D has a taxable account with B, a broker, consisting 
solely of stock in a single corporation. In 2010, D receives reportable 
dividends from this stock and sells the

[[Page 310]]

stock. Under this section and Sec. 1.6042-4, B must furnish a Form 
1099-B, ``Proceeds From Broker and Barter Exchange Transactions,'' and 
Form 1099-DIV, ``Dividends and Distributions,'' to D in 2011 for the 
sale and the dividends. Under paragraph (k)(2) of this section, B is 
required to furnish the required statement under this section to D by 
February 15, 2011. B must furnish the statement reporting the dividends 
by the January 31, 2011, due date provided in Sec. 1.6042-4. However, 
under paragraph (k)(3)(ii) of this section, B must furnish the statement 
reporting the dividends by February 15, 2011, if furnished in a 
consolidated reporting statement as defined in paragraph (k)(3)(i) of 
this section.
    Example 2. Assume the same facts as in Example 1 except that D has 
invested solely in a money market fund for which sales are excepted from 
the reporting required under this section. B therefore is not required 
to issue a statement under this section if D sells an interest in the 
money market fund. Under paragraph (k)(3)(i) of this section, B may 
treat a grouping of statements for D as including a required statement 
under this section because D has an account for which a statement would 
be required under this section if D purchased and sold stock in a 
corporation in the account during the year. Therefore, under paragraph 
(k)(3)(ii) of this section, B must furnish the statement reporting the 
dividends by February 15, 2011.
    Example 3. E has a nontaxable IRA account with B, a broker. This 
account is the only account E holds with B. E sells stock in 2010 in 
this account. E also receives a cash distribution from the account in 
2010. The cash distribution from the IRA is reportable on Form 1099-R, 
``Distributions From Pensions, Annuities, Retirement or Profit-Sharing 
Plans, IRAs, Insurance Contracts, etc.,'' under Sec. 1.408-7. Because 
the account is not taxable, sales in the account are not subject to 
reporting under this section. Therefore, because no statement is 
required under this section, under paragraph (k)(3) of this section, B 
may not furnish any statements to E in a consolidated reporting 
statement. B must furnish the Form 1099-R by the date required under 
Sec. 1.408-7.
    Example 4. Assume the same facts as in Example 3 except that E and F 
have a joint taxable account with B. Because sales in the joint taxable 
account are subject to reporting under this section, under paragraph 
(k)(3) of this section, B must furnish by February 15, 2011, all 
customer statements for 2010 that B otherwise must furnish jointly to E 
and F on or before January 31, 2011, if furnished on the same date in a 
consolidated reporting statement with the required statements under this 
section for any sales in the joint taxable account. However, B may not 
include any statement for E's IRA account in the consolidated reporting 
statement furnished jointly to E and F because the statements are not 
furnished to the same customer or group of customers.
    (4) Cross-reference to penalty. For provisions for failure to 
furnish timely a correct payee statement, see Sec. 301.6724-1 of this 
chapter (Procedure and Administration Regulations). See Sec. 301.6724-1 
of this chapter for the waiver of a penalty if the failure is due to 
reasonable cause and is not due to willful neglect.
    (l) Use of magnetic media. For information returns filed after 
December 31, 1996, see Sec. 301.6011-2 of this chapter for rules 
relating to filing information returns on magnetic media and for rules 
relating to waivers granted for undue hardship. A broker or barter 
exchange that fails to file a Form 1099 on magnetic media, when 
required, may be subject to a penalty under section 6721 for each such 
failure. See paragraph (j) of this section.
    (m) Additional rules for option transactions--(1) In general. This 
paragraph (m) provides rules for a broker to determine and report the 
information required under this section for an option that is a covered 
security under paragraph (a)(15)(i)(E) of this section.
    (2) Scope--(i) In general. Paragraph (m) of this section applies to 
the following types of options granted or acquired on or after January 
1, 2014:
    (A) An option on one or more specified securities (which includes an 
index substantially all the components of which are specified 
securities);
    (B) An option on financial attributes of specified securities, such 
as interest rates or dividend yields; or
    (C) A warrant or a stock right.
    (ii) Delayed effective date for certain options--(A) Notwithstanding 
paragraph (m)(2)(i) of this section, if an option, stock right, or 
warrant is issued as part of an investment unit described in Sec. 
1.1273-2(h), paragraph (m) of this section applies to the option, stock 
right, or warrant if it is acquired on or after January 1, 2016.
    (B) Notwithstanding paragraph (m)(2)(i) of this section, if the 
property referenced by an option (that is, the property underlying the 
option) is a debt instrument that is issued by a non-U.S. person or that 
provides for one or more payments denominated in,

[[Page 311]]

or determined by reference to, a currency other than the U.S. dollar, 
paragraph (m) of this section applies to the option if it is granted or 
acquired on or after January 1, 2016.
    (iii) Compensatory option. Notwithstanding paragraphs (m)(2)(i) and 
(m)(2)(ii) of this section, paragraph (m) of this section does not apply 
to compensatory options.
    (3) Option subject to section 1256. If an option described in 
paragraph (m)(2) of this section is also described in section 1256(b), a 
broker must apply the rules described in paragraph (c)(5) of this 
section by treating the option as if it were a regulated futures 
contract and must report the information required under paragraph (c)(5) 
of this section. A broker is permitted, but not required, to report the 
amounts for options and the amounts for regulated futures contracts 
determined under paragraph (c)(5) of this section as a net amount for 
each reportable item.
    (4) Option not subject to section 1256. The following rules apply to 
an option that is described in paragraph (m)(2) of this section but is 
not also described in paragraph (m)(3) of this section:
    (i) Physical settlement. For purposes of paragraph (d) of this 
section, if a specified security (other than an option) is acquired or 
disposed of pursuant to the exercise of an option, the broker must 
adjust the basis of the acquired asset or the gross proceeds amount as 
appropriate to account for any payment related to the option, including 
the premium.
    (ii) Cash settlement. For purposes of paragraph (d) of this section, 
for an option that is settled for cash, a broker must reflect on Form 
1099-B all payments made or received on the option. For a purchased 
option, a broker must report as basis the premium paid plus any costs 
(for example, commissions) related to the acquisition of the option and 
must report as proceeds the gross proceeds from settlement minus any 
costs related to the settlement of the option. For a written option, a 
broker must report as proceeds the premium received decreased by any 
amounts paid on the option and report $0 as the basis of the option.
    (iii) Rules for warrants and stock rights acquired in a section 305 
distribution. For a right (including a warrant) to acquire stock 
received in the same account as the underlying security in a 
distribution that is described in section 305(a), a broker is permitted, 
but not required, to apply the rules described in sections 305 and 307 
when reporting or accounting for the basis of the option and the 
underlying equity. If a stock right or warrant is acquired from the 
initial distributee, the buyer or transferee must treat it as an option 
covered by either paragraph (m)(4)(i) or (m)(4)(ii) of this section.
    (iv) Examples. The following examples illustrate the rules in this 
paragraph (m)(4):

    Example 1. (i) On January 15, 2014, C, an individual who is neither 
a dealer nor a trader in securities, writes a 2-year exchange-traded 
option on 100 shares of Company X through Broker D. C receives a premium 
for the option of $100 and pays no commission. In C's hands, the option 
produces capital gain or loss and Company X stock is a capital asset. On 
December 16, 2014, C pays $110 to close out the option.
    (ii) D is required to report information about the closing 
transaction because the option is a covered security as described in 
paragraph (a)(15)(i)(E) of this section and was part of a closing 
transaction described in paragraph (a)(8) of this section. Under 
paragraph (m)(4)(ii) of this section, D must report as gross proceeds on 
C's Form 1099-B -$10 (the $100 received as option premium minus the $110 
C paid to close out the option) and report $0 in the basis box on the 
Form 1099-B. Under section 1234(b)(1) and paragraph (d)(2) of this 
section, D must also report the loss on the closing transaction as a 
short-term capital loss.
    Example 2. (i) On January 15, 2014, E, an individual who is neither 
a dealer nor a trader in securities, buys a 2-year exchange-traded 
option on 100 shares of Company X through Broker F. E pays a premium of 
$100 for the option and pays no commission. In E's hands, both the 
option and Company X stock are capital assets. On December 16, 2014, E 
receives $110 to close out the option.
    (ii) F is required to report information about the closing 
transaction because the option is a covered security as described in 
paragraph (a)(15)(i)(E) of this section and was part of a closing 
transaction described in paragraph (a)(8) of this section. Because the 
option is on the shares of a single company, it is an equity option 
described in section 1256(g)(6) and is not described in section 
1256(b)(1)(C). Therefore, the rules of paragraph (m)(3) of this section 
do not apply, and F must report under paragraph (m)(4) of this section. 
Under paragraph (m)(4)(ii) of this

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section, F must report $110 as gross proceeds on the Form 1099-B for the 
gross proceeds E received and $100 in the basis box on the Form 1099-B 
to reflect the $100 option premium paid. Under section 1234(b)(1) and 
paragraph (d)(2) of this section, F must also report the gain on the 
closing transaction as a short-term capital gain.

    (5) Multiple options documented in a single contract. If more than 
one option described in paragraph (m)(2) of this section is documented 
in a single contract, a broker must separately report the required 
information for each option as that option is sold.

    (6) Determination of index status. Penalties will not be asserted 
under sections 6721 and 6722 if a broker in good faith determines that 
an index is, or is not, a narrow-based index described in section 
1256(g)(6) and reports in a manner consistent with this determination.
    (n) Reporting for debt instrument transactions--(1) In general. For 
purposes of this section, this paragraph (n) provides rules for a broker 
to determine and report information for a debt instrument that is a 
covered security under paragraph (a)(15)(i)(C) or (D) of this section. 
Neither a debt instrument subject to section 1272(a)(6) nor a short-term 
obligation described in section 1272(a)(2)(C) is subject to this 
paragraph (n) because neither is a specified security under paragraph 
(a)(14)(ii) of this section (a requirement for a debt instrument to be a 
covered security).
    (2) Debt instruments subject to January 1, 2014, reporting--(i) In 
general. For purposes of paragraph (a)(15)(i)(C) of this section, except 
as provided in paragraph (n)(2)(ii) of this section, a debt instrument 
is described in this paragraph (n)(2)(i) if the debt instrument is one 
of the following:
    (A) A debt instrument that provides for a single fixed payment 
schedule for which a yield and maturity can be determined for the 
instrument under Sec. 1.1272-1(b);
    (B) A debt instrument that provides for alternate payment schedules 
for which a yield and maturity can be determined for the instrument 
under Sec. 1.1272-1(c); or
    (C) A debt instrument for which the yield of the debt instrument can 
be determined under Sec. 1.1272-1(d).
    (ii) Exceptions. A debt instrument is not described in paragraph 
(n)(2)(i) of this section if the debt instrument is one of the 
following:
    (A) A debt instrument that provides for more than one rate of stated 
interest (including a debt instrument that provides for stepped interest 
rates);
    (B) A convertible debt instrument described in Sec. 1.1272-1(e);
    (C) A stripped bond or stripped coupon subject to section 1286;
    (D) A debt instrument that requires payment of either interest or 
principal in a currency other than the U.S. dollar;
    (E) A debt instrument that, at one or more times in the future, 
entitles a holder to a tax credit;
    (F) A debt instrument that provides for a payment-in-kind (PIK) 
feature (that is, under the terms of the debt instrument, a holder may 
receive one or more additional debt instruments of the issuer);
    (G) A debt instrument issued by a non-U.S. issuer;
    (H) A debt instrument for which the terms of the instrument are not 
reasonably available to the broker within 90 days of the date the debt 
instrument was acquired by the customer;
    (I) A debt instrument that is issued as part of an investment unit 
described in Sec. 1.1273-2(h); or
    (J) A debt instrument evidenced by a physical certificate unless 
such certificate is held (whether directly or through a nominee, agent, 
or subsidiary) by a securities depository or by a clearing organization 
described in Sec. 1.1471-1(b)(18).
    (iii) Remote or incidental. For purposes of paragraphs (n)(2)(i) and 
(n)(2)(ii) of this section, a remote or incidental contingency (as 
determined under Sec. 1.1275-2(h)) is ignored.
    (iv) Penalty rate. For purposes of paragraph (n)(2)(ii)(A) of this 
section, a debt instrument does not provide for more than one rate of 
stated interest merely because the instrument provides for a penalty 
interest rate or an adjustment to the stated interest rate in the event 
of a default or similar event.
    (3) Debt instruments subject to January 1, 2016, reporting. For 
purposes of paragraph (a)(15)(i)(D) of this section, a

[[Page 313]]

debt instrument is described in this paragraph (n)(3) if it is described 
in paragraph (n)(2)(ii) of this section or it otherwise is not described 
in paragraph (n)(2)(i) of this section. For example, this paragraph 
(n)(3) applies to variable rate debt instruments, inflation-indexed debt 
instruments, and contingent payment debt instruments because these 
instruments are not described in paragraph (n)(2)(i) of this section.
    (4) Holder elections. For purposes of this section, a broker is 
required to take into account an election described in this paragraph 
(n)(4), and the broker must take the election into account in accordance 
with the rules in paragraph (n)(5) of this section. A broker, however, 
may not take into account any other election. See paragraph (n)(11) of 
this section for the treatment of an election described in paragraph 
(n)(4)(iii) of this section (election to accrue market discount based on 
a constant yield) and an election described in paragraph (n)(4)(iv) of 
this section (election to treat all interest as OID).
    (i) Election to amortize bond premium. An election under section 171 
and Sec. 1.171-4 to amortize bond premium on a taxable debt instrument 
(this election applies to all taxable debt instruments held by a 
taxpayer during the taxable year the election is effective and 
thereafter; this election may be revoked with the consent of the 
Commissioner).
    (ii) Election to currently include accrued market discount. An 
election under section 1278(b) to include market discount in income as 
it accrues (this election applies to all debt instruments acquired by a 
taxpayer during the taxable year the election is effective and 
thereafter; this election may be revoked with the consent of the 
Commissioner).
    (iii) Election to accrue market discount based on a constant yield. 
An election under section 1276(b)(2) to compute accruals of market 
discount using a constant yield method (this election is generally made 
on an instrument-by-instrument basis and must be made for the earliest 
taxable year for which the taxpayer is required to determine accrued 
market discount on the debt instrument; this election may not be 
revoked).
    (iv) Election to treat all interest as OID. An election under Sec. 
1.1272-3 to treat all interest on a taxable debt instrument (adjusted 
for any acquisition premium or premium) as original issue discount (this 
election is generally made on an instrument-by-instrument basis and must 
be made for the taxable year the debt instrument is acquired by the 
taxpayer; this election may be revoked with the consent of the 
Commissioner). However, see paragraph (n)(11)(i)(A) of this section for 
a debt instrument acquired on or after January 1, 2014.
    (v) Election to translate interest income and expense at the spot 
rate. An election under Sec. 1.988-2(b)(2)(iii)(B) to translate 
interest income and expense at the spot rate on the last day of the 
interest accrual period or, in the case of a partial accrual period, the 
last day of the taxable year (this election applies to all taxable debt 
instruments held by a taxpayer during the taxable year the election is 
effective and thereafter; this election may be revoked with the consent 
of the Commissioner).
    (5) Broker assumptions and customer notice to brokers--(i) Broker 
assumptions if the customer does not notify the broker. Except as 
provided in paragraph (n)(5)(ii)(A) of this section, a broker must 
report the information required under paragraph (d) of this section by 
assuming that a customer has made the election to amortize bond premium 
described in paragraph (n)(4)(i) of this section. In addition, except as 
provided in paragraph (n)(5)(ii)(B) of this section, a broker must 
report the information required under paragraph (d) of this section by 
assuming that a customer has not made an election described in paragraph 
(n)(4)(ii), (n)(4)(iii), (n)(4)(iv), or (n)(4)(v) of this section. 
However, see paragraph (n)(11) of this section for the treatment of an 
election described in paragraph (n)(4)(iii) of this section (election to 
accrue market discount based on a constant yield) and an election 
described in paragraph (n)(4)(iv) of this section (election to treat all 
interest as OID).
    (ii) Effect of customer notification of an election or revocation--
(A) Election to amortize bond premium. If a customer notifies a broker 
in writing that the customer does not want the broker to

[[Page 314]]

take into account the election to amortize bond premium, the broker must 
report the information required under paragraph (d) of this section 
without taking into account the election to amortize bond premium. The 
customer must provide this notification to the broker by the end of the 
calendar year for which the customer does not want to amortize bond 
premium. If for a subsequent calendar year, the customer wants the 
broker to take into account the election to amortize bond premium, the 
customer must notify the broker in writing by the end of the calendar 
year that the customer wants to amortize bond premium. If the customer 
provides such notification, the broker must report the information 
required under paragraph (d) of this section as if the customer made the 
election to amortize bond premium for that year.
    (B) Other debt elections. If a customer notifies a broker in writing 
that the customer has made or will make an election described in 
paragraph (n)(4)(ii), (iii), (iv), or (v) of this section, the broker 
must report the information required under paragraph (d) of this section 
by taking into account the election. A customer must notify the broker 
in writing of the election by the end of the calendar year in which a 
debt instrument subject to the election is acquired in, or transferred 
into, an account with the broker or, if later, by the end of the 
calendar year for which the election is effective. If a customer has 
revoked or will revoke an election described in paragraph (n)(4)(ii), 
(n)(4)(iv), or (n)(4)(v) of this section for a calendar year, the 
customer must notify the broker of the revocation in writing by the end 
of the calendar year for which the revocation is effective. If the 
customer provides such notification, the broker must report the 
information required under paragraph (d) of this section by taking into 
account the revocation.
    (iii) Electronic notification. For purposes of paragraph (n)(5)(ii) 
of this section, the written notification to the broker includes a 
writing in electronic format.
    (6) Reporting of accrued market discount. In addition to the 
information required to be reported under paragraph (d) of this section, 
if a debt instrument is subject to the market discount rules in sections 
1276 through 1278, a broker also must report the information described 
in paragraph (n)(6)(i) or (n)(6)(ii) of this section, whichever is 
applicable. Such information must be shown in the manner and at the time 
required by Form 1099 and section 6045.
    (i) Sale. A broker must report the amount of market discount that 
has accrued on a debt instrument as of the date of the instrument's 
sale, as defined in paragraph (a)(9) of this section. See paragraphs 
(n)(5) and (n)(11)(i)(B) of this section to determine whether the amount 
reported should take into account a customer election under section 
1276(b)(2). See paragraph (n)(8) of this section to determine the 
accrual period to be used to compute the accruals of market discount. 
This paragraph (n)(6)(i) does not apply if the customer notifies the 
broker under the rules in paragraph (n)(5) of this section that the 
customer elects under section 1278(b) to include market discount in 
income as it accrues.
    (ii) Current inclusion election. If a customer notifies a broker 
under the rules in paragraph (n)(5) of this section that the customer 
elects under section 1278(b) to include market discount in income as it 
accrues, the broker is required to report to the customer the amount of 
market discount that accrued on a debt instrument during a taxable year 
while held by the customer in the account. The broker also must adjust 
basis in accordance with section 1278(b)(4). If a customer notifies a 
broker under the rules in paragraph (n)(5) of this section that the 
customer is revoking its election under section 1278(b), the broker will 
not report the market discount accrued during the taxable year of the 
revocation and thereafter and will cease to adjust basis in accordance 
with section 1278(b)(4). See paragraph (n)(8) of this section to 
determine the accrual period to be used to compute the accruals of 
market discount. See paragraphs (n)(5) and (n)(11)(i)(B) of this section 
to determine whether the amount reported should take into account a 
customer election under section 1276(b)(2).

[[Page 315]]

    (7) Adjusted basis. For purposes of this section, a broker must use 
the rules in paragraph (n) of this section to determine the adjusted 
basis of a debt instrument.
    (i) Original issue discount. If a debt instrument is subject to the 
original issue discount rules in sections 1271 through 1275, section 
1286, or section 1288, a broker must increase a customer's basis in the 
debt instrument by the amount of original issue discount that accrued on 
the debt instrument while held by the customer in the account. See 
paragraph (n)(8) of this section to determine the accrual period to be 
used to compute the accruals of original issue discount.
    (ii) Amortizable bond premium--(A) Taxable bond. A broker is 
required to adjust the customer's basis for any taxable bond acquired at 
a premium and held in the account in accordance with Sec. 1.1016-5(b). 
If a customer, however, informs a broker under the rules in paragraph 
(n)(5)(ii)(A) of this section that the customer does not want to 
amortize bond premium, the broker must not adjust the customer's basis 
for any premium.
    (B) Tax-exempt bonds. A broker is required to adjust the customer's 
basis for any tax-exempt obligation acquired at a premium and held in 
the account in accordance with Sec. 1.1016-5(b).
    (iii) Acquisition premium. If a debt instrument is acquired at an 
acquisition premium (as determined under Sec. 1.1272-2(b)(3)), a broker 
must decrease the customer's basis in the debt instrument by the amount 
of acquisition premium that is taken into account each year to reduce 
the amount of the original issue discount that is otherwise includible 
in the customer's income for that year. See Sec. 1.1272-2(b)(4) to 
determine the amount of the acquisition premium taken into account each 
year. However, if a broker took into account a customer election under 
Sec. 1.1272-3 in 2014, the broker must decrease the customer's basis in 
the debt instrument by the amount of acquisition premium that is taken 
into account each year to reduce the amount of the original issue 
discount that is otherwise includible in the customer's income for that 
year in accordance with Sec. Sec. 1.1272-2(b)(5) and 1.1272-3.
    (iv) Market discount. See paragraph (n)(6) of this section for rules 
to determine the adjusted basis of a debt instrument with market 
discount.
    (v) Principal and certain other payments. A broker must decrease the 
customer's basis in a debt instrument by the amount of any payment made 
to the customer during the period the debt instrument is held in the 
account, other than a payment of qualified stated interest as defined in 
Sec. 1.1273-1(c).
    (8) Accrual period. For purposes of this section, a broker generally 
must use the same accrual period that is used to report any original 
issue discount or stated interest to a customer under section 6049 for a 
debt instrument. In any other situation, a broker must use a semi-annual 
accrual period or, if a debt instrument provides for scheduled payments 
of principal or interest at regular intervals of less than six months 
over the entire term of the debt instrument, a broker must use an 
accrual period equal in length to this shorter interval. For example, if 
a debt instrument provides for monthly payments of interest over the 
entire term of the debt instrument, the broker must use a monthly 
accrual period. The rules in Sec. 1.1272-1(b)(4)(iii) apply for 
purposes of an initial short accrual period. In computing the length of 
an accrual period, any reasonable counting convention may be used (for 
example, 30 days per month/360 days per year, or actual days per month/
365 days per year).
    (9) Premium on convertible bond. If a customer acquires a 
convertible bond (as defined in Sec. 1.171-1(e)(1)(iii)(C)) at a 
premium (as determined under Sec. 1.171-1(d)), then, solely for 
purposes of this section and Sec. 1.6049-9, a broker must assume that 
the premium is attributable to the conversion feature. Based on this 
assumption, no portion of the premium is amortizable for purposes of 
this section and Sec. 1.6049-9.
    (10) Effect of broker assumptions on customer. The rules in this 
paragraph (n) only apply for purposes of a broker's reporting obligation 
under section 6045. A customer is not bound by the assumptions that the 
broker uses to satisfy the broker's reporting obligations under section 
6045. In addition, a notification to the broker under

[[Page 316]]

paragraph (n)(5) of this section does not constitute an effective 
election or revocation under the applicable rules for the election.
    (11) Additional rules for certain holder elections--(i) In general. 
For purposes of this section, the rules in this paragraph (n)(11) apply 
notwithstanding any other rule in paragraph (n) of this section.
    (A) Election to treat all interest as OID. A broker must report the 
information required under paragraph (d) of this section without taking 
into account any election described in paragraph (n)(4)(iv) of this 
section (the election to treat all interest as OID in Sec. 1.1272-3). 
As a result, for example, a broker must determine the amount of any 
acquisition premium taken into account each year for purposes of this 
section in accordance with Sec. 1.1272-2(b)(4). This paragraph 
(n)(11)(i)(A) applies to a debt instrument acquired on or after January 
1, 2015. A broker, however, may rely on this paragraph (n)(11)(i)(A) for 
a debt instrument acquired on or after January 1, 2014, and before 
January 1, 2015.
    (B) Election to accrue market discount based on a constant yield. A 
broker must report the information required under paragraph (d) of this 
section by assuming that a customer has made the election described in 
paragraph (n)(4)(iii) of this section (the election to accrue market 
discount based on a constant yield). However, if a customer notifies a 
broker in writing that the customer does not want the broker to take 
into account this election, the broker must report the information 
required under paragraph (d) of this section without taking into account 
this election. The customer must provide this notification to the broker 
by the end of the calendar year in which the customer acquired the debt 
instrument in an account with the broker. This paragraph (n)(11)(i)(B) 
applies to a debt instrument acquired on or after January 1, 2015. A 
broker, however, may rely on this paragraph (n)(11)(i)(B) to report 
accrued market discount for a debt instrument that is a covered security 
acquired on or after January 1, 2014, and before January 1, 2015, if the 
customer had not informed the broker that the customer had made a 
section 1278(b) election and there were no principal payments on the 
debt instrument during this period.
    (ii) [Reserved].
    (12) Certain debt instruments treated as noncovered securities--(i) 
In general. Notwithstanding paragraph (a)(15) of this section, a debt 
instrument is treated as a noncovered security for purposes of this 
section if the terms of the debt instrument are not reasonably available 
to the broker within 90 days of the date the debt instrument was 
acquired by the customer and the debt instrument is either--
    (A) A debt instrument issued by a non-U.S. issuer; or
    (B) A tax-exempt obligation issued before January 1, 2014.
    (ii) Effective/applicability date. Paragraph (n)(12)(i) of this 
section applies to a debt instrument described in paragraph 
(n)(12)(i)(A) or (B) of this section that is acquired on or after 
February 18, 2016. However, a broker may rely on paragraph (n)(12)(i) of 
this section for a debt instrument described in paragraph (n)(12)(i)(A) 
or (B) of this section acquired before February 18, 2016.
    (o) Additional reporting by stock transfer agents. [Reserved]
    (p) Electronic filing. Notwithstanding the time prescribed for 
filing in paragraph (j) of this section, Forms 1096 and 1099 required 
under this section for reporting periods ending during a calendar year 
shall, if filed electronically, be filed after the last calendar day of 
the reporting period elected by the broker or barter exchange and on or 
before March 31 of the following calendar year.
    (q) Effective/applicability date. Except as otherwise provided in 
paragraphs (m)(2)(ii), and (n)(12)(ii) of this section, this section 
applies on or after January 6, 2017. (For rules that apply after June 
30, 2014, and before January 6, 2017, see this section as in effect and 
contained in 26 CFR part 1, as revised April 1, 2016.)

[T.D. 7873, 48 FR 10304, Mar. 11, 1983]

    Editorial Note: For Federal Register citations affecting Sec. 
1.6045-1, see the List of CFR Sections Affected, which appears in the 
Finding Aids section of the printed volume and at www.govinfo.gov.

[[Page 317]]



Sec. 1.6045-2  Furnishing statement required with respect to certain
substitute payments.

    (a) Requirement of furnishing statements--(1) In general. Any broker 
(as defined in paragraph (a)(4)(ii) of this section) that transfers 
securities (as defined in Sec. 1.6045-1(a)(3)) of a customer (as 
defined in paragraph (a)(4)(iii) of this section) for use in a short 
sale and receives on behalf of the customer a substitute payment (as 
defined in paragraph (a)(4)(i)) shall, except as otherwise provided, 
furnish a statement to the customer identifying such payment as being a 
substitute payment.
    (2) Special rule for transfers for broker's own use. Any broker that 
borrows securities of a customer for use in a short sale entered into 
for the broker's own account shall be deemed to have transferred the 
stock to itself and received on behalf of the customer any substitute 
payment made with respect to the transferred securities, and shall be 
required to furnish a statement with respect to such payments in 
accordance with paragraph (a)(1) of this section.
    (3) Special rule for furnishing statements to individual customers 
with respect to payments in lieu of dividends--(i) In general. Except as 
otherwise provided in paragraph (a)(3)(ii) of this section, for taxable 
years beginning before January 1, 2003, a broker that receives a 
substitute payment in lieu of a dividend on behalf of a customer who is 
an individual (``individual customer'') need not furnish a statement to 
the customer.
    (ii) Reporting for certain dividends. Any broker that receives on 
behalf of an individual customer a substitute payment in lieu of--
    (A) An exempt-interest dividend (as defined in paragraph (a)(4)(vii) 
of this section);
    (B) A capital gain dividend (as defined in paragraph (a)(4)(vi) of 
this section);
    (C) A distribution treated as a return of capital under section 
301(c)(2) or (c)(3); or
    (D) An FTC dividend (as defined in paragraph (a)(4)(viii) of this 
section) shall furnish a statement to the individual customer 
identifying the payment as being a substitute payment as prescribed by 
this section, provided that the broker has reason to know not later than 
the record date of the dividend payment that the payment is a substitute 
payment in lieu of an exempt-interest dividend, a capital gain dividend, 
a distribution treated as a return of capital, or an FTC dividend.
    (4) Meaning of terms. The following definitions apply for purposes 
of this section.
    (i) The term substitute payment means a payment in lieu of--
    (A) Tax-exempt interest, to the extent that interest has accrued on 
the obligation for the period during which the short sale is open;
    (B) A dividend, the ex-dividend date for which occurs during the 
period after the transfer of stock for use in a short sale, and prior to 
the closing of the short sale; or
    (C) Any other item specified in a rule-related notice published in 
the Federal Register (provided that such items shall be subject to the 
rules of this section only subsequent to the time of such publication).


For purposes of this section original issue discount accruing on an 
obligation (the interest upon which is exempt from tax under section 
103) for the period during which the short sale is open shall be deemed 
a payment in lieu of tax-exempt interest.
    (ii) The term broker means both a person described in Sec. 1.6045-
1(a)(1) and a person that, in the ordinary course of a trade or business 
during the calendar year, loans securities owned by others.
    (iii) The term customer means, with respect to a transfer of 
securities for use in a short sale, the person that is the record owner 
of the securities so transferred.
    (iv) The term dividend means a dividend (as defined in section 316) 
or a distribution that is treated as a return of capital under section 
301(c)(2) or (c)(3).
    (v) The term tax-exempt interest means interest to which the 
exception in section 6049 (b)(2)(B) applies.
    (vi) The term capital gain dividend means a capital gain dividend as 
defined in section 852(b)(3)(C) or section 857(b)(3)(C).
    (vii) The term exempt-interest dividend means an exempt-interest 
dividend as defined in section 852(b)(5)(A).

[[Page 318]]

    (viii) The term FTC dividend means a dividend with respect to which 
the recipient is entitled to claim a foreign tax credit under section 
901 (but not by virtue of taxes deemed paid under section 902 or 960).
    (5) Examples. The following examples illustrate the definition of a 
substitute payment in lieu of tax-exempt interest found in paragraph 
(a)(4)(i)(A) of this section.
    Example 1. On September 1, 1984, L, a broker, borrows 200 State Q 
Bonds (the interest upon which is exempt from tax under section 103) 
held in street name for customer R and transfers the bonds to W for use 
in a short sale. The bonds each have a face value of $100 and bear 12% 
stated annual interest paid semiannually on January 1 and July 1 of each 
year. The bonds were not issued with original issue discount. On 
November 1, 1984, W closes the short sale and returns State Q Bonds to 
L. On January 1, 1985, L receives a $1200 interest payment (6% x $100 x 
200 bonds = $1200) from State Q with respect to R's bonds. Four hundred 
dollars (2 months the bonds were on loan/6 months in the interest period 
=\1/3\ x $1200 = $400) of the interest payment represents accrued 
interest on the obligations for the period during which the short sale 
was open and is a substitute payment in lieu of tax-exempt interest 
within the meaning of paragraph (a)(4)(i)(A) of this section. L must 
furnish a statement under paragraph (a) of this section to R for 
calendar year 1985 with respect to the $400 substitute payment.
    Example 2. Assume the same facts as in Example (1), except that W 
closes the short sale on February 1, 1985. On January 1, 1985, L 
receives a $1200 payment from W with respect to R's bonds. Eight hundred 
dollars (4 months the bonds were on loan prior to January 1, 1985/6 
months in the interest period =\2/3\ x $1200 = $800) of the payment 
represents accrued interest on the obligation for the period during 
which the short sale was open and is a substitute payment in lieu of 
tax-exempt interest. On July 1, 1985, L receives a $1200 payment from 
State Q. Two hundred dollars (1 month the bonds were on loan after 
December 31, 1984/6 months in the interest period =\1/6\ x $1200 = $200) 
of the payment represents accrued interest on the obligation for the 
period during which the short sale was open and is a substitute payment 
in lieu of the tax-exempt interest. Because both payments are received 
by L in 1985, L must furnish a statement under paragraph (a) of this 
section to R for that year with respect to both payments.

    (b) Exceptions--(1) Minimal payments. No statement is required to be 
furnished under section 6045(d) or this section to any customer if the 
aggregate amount of the substitute payments received by a broker on 
behalf of the customer during a calendar year for which a statement must 
be furnished is less than $10.
    (2) Exempt recipients--(i) In general. A statement shall not be 
required to be furnished with respect to substitute payments made to a 
broker on behalf of--
    (A) An organization exempt from taxation under section 501(a);
    (B) An individual retirement plan;
    (C) The United States, a possession of the United States, or an 
instrumentality or a political subdivision or a wholly-owned agency of 
the foregoing;
    (D) A State, the District of Columbia, or a political subdivision or 
a wholly-owned agency or instrumentality of either of the foregoing;
    (E) A foreign government or a political subdivision thereof;
    (F) An international organization; or
    (G) A foreign central bank of issue, as defined in Sec. 1.6049-
4(c)(1)(ii)(H), or the Bank for International Settlements.
    (ii) Determination of whether a person is described in paragraph 
(b)(2)(i) of this section. The determination of whether a person is 
described in paragraph (b)(2)(i) of this section shall be made in the 
manner provided in Sec. 1.6045-1(c)(3)(i)(B).
    (3) Exempt foreign persons. A statement shall not be required to be 
furnished with respect to substitute payments made to a broker on behalf 
of a person that is an exempt foreign person as described in Sec. 
1.6045-1(g)
    (c) Form of statement. A broker shall furnish the statement required 
by paragraph (a) of this section on Form 1099. The statement must show 
the aggregate dollar amount of all substitute payments received by the 
broker on behalf of a customer (for which the broker is required to 
furnish a statement) during a calendar year, and such other information 
as may be required by Form 1099. A statement shall be considered to be 
furnished to a customer if it is mailed to the customer at the last 
address of the customer known to the broker. An IRS truncated taxpayer 
identifying number (TTIN) may be used as the identifying number of the 
customer in lieu of the identifying

[[Page 319]]

number appearing on the information return filed with the Internal 
Revenue Service. For provisions relating to the use of TTINs, see Sec. 
301.6109-4 of this chapter (Procedure and Administration Regulations).
    (d) Time for furnishing statements--(1) General requirements. A 
broker must furnish the statements required by paragraph (a) of this 
section for each calendar year. The statements must be furnished after 
April 30th of the calendar year but in no case before the final 
substitute payment for the calendar year is made, and on or before 
February 15 of the following calendar year.
    (2) Consolidated reporting. (i) The term consolidated reporting 
statement means a grouping of statements the same broker furnishes to 
the same customer or group of customers on the same date for the same 
reporting year that includes a statement required under this section. A 
consolidated reporting statement is limited to statements based on the 
same relationship of broker to customer as the statement required to be 
furnished under this section.
    (ii) A consolidated reporting statement must be furnished on or 
before February 15 of the year following the calendar year reported. Any 
statement that otherwise must be furnished on or before January 31 must 
be furnished on or before February 15 if it is furnished in the 
consolidated reporting statement.
    (e) When substitute payment deemed received. A Broker is deemed to 
have received a substitute payment on behalf of a customer when the 
amount is paid or deemed paid to the broker (or as it accrues in the 
case of original issue discount deemed a payment in lieu of tax-exempt 
interest).
    (f) Identification of customer and recordkeeping with respect to 
substitute payments--(1) Payments in lieu of tax-exempt interest and 
exempt-interest dividends. A broker that receives substitute payments in 
lieu of tax-exempt interest, exempt-interest dividends, or other items 
(to the extent specified in a rule-related notice published pursuant to 
paragraph (a)(4)(i)(C) of this section) on behalf of a customer and is 
required to furnish a statement under paragraph (a) of this section must 
determine the identity of the customer whose security was transferred 
and on whose behalf the broker received such substitute payments by 
specific identification of the record owner of the security so 
transferred. A broker must keep adequate records of the determination so 
made.
    (2) Payments in lieu of dividends other than exempt-interest 
dividends--(i) Requirements and methods. A broker that receives 
substitute payments in lieu of dividends, other than exempt-interest 
dividends, on behalf of a customer and is required to furnish a 
statement under paragraph (a) of this section must make a determination 
of the identity of the customer whose stock was transferred and on whose 
behalf such broker receives substitute payments. Such determination must 
be made as of the record date with respect to the dividend distribution, 
and must be made in a consistent manner by the broker in accordance with 
any of the following methods:
    (A) Specific identification of the record owner of the transferred 
stock;
    (B) The method of allocation and selection specified in paragraph 
(f)(2)(ii) of this section; or
    (C) Any other method, with the prior approval of the Commissioner.


A broker must keep adequate records of the determination so made.
    (ii) Method of allocation and selection--(A) Allocation to borrowed 
shares and individual and nonindividual pools. With respect to each 
substitute payment in lieu of a dividend received by a broker, the 
broker must allocate the transferred shares (i.e., the shares giving 
rise to the substitute payment) among all shares of stock of the same 
class and issue as the transferred shares which were (1) borrowed by the 
broker, and (2) which the broker holds (or has transferred in a 
transaction described in paragraph (a)(1) of this section) and is 
authorized by its customers to transfer (including shares of stock of 
the same class and issue held for the broker's own account) (``loanable 
shares''). The broker may first allocate the transferred shares to any 
borrowed shares. Then to the extent that the number of transferred 
shares exceeds the number of borrowed shares (or if

[[Page 320]]

the broker does not allocate to the borrowed shares first), the broker 
must allocate the transferred shares between two pools, one consisting 
of the loanable shares of all individual customers (the ``individual 
pool'') and the other consisting of the loanable shares of all 
nonindividual customers (the ``nonindividual pool''). The transferred 
shares must be allocated to the individual pool in the same proportion 
that the number of loanable shares held by individual customers bears to 
the total number of loanable shares available to the broker. Similarly, 
the transferred shares must be allocated to the nonindividual pool in 
the same proportion that the number of loanable shares held by 
nonindividual customers bears to the total number of loanable shares 
available to the broker.
    (B) Selection of deemed transferred shares within the nonindividual 
pool. The broker must select which shares within the nonindividual pool 
are deemed transferred for use in a short sale (the ``deemed transferred 
shares''). Selection of deemed transferred shares may be made either by 
purely random lottery or on a first-in-first-out (``FIFO'') basis.
    (C) Selection of deemed transferred shares within the individual 
pool. The broker must select which shares within the individual pool are 
deemed transferred shares (in the manner described in the preceding 
paragraph) only with respect to substitute payments as to which a 
statement is required to be furnished under paragraph (a)(2)(ii) of this 
section.
    (3) Examples. The following examples illustrate the identification 
of customer rules of paragraph (f)(2):

    Example 1. A, a broker, holds X corporation common stock (of which 
there is only a single class) in street name for five customers: C, a 
corporation; D, a partnership; E, a corporation; F, an individual; and 
G, a corporation. C owns 100 shares of X stock, D owns 50 shares of X 
stock, E owns 100 shares of X stock, F owns 50 shares of X stock, and G 
owns 100 shares of X stock. A is authorized to loan all of the X stock 
of C, D, E, and F. G, however, has not authorized A to loan its X 
stocks. A does not hold any X stock in its trading account nor has A 
borrowed any X stock from another broker. A transfers 150 shares of X 
stock to H for use in a short sale on July 1, 1985. A dividend of $2 per 
share is declared with respect to X stock on August 1, 1985, payable to 
the owners of record as of August 15, 1985 (the ``record'' date). A 
receives $2 per transferred share as a payment in lieu of a dividend 
with respect to X stock or a total of $300 on September 15, 1985. H 
closes the short sale and returns X stock to A on January 2, 1986. A's 
records specifically identify the owner of each loanable share of stock 
held in street name. From A's records it is determined that the shares 
transferred to H consisted of 100 shares owned by C, 25 shares owned by 
D, and 25 shares owned by F. The substitute payment in lieu of dividends 
with respect to X stock is therefore attributed to C, D and F based on 
the actual number of their shares that were transferred to H. 
Accordingly, C receives $200 (100 shares x $2 per share), and D and F 
each receive $50 (25 shares each x $2 per share). A must furnish 
statements identifying the payments as being in lieu of dividends to 
both C and D, unless they are exempt recipients as defined in paragraph 
(b)(2) of this section or exempt foreign persons as defined in paragraph 
(b)(3) of this section. Assuming that A had no reason to know on the 
record date of the payment that the dividend paid by X is of a type 
described in paragraphs (a)(3)(ii)(A) through (D) of this section, A 
need not furnish F with a statement under section 6045(d) because F is 
an individual. (However, A may be required to furnish F with a statement 
in accordance with section 6042 and the regulations thereunder. See 
paragraph (h) of this section.) By recording the ownership of each share 
transferred to H, A has complied with the identification requirement of 
paragraph (f)(2) of this section.
    Example 2. Assume the same facts as in example (1), except that A's 
records do not specifically identify the record owner of each share of 
stock. Rather, all shares of X stock held in street name are pooled 
together. When A receives the $2 per share payment in lieu of a 
dividend, A determines the identity of the customers to which the 
payment relates by the method of allocation and selection prescribed in 
paragraph (f)(2)(ii) of this section. First, the transferred shares are 
allocated proportionately between the individual pool and the 
nonindividual pool. One-sixth of the transferred shares or 25 shares are 
allocated to the individual pool (50 loanable shares owned by 
individuals/300 total loanable shares-\1/6\; \1/6\ x 150 transferred 
shares = 25 shares). Assuming A has no reason to know by the record date 
of the payment that the payment is in lieu of a dividend of a type 
described in paragraphs (a)(3)(ii)(A) through (D) of this section, no 
selection of deemed transferred shares within the individual customer 
pool is required. (However, A may be required to furnish F with a 
statement under section 6042 and the regulations thereunder. See 
paragraph (h) of this section.) Five-sixths of the transferred shares or 
125 shares are allocated to the nonindividual pool (250

[[Page 321]]

loanable shares owned by nonindividuals/300 total loanable shares =\5/
6\; \5/6\ x 150 transferred shares = 125 shares). A must select which 
125 shares within the nonindividual pool are deemed to have been 
transferred. Using a purely random lottery, A selects 100 shares 
identified as being owned by C, and 25 shares identified as being owned 
by D. Accordingly, A is deemed to have transferred 100 shares and 25 
shares owned by C and D respectively, and received substitute payments 
in lieu of dividends of $200 (100 shares x $2 per share) and $50 (25 
shares x $2 per share) on behalf of C and D respectively. A must furnish 
statements to both C and D identifying such payments as being in lieu of 
dividends unless they are exempt recipients as defined in paragraph 
(b)(2) of this section or exempt foreign persons as defined in paragraph 
(b)(3) of this section. A has complied with the identification 
requirement of paragraph (f)(2) of this section.

    (g) Reporting by brokers--(1) Requirement of reporting. Any broker 
required to furnish a statement under paragraph (a) of this section 
shall report on Form 1096 showing such information as may be required by 
Form 1096, in the form, manner, and number of copies required by Form 
1096. With respect to each customer for which a broker is required to 
furnish a statement, the broker shall make a return of information on 
Form 1099, in the form, manner and number of copies required by Form 
1099.
    (2) Use of magnetic media. For information returns filed after 
December 31, 1996, see Sec. 301.6011-2 of this chapter for rules 
relating to filing information returns on magnetic media and for rules 
relating to waivers granted for undue hardship. A broker or barter 
exchange that fails to file a Form 1099 on magnetic media, when 
required, may be subject to a penalty under section 6721 for each such 
failure. See paragraph (g)(4) of this section.
    (3) Time and place of filing. The returns required under this 
paragraph (g) for any calendar year shall be filed after September 30 of 
such year, but not before the final substitute payment for the year is 
received by the broker, and on or before February 28 (March 31 if filed 
electronically) of the following year with any of the Internal Revenue 
Service Centers, the addresses of which are listed in the instructions 
for Form 1096.
    (4) Cross-reference to penalties. For provisions relating to the 
penalty provided for failure to file timely a correct information return 
required under section 6045(d) and Sec. 1.6045-2(g)(1), including a 
failure to file on magnetic media, see Sec. 301.6721-1 of this chapter. 
For provisions relating to the penalty provided for failure to furnish 
timely a correct payee statement required under section 6045(d) and 
Sec. 1.6045-2(a), see Sec. 301.6722-1 of this chapter. See Sec. 
301.6724-1 of this chapter for the waiver of a penalty if the failure is 
due to reasonable cause and is not due to willful neglect.
    (h) Coordination with section 6042. In cases in which reporting is 
required by both sections 6042 and 6045(d) with respect to the same 
substitute payment in lieu of a dividend, the provisions of section 
6045(d) control, and no report or statement under section 6042 need be 
made. If reporting is not required under section 6045(d) with respect to 
a substitute payment in lieu of a dividend, a report under section 6042 
must be made if required in accordance with the rules of section 6042 
and the regulations thereunder. Thus, if a broker receives a substitute 
payment in lieu of a dividend on behalf of an individual customer and 
the broker does not have reason to know by the record date of the 
payment that the payment is in lieu of a dividend of a type described in 
paragraphs (a)(3)(ii)(A) through (D) of this section, the broker must 
report with respect to the substitute payment if required in accordance 
with section 6042 and the regulations thereunder.
    (i) Effective/applicability date. These regulations apply to 
substitute payments received by a broker after December 31, 1984. The 
amendments to paragraph (c) apply to payee statements due after December 
31, 2014. For payee statements due before January 1, 2015, Sec. 1.6045-
2(c) (as contained in 26 CFR part 1, revised April 2013) shall apply. 
With regard to paragraph (g)(2) of this section, see section 6011(e) of 
the Internal Revenue Code for information returns required to be filed 
after December 31, 1989, and before January 1, 1997; and see paragraph 
(g)(2) of this

[[Page 322]]

section for information returns required to be filed after December 31, 
1996.

[T.D. 8029, 50 FR 23677, June 5, 1985, as amended by T.D. 8683, 61 FR 
53060, Oct. 10, 1996; T.D. 8734, 62 FR 53480, Oct. 14, 1997; T.D. 8770, 
63 FR 35519, June 30, 1998; T.D. 8895, 65 FR 50407, Aug. 18, 2000; T.D. 
9010, 67 FR 48758, July 26, 2002; T.D. 9103, 68 FR 74848, Dec. 29, 2003; 
T.D. 9504, 75 FR 64097, Oct. 18, 2010; T.D. 9675, 79 FR 41129, July 15, 
2014]



Sec. 1.6045-3  Information reporting for an acquisition of control
or a substantial change in capital structure.

    (a) In general. Any broker (as defined in Sec. 1.6045-1(a)(1)) that 
holds shares on behalf of a customer in a corporation that the broker 
knows or has reason to know based on readily available information 
(including, for example, information from a clearing organization or 
from information published by the Internal Revenue Service (IRS)) has 
engaged in a transaction described in Sec. 1.6043-4(c) (acquisition of 
control) or Sec. 1.6043-4(d) (substantial change in capital structure) 
shall file a return of information with respect to the customer, unless 
the customer is an exempt recipient as defined in paragraph (b) of this 
section.
    (b) Exempt recipients. A broker is not required to file a return of 
information under this section with respect to the following customers:
    (1) Any customer who receives only cash in exchange for its stock in 
the corporation, which must be reported by the broker pursuant to Sec. 
1.6045-1.
    (2) Any customer who is an exempt recipient as defined in Sec. 
1.6043-4(b)(5) or Sec. 1.6045-1(c)(3)(i).
    (c) Form, manner and time for making information returns. The return 
required by paragraph (a) of this section must be on Forms 1096, 
``Annual Summary and Transmittal of U.S. Information Returns,'' and 
1099-B, ``Proceeds from Broker and Barter Exchange Transactions,'' or on 
an acceptable substitute statement. Such forms must be filed on or 
before February 28 (March 31 if filed electronically) of the year 
following the calendar year in which the acquisition of control or the 
substantial change in capital structure occurs.
    (d) Contents of return. A separate Form 1099-B must be prepared for 
each customer. The Form 1099-B will request information with respect to 
the following and such other information as may be specified in the 
instructions:
    (1) The name, address and taxpayer identification number (TIN) of 
the customer;
    (2) The name of the corporation which engaged in the transaction 
described in Sec. 1.6043-4(c) or (d);
    (3) The number and class of shares in the corporation exchanged by 
the customer; and
    (4) The aggregate amount of cash and the fair market value of any 
stock or other property provided to the customer in exchange for its 
stock.
    (e) Furnishing of forms to customers--(1) General requirements. A 
broker must furnish Form 1099-B to the customer on or before February 15 
of the year following the calendar year in which the customer receives 
stock, cash or other property. An IRS truncated taxpayer identifying 
number (TTIN) may be used as the identifying number of the customer. For 
provisions relating to the use of TTINs, see Sec. 301.6109-4 of this 
chapter (Procedure and Administration Regulations).
    (2) Consolidated reporting. (i) The term consolidated reporting 
statement means a grouping of statements the same broker furnishes to 
the same customer or group of customers on the same date for the same 
reporting year that includes a statement required under this section. A 
consolidated reporting statement is limited to statements based on the 
same relationship of broker to customer as the statement required to be 
furnished under this section.
    (ii) A consolidated reporting statement must be furnished on or 
before February 15 of the year following the calendar year reported. Any 
statement that otherwise must be furnished on or before January 31 must 
be furnished on or before February 15 if it is furnished in the 
consolidated reporting statement.
    (f) Single Form 1099. If a broker is required to file a Form 1099-B 
with respect to a customer under Sec. Sec. 1.6045-3 and 1.6045-1(c) 
with respect to the same transaction, the broker may satisfy the 
requirements of both sections by filing and furnishing one Form 1099-B 
that contains all the relevant information,

[[Page 323]]

as provided in the instructions to Form 1099-B.
    (g) Effective/applicability date. This section applies with respect 
to any acquisition of control and any substantial change in capital 
structure occurring after December 5, 2005. The amendments to paragraph 
(e)(1) apply to payee statements due after December 31, 2014. For payee 
statements due before January 1, 2015, Sec. 1.6045-3(e)(1) (as 
contained in 26 CFR part 1, revised April 2013) shall apply.

[T.D. 9230, 70 FR 72380, Dec. 5, 2005, as amended by T.D. 9504, 75 FR 
64097, Oct. 18, 2010; T.D. 9675, 79 FR 41130, July 15, 2014]



Sec. 1.6045-4  Information reporting on real estate transactions
with dates of closing on or after January 1, 1991.

    (a) Requirement of reporting. Except as otherwise provided in 
paragraphs (c) and (d) of this section, a real estate reporting person 
(``reporting person'') must make an information return with respect to a 
real estate transaction and, under paragraph (m) of this section, must 
furnish a statement to the transferor. A reporting person may also 
report with respect to transactions otherwise excepted in paragraphs (c) 
and (d) of this section. However, if the reporting person so elects, the 
return must be filed and the statement furnished in accordance with the 
provisions of this section. For the definition of a real estate 
transaction for purposes of these reporting requirements, see paragraph 
(b) of this section. For rules for determining the reporting person with 
respect to a real estate transaction, see paragraph (e) of this section.
    (b) Definition of real estate transaction--(1) In general. A 
transaction is a ``real estate transaction'' under this section if the 
transaction consists in whole or in part of the sale or exchange of 
``reportable real estate'' (as defined in paragraph (b)(2) of this 
section) for money, indebtedness, property other than money, or 
services. The term ``sale or exchange'' shall include any transaction 
properly treated as a sale or exchange for Federal income tax purposes, 
whether or not the transaction is currently taxable. Thus, for example, 
a sale or exchange of a principal residence is a real estate transaction 
under this section even though the transferor is entitled to defer 
recognition under section 1034 (relating to rollover of gain on sale of 
principal residence), or the transferor is entitled to the special one-
time exclusion of gain from the sale of a principal residence provided 
by section 121 to certain persons who have attained age 55.
    (2)(i) Definition of reportable real estate. Except as otherwise 
provided in paragraph (c)(2) of this section, the term ``reportable real 
estate'' means any present or future ownership interest in--
    (A) Land (whether improved or unimproved), including air space;
    (B) Any inherently permanent structure, including any residential, 
commercial or industrial building;
    (C) Any condominium unit, including appurtenant fixtures and common 
elements (including land); or
    (D) Any stock in a cooperative housing corporation (as defined in 
section 216).
    (E) Any non-contingent interest in standing timber.
    (ii) For purposes of this section, the term ``ownership interest'' 
includes fee simple interests, life estates, reversions, remainders, and 
perpetual easements. In addition, the term ``ownership interest'' 
includes any previously created rights to possession or use for all or a 
portion of any particular year (i.e., a leasehold, easement, or 
``timeshare''), with a remaining term of at least 30 years, including 
any period for which such rights may be renewed at the option of the 
holder of the rights, as determined on the date of closing (as defined 
in paragraph (h)(2)(ii) of this section). Thus, for example, a pre-
existing leasehold on a building with an original term of 99 years is an 
ownership interest in real estate for purposes of this section if it has 
a remaining term of 35 years as of the date of closing, but not if it 
has a remaining term of only 10 years as of the date of closing. 
However, the term ``ownership interest'' does not include an option to 
acquire otherwise reportable real estate. Further, the term ``ownership 
interest'' includes any contractual interest in a sale or exchange

[[Page 324]]

of standing timber for a lump-sum payment that is fixed and not 
contingent.
    (c) Exception for certain exempt transactions--(1) Certain 
transfers. No return of information is required with respect to--
    (i) A transaction that is not a sale or exchange (such as a gift 
(including a transaction treated as a gift under section 1041) or 
bequest, or a financing or refinancing that is not related to the 
acquisition of reportable real estate), even if the transaction involves 
reportable real estate, as defined in paragraph (b)(2) of this section;
    (ii) A transfer in full or partial satisfaction of any indebtedness 
secured by the property so transferred including a foreclosure, a 
transfer in lieu of foreclosure or an abandonment; or
    (iii) A transaction (a ``de minimis transfer'') in which it can be 
determined with certainty that the total consideration (in money, 
services and property), received or to be received in connection with 
the transaction is less than $600 in value (determined without regard to 
any allocation of gross proceeds among multiple transferors under 
paragraph (i)(5) of this section) as of the date of the closing (as 
defined in paragraph (h)(2)(ii) of this section), even if the 
transaction involves reportable real estate. Thus, for example, if a 
contract for sale of reportable real estate recites total consideration 
of ``$1.00 plus other valuable consideration,'' the transfer is not a de 
minimis transfer unless the reporting person can determine that the 
``other valuable consideration'' received or to be received is less than 
$599 in value as measured on the date of closing.
    (2) Certain property. Notwithstanding the provisions of paragraph 
(b)(2) of this section, no return of information is required with 
respect to a sale or exchange of an interest in any of the following 
property--provided the sale or exchange of such property is not related 
to the sale or exchange of reportable real estate--
    (i) An interest in surface or subsurface natural resources (for 
example, water, ores, and other natural deposits) or crops, whether or 
not such natural resources or crops are severed from the land. For 
purposes of this section, the terms ``natural resources'' and ``crops'' 
do not include standing timber.
    (ii) A burial plot or vault; or
    (iii) A manufactured structure used as a dwelling that is 
manufactured and assembled at a location different from that where it is 
used, but only if such structure is not affixed, at the date of closing 
(as defined in paragraph (h)(2)(ii) of this section), to a foundation. 
Thus, a transfer of an unaffixed mobile home that is unrelated to the 
sale or exchange of reportable real estate is excepted from the 
reporting requirements of this section.
    (d) Exception for certain exempt transferors--(1) General rule. No 
return of information is required with respect to a transferor that is a 
corporation under section 7701(a)(3) or section 7704(a) or is considered 
under paragraph (d)(2) of this section to be--
    (i) A corporation;
    (ii) A governmental unit; or
    (iii) An exempt volume transferor.


In the case of a real estate transaction with respect to which there is 
one or more exempt transferor(s) and one or more non-exempt 
transferor(s), the reporting person is required to report with respect 
to any non-exempt transferor. The special rule for allocation of gross 
proceeds, as provided in paragraph (i)(5) of this section, applies to 
such a transaction.
    (2) Treatment as exempt transferor. Absent actual knowledge to the 
contrary, a reporting person may treat a transferor as--
    (i) A corporation if--
    (A) The name of the transferor contains an unambiguous expression of 
corporate status, such as Incorporated, Inc., Corporation, Corp., or 
P.C. (but not Company or Co.);
    (B) The name of the transferor contains the term ``insurance 
company,'' ``reinsurance company,'' or ``assurance company''; or
    (C) The transfer or loan documents clearly indicate the corporate 
status of the transferor;
    (ii) A governmental unit if the transferor is--
    (A) The United States or a state, the District of Columbia, a 
possession of the United States, a political subdivision of any of the 
foregoing, or any

[[Page 325]]

wholly owned agency or instrumentality of any one or more of the 
foregoing; or
    (B) A foreign government, a political subdivision thereof, an 
international organization, as defined in section 7701(a)(18), or any 
wholly-owned agency or instrumentality of the foregoing; or
    (iii) An exempt volume transferor if, and only if, the reporting 
person receives a certification of exempt status under paragraph (d)(3) 
of this section.
    (3) Certification of exempt status--(i) In general. A certification 
of exempt status must contain--
    (A) The name, address, and taxpayer identification number of the 
transferor (the address must be that of the permanent residence (in the 
case of an individual), that of the principal office (in the case of a 
corporation or partnership), or that of the permanent residence or 
principal office of any fiduciary (in the case of a trust or estate));
    (B) Sufficient information to identify any otherwise reportable real 
estate not reported by virtue of the exempt status of the transferor; 
and
    (C) A declaration that the transferor has sold or exchanged during 
either of the prior two calendar years, or previously sold or exchanged 
during the current calendar year, or, as of the date of closing (as 
defined in paragraph (h)(2)(ii) of this section), reasonably expects to 
sell or exchange during the current calendar year at least 25 separate 
items of reportable real estate (as defined in paragraph (b)(2) of this 
section) to at least 25 separate transferees, and that each such item, 
at the date of closing of the sale of such item was or will be held 
primarily for sale or resale to customers in the ordinary course of a 
trade or business. For example, the declaration may be worded as 
follows:

________________________________________________________________________
[Insert name of transferor]

[check one or more]:
    (1) __ has sold or exchanged during either of the prior two calendar 
years,
    (2) __ previously sold or exchanged during the current calendar 
year,
    (3) __ on the date of closing expects to sell or exchange during the 
current calendar year,

at least 25 separate items of reportable real estate to at least 25 
separate transferees and each such item, at the date of closing of such 
item was or will be held primarily for sale or resale to customers in 
the ordinary course of a trade or business.

    (ii) Additional requirements. A certification of exempt status must 
be--
    (A) Signed under penalties of perjury by the transferor or any 
person who is authorized to sign a declaration under penalties of 
perjury in behalf of the transferor as described in section 6061 and the 
regulations thereunder;
    (B) Received by the reporting person no later than the time of 
closing; and
    (C) Retained by the reporting person for four years following the 
close of the calendar year in which the date of closing (as determined 
under paragraph (h)(2)(ii) of this section) occurs.
    (iii) Reporting person may accept or disregard certification. A 
reporting person may solicit or merely accept a certification of exempt 
status. Moreover, notwithstanding a transferor's furnishing of such 
certification, a reporting person may disregard the certification and, 
instead, report with respect to the transaction. See paragraph (a) of 
this section for the requirement that such elective reporting must be in 
compliance with the provisions of this section.
    (e) Person required to report--(1) In general. Although there may be 
other persons involved in a real estate transaction, only the reporting 
person is required to report with respect to any real estate 
transaction. Except as provided in a designation agreement under 
paragraph (e)(5) of this section, the reporting person with respect to a 
real estate transaction is--
    (i) The person responsible for closing the transaction, as defined 
in paragraph (e)(3) of this section; or
    (ii) If there is no person responsible for closing the transaction, 
the person determined to be the reporting person under paragraph (e)(4) 
of this section.


A person may be the reporting person with respect to a transaction 
whether or not such person performs or is licensed to perform real 
estate brokerage services for a commission or fee.
    (2) Employees, agents, and partners. For purposes of this paragraph 
(e), if an employee, agent, or partner (other than an employee, agent, 
or partner of the transferor or the transferee) acting

[[Page 326]]

within the scope of such person's employment, agency, or partnership 
participates in a real estate transaction--
    (i) Such participation shall be attributed to such person's 
employer, principal, or partnership; and
    (ii) Only the employer, principal, or partnership (and not such 
person) may be the reporting person with respect to such transaction as 
a result of such participation.
    However, the participation of a person described in paragraph 
(e)(3)(i) of this section (i.e., a person listed on the Uniform 
Settlement Statement as the settlement agent) acting as an agent of 
another is not attributed to the principal.
    (3) Person responsible for closing the transaction--(i) Uniform 
Settlement Statement used. If a Uniform Settlement Statement prescribed 
under the Real Estate Settlement Procedures Act of 1974 (RESPA), 12 
U.S.C. 2601 et seq. (a ``Uniform Settlement Statement''), is used with 
respect to the real estate transaction and a person is listed as 
settlement agent on the statement, such person is the person responsible 
for closing the transaction. For purposes of this section, a Uniform 
Settlement Statement shall include any amendments or variations thereto, 
or substitutions therefore that may hereafter be prescribed under RESPA, 
provided that any such amended, varied, or substituted form requires 
disclosure of the parties to the transaction, the application of the 
proceeds of the transaction, and the identity of the settlement agent or 
other person responsible for preparing the form.
    (ii) Other closing statement used. If a Uniform Settlement Statement 
is not used, or if a Uniform Settlement Statement is used, but no person 
is listed as settlement agent, the person responsible for closing the 
transaction is the person who prepares a closing statement presented to 
the transferor and transferee at, or in connection with, the closing of 
the real estate transaction. For purposes of this section, a closing 
statement is any closing statement, settlement statement (including a 
Uniform Settlement Statement), or other written document that identifies 
the transferor and transferee, reasonably identifies the transferred 
real estate, and describes the manner in which the proceeds payable to 
the transferor are to be (or were) disbursed at, or in connection with, 
the closing.
    (iii) No closing statement used or multiple closing statements used. 
If no closing statement is used or multiple closing statements are used, 
the person responsible for closing the transaction is the first-listed 
of the persons that participate in the transaction as--
    (A) The attorney for the transferee who is present at the occasion 
of the delivery of either the transferee's note or a significant portion 
of the cash proceeds to the transferor, or who prepares or reviews the 
preparation of the document(s) transferring legal or equitable ownership 
of the real estate;
    (B) The attorney for the transferor who is present at the occasion 
of the delivery of either the transferee's note or a significant portion 
of the cash proceeds to the transferor, or who prepares or reviews the 
preparation of the document(s) transferring legal or equitable ownership 
of the real estate; or
    (C) The disbursing title or escrow company that is most significant 
in terms of gross proceeds disbursed.


If more than one attorney would be the person responsible for closing 
the transaction under the preceding sentence, the person among such 
attorneys who is considered responsible for closing the transaction 
under this paragraph (e)(3)(iii) is the person whose involvement in the 
transaction is most significant.
    (4) Determination of the real estate reporting person in the absence 
of a person responsible for closing the transaction. If no person is 
responsible for closing the transaction (within the meaning of paragraph 
(e)(3) of this section), the reporting person with respect to the real 
estate transaction is the person first-listed below of the persons that 
participate in the transaction as--
    (i) The mortgage lender (as defined in paragraph (e)(6)(i) of this 
section);
    (ii) The transferor's broker (as defined in paragraph (e)(6)(ii) of 
this section);
    (iii) The transferee's broker (as defined in paragraph (e)(6)(iii) 
of this section); or
    (iv) The transferee (as defined in paragraph (e)(6)(iv) of this 
section).

[[Page 327]]

    (5) Designation agreement--(i) In general. If a written designation 
agreement executed at or prior to the time of closing designates one of 
the persons described in paragraph (e)(5)(ii) of this section as the 
reporting person with respect to the transaction and the designated 
person is a party to the agreement, the designated person is the 
reporting person with respect to the transaction. It is not necessary 
that all parties to the transaction (or that more than one party) be 
parties to the agreement.
    (ii) Persons eligible. A person may be designated as the reporting 
person under this paragraph (e)(5) only if the person is--
    (A) The person responsible for closing the transaction (as defined 
in paragraph (e)(3) of this section);
    (B) A person described in paragraph (e)(3)(iii) (A), (B) or (C) of 
this section (whether or not such person is responsible for closing the 
transaction); or
    (C) The mortgage lender (as defined in paragraph (e)(6)(i) of this 
section).
    (iii) Form of designation agreement. A designation agreement may be 
in any form that is consistent with the requirements of this paragraph 
(e)(5), and may be included on a closing statement with respect to the 
transaction. The designation agreement must, however, include the name 
and address of the transferor and transferee and the address and any 
additional information necessary to identify the real estate 
transferred. The agreement must identify, by name and address, the 
person designated as the reporting person with respect to the 
transaction, and all other parties (if any) to the agreement. All 
parties to the agreement must date and sign the agreement and must 
retain the agreement for four years following the close of the calendar 
year in which the date of closing (as determined under paragraph 
(h)(2)(ii) of this section) occurs. Upon request by the Internal Revenue 
Service, or any person involved in the transaction who did not 
participate in the designation agreement, the agreement must be made 
available for inspection.
    (6) Meaning of terms--(i) Mortgage lender. For purposes of this 
paragraph (e), the term ``mortgage lender'' means the person who lends 
new funds in connection with the transaction, but only if the repayment 
of such funds is secured in whole or in part by the real estate 
transferred. If new funds are advanced by more than one person, the 
mortgage lender is the person who advances the largest amount of new 
funds. If two or more persons advance equal amounts of new funds and no 
other person advances a greater amount of new funds, the mortgage lender 
among the persons advancing such equal amounts is the person with the 
security interest that is most senior in terms of priority. For purposes 
of this paragraph (e)(6)(i), any amounts advanced by the transferor are 
not treated as new funds.
    (ii) Transferor's broker. For purposes of this paragraph (e), the 
term ``transferor's broker'' means only the broker that contracts with 
the transferor and is compensated in connection with the transaction.
    (iii) Transferee's broker. For purposes of this paragraph (e), the 
term ``transferee's broker'' means only the broker that participates to 
a significant extent in the preparation of the transferee's offer to 
acquire the real estate or that presents such offer to the transferor. 
If more than one person is so described, the transferee's broker is the 
person whose participation in the preparation of the transferee's offer 
to acquire the real estate is most significant or, in the event there is 
no such person, the person whose participation in the presentation of 
the offer is most significant.
    (iv) Transferee. For purposes of this paragraph (e), the term 
``transferee'' means the person who acquires the greatest interest in 
the real estate. If there is no such person, the transferee is the 
person listed first on the document(s) transferring legal or equitable 
ownership of the real estate.
    (f) Multiple transferors--(1) General rule. In the case of multiple 
transferors, each of which transfers an interest in the same reportable 
real estate, the reporting person shall make a separate information 
return with respect to each transferor. Paragraph (i)(5) of this section 
provides rules for the determination of gross proceeds to be reported in 
the case of multiple transferors.

[[Page 328]]

    (2) Rules for spouses. Transferors who are husband and wife at the 
time of closing and hold the reportable real estate as tenants in 
common, joint tenants, tenants by the entirety, or community property 
are treated as a single transferor for purposes of paragraphs (f)(1), 
(h)(1)(i), (i)(5) and (l)(1)(i) of this section, unless the reporting 
person receives, at or prior to the time of closing, an uncontested 
allocation of gross proceeds between them. In the case of a husband and 
wife treated as a single transferor, the reporting person may treat 
either as the transferor for purposes of paragraphs (h)(1)(i) and (l)(1) 
of this section, relating to reporting and soliciting taxpayer 
identification numbers.
    (g) Prescribed form. Except as otherwise provided in paragraph (k) 
of this section, the information return required by paragraph (a) of 
this section shall be made on Form 1099.
    (h) Information required--(1) In general. The following information 
must be set forth on the Form 1099 required by this section:
    (i) The name, address, and taxpayer identification number (TIN) of 
the transferor (see also paragraph (f)(2) of this section);
    (ii) A general description of the real estate transferred (in 
accordance with paragraph (h)(2)(i) of this section);
    (iii) The date of closing (as defined in paragraph (h)(2)(ii) of 
this section);
    (iv) To the extent required by the Form 1099 and its instructions, 
the entire gross proceeds with respect to the transaction (as determined 
under the rules of paragraph (i) of this section), and, in the case of 
multiple transferors, the gross proceeds allocated to the transferor (as 
determined under paragraph (i)(5) of this section);
    (v) To the extent required by the Form 1099 and its instructions, an 
indication that the transferor--
    (A) Received (or will, or may, receive) property (other than cash 
and consideration treated as cash in computing gross proceeds) or 
services as part of the consideration for the transaction,
    (B) May receive property (other than cash) or services in 
satisfaction of an obligation having a stated principal amount, or
    (C) May receive, in connection with a contingent payment 
transaction, an amount of gross proceeds that cannot be determined with 
certainty using the method described in paragraph (i)(3)(iii) of this 
section and is therefore not included in gross proceeds under paragraphs 
(i)(3)(i) and (i)(3)(iii) of this section;
    (vi) The real estate reporting person's name, address, and TIN;
    (vii) [Reserved]; and
    (viii) Any other information required by the Form 1099 or its 
instructions.
    (2) Meaning of terms--(i) General description of the real estate 
transferred. A general description of the real estate transferred 
includes the complete address of the property. If the address would not 
sufficiently identify the property, a general description of the real 
estate also includes a legal description (e.g., section, lot, and block) 
of the property.
    (ii) Date of closing. In the case of a real estate transaction with 
respect to which a Uniform Settlement Statement is used, the date of 
closing shall be the date (if any) properly described as the 
``Settlement Date'' on such statement. In all other cases, the date of 
closing shall be the earlier of the date on which title is transferred 
or the date on which the economic burdens and benefits of ownership of 
the real estate shift from the transferor to the transferee.
    (i) Gross proceeds--(1) In general. Except as otherwise provided in 
this paragraph (i), the term ``gross proceeds'' means the total cash 
received or to be received by or on behalf of the transferor in 
connection with the real estate transaction. For purposes of this 
paragraph (i), the following amounts are treated as cash received or to 
be received by or on behalf of the transferor in connection with the 
real estate transaction:
    (i) The stated principal amount of any obligation to pay cash to or 
for the benefit of the transferor in the future (including any 
obligation having a stated principal amount that may be satisfied by the 
delivery of property (other than cash) or services);
    (ii) The amount of any liability of the transferor assumed by the 
transferee as part of the consideration for

[[Page 329]]

the transfer or of any liability to which the real estate acquired is 
subject (whether or not the transferor is personally liable for the 
debt); and
    (iii) In the case of a contingent payment transaction, as defined in 
paragraph (i)(3)(ii) of this section, the maximum determinable proceeds, 
as defined in paragraph (i)(3)(iii) of this section.


Gross proceeds does not include the value of any property (other than 
cash and consideration treated as cash) or services received by, or on 
behalf of, the transferor in connection with the real estate 
transaction. See paragraph (h)(1)(v) of this section for the information 
that must be included on the Form 1099 required by this section in cases 
in which the transferor receives (or will, or may, receive) property 
(other than cash and consideration treated as cash) or services as part 
of the consideration for the transfer.
    (2) Treatment of sales commissions and similar expenses. In 
computing gross proceeds, the total cash received or to be received by 
or on behalf of the transferor shall not be reduced by expenses borne by 
the transferor (such as sales commissions, expenses of advertising the 
real estate, expenses of preparing the deed, and the cost of legal 
services in connection with the transfer).
    (3) Special rules for contingent payments--(i) In general. If a real 
estate transaction is a contingent payment transaction, gross proceeds 
consist of the maximum determinable proceeds, if any.
    (ii) Contingent payment transaction. For purposes of this section, 
the term ``contingent payment transaction'' means a real estate 
transaction with respect to which the receipt, by or on behalf of the 
transferor, of cash or consideration treated as cash under paragraph 
(i)(1)(i) of this section is subject to a contingency.
    (iii) Maximum determinable proceeds. For purposes of this section, 
the term ``maximum determinable proceeds'' means the gross proceeds 
determined by assuming that all of the contingencies contemplated by the 
documents available at closing are met or otherwise resolved in a manner 
that will maximize the gross proceeds. If the maximum amount of gross 
proceeds cannot be determined with certainty using this method, the 
maximum determinable proceeds are the greatest amount that can be 
determined with certainty using this method. See paragraph (h)(1)(v)(C) 
of this section for the information that must be included on the Form 
1099 required by this section in cases in which the maximum amount of 
gross proceeds cannot, by using the method described in this paragraph 
(i)(3)(iii), be determined with certainty.
    (4) Uniform Settlement Statement used. If a Uniform Settlement 
Statement is used with respect to a real estate transaction involving a 
transfer of reportable real estate solely for cash and consideration 
treated as cash in computing gross proceeds, the gross proceeds 
generally will be the same amount as the contract sales price properly 
shown on that statement.
    (5) Special rules for multiple transferors--(i) General rules. In 
the case of multiple transferors (within the meaning of paragraph (f) of 
this section) each of which transfers an interest in the same reportable 
real estate, the reporting person must request the transferors to 
provide an allocation of the gross proceeds among the transferors. The 
request must be made at or before the time of closing. Neither the 
request nor the response is required to be in writing. The reporting 
person must make a reasonable effort to contact all transferors of whom 
the reporting person has actual knowledge. The reporting person may, 
however, rely on the unchallenged response of any transferor and need 
not make additional efforts to contact other transferors after at least 
one complete allocation (whether or not contained in a single response) 
is received. Except as otherwise provided in this paragraph (i)(5), the 
reporting person shall report the gross proceeds in accordance with any 
allocation received at or before the time of closing. The reporting 
person may (but is not required to) report the gross proceeds in 
accordance with any allocation received after the time of closing and 
before the date (determined without regard to extensions) the Forms 1099 
are required to be filed. The reporting person may not report the

[[Page 330]]

gross proceeds in accordance with any allocation received on or after 
the date (determined without regard to extensions) the Forms 1099 are 
required to be filed. If no gross proceeds are allocated to a transferor 
because no allocation or an incomplete allocation is received by the 
reporting person, the reporting person shall report the entire 
unallocated gross proceeds (if any) on the return of information made 
with respect to such transferor. If the reporting person receives 
conflicting allocations from the transferors, the reporting person shall 
report the entire gross proceeds on each return of information made with 
respect to the transaction.
    (ii) Rules for spouses. The reporting person need not request an 
allocation of gross proceeds if the only transferors are husband and 
wife at the time of closing. If there are other transferors, the 
reporting person need only make a reasonable effort to contact either 
the husband or wife in connection with the request for an allocation. 
See paragraph (f)(2) of this section for rules that treat a husband and 
wife as multiple transferors if an uncontested allocation of gross 
proceeds is received by the reporting person at or prior to the time of 
closing.
    (6) Multiple asset transactions. In the case of a real estate 
transaction reportable under this section that involves the transfer of 
reportable real estate and other assets, the amount attributable to both 
the real estate and other assets is treated as the gross proceeds with 
respect to that real estate transaction. No allocation of gross proceeds 
is made among the assets.
    (j) Time and place for filing. A reporting person shall file the 
information returns required by this section with respect to a real 
estate transaction after December 31 of the calendar year that includes 
the date of closing (as determined under paragraph (h)(2)(ii) of this 
section) and on or before February 28 (March 31 if filed electronically) 
of the following calendar year. The returns shall be filed with the 
appropriate Internal Revenue Service Center at the address listed in the 
Instructions to Form 1099.
    (k) Use of magnetic media and substitute forms--(1) Magnetic media--
(i) General rule. A reporting person that is required to make a return 
of information under this section shall, except as otherwise provided in 
paragraph (k)(1) (ii) or (iii) of this section, submit the information 
required by this section on magnetic media (within the meaning of 26 CFR 
301.6011-2). Returns on magnetic media shall be made in accordance with 
26 CFR 301.6011-2) and applicable revenue procedures.
    (ii) Exception for low-volume filers. For rules allowing a reporting 
person to make the information returns required by this section on the 
prescribed paper Form 1099 if the reporting person is required by this 
section to file fewer than 250 returns during the calendar year, see 
section 6011(e) and guidance issued by the Internal Revenue Service 
thereunder.
    (iii) Undue hardship. The Commissioner may authorize a reporting 
person to file information returns on the prescribed paper Form 1099 
instead of on magnetic media if undue hardship is shown either on Form 
8508, Request for Waiver From Filing Information Returns on Magnetic 
Media, or on a written statement requesting a waiver for undue hardship 
filed with the Martinsburg Computing Center, Martinsburg, West Virginia 
in accordance with applicable revenue procedures.
    (2) Substitute forms. A reporting person that is described in 
paragraph (k)(1)(ii) of this section or that receives permission to file 
returns on the prescribed paper Form 1099 under paragraph (k)(1)(iii) of 
this section may prepare and use a form that contains provisions 
identical with those of Form 1099 if the reporting person complies with 
all applicable revenue procedures relating to substitute Form 1099, 
including any requirement relating to the use of machine-readable paper 
forms.
    (l) Requesting taxpayer identification numbers (TINS)--(1) 
Solicitation--(i) General requirements. A reporting person who is 
required to make an information return with respect to a real estate 
transaction under this section must solicit a TIN from the transferor at 
or before the time of closing. The solicitation may be made in person or 
in a mailing that includes other items. Any person whose TIN is 
solicited under this paragraph (l) must furnish

[[Page 331]]

such TIN to the reporting person and certify that the TIN is correct. 
See paragraph (f)(2) of this section for rules that treat a husband and 
wife as a single transferor (and provide for the TIN solicitation of 
either) in the absence of an allocation of gross proceeds under 
paragraph (i)(5) of this section.
    (ii) Content of solicitation. The solicitation shall be made by 
providing to the person from whom the TIN is solicited a written 
statement that the person is required by law to furnish a correct TIN to 
the reporting person, and that the person may be subject to civil or 
criminal penalties for failing to furnish a correct TIN. For example, 
the solicitation may be worded as follows:

    You are required by law to provide [insert name of reporting person] 
with your correct taxpayer identification number. If you do not provide 
[insert name of reporting person] with your correct taxpayer 
identification number, you may be subject to civil or criminal penalties 
imposed by law.


The solicitation shall contain space for the name, address, and TIN of 
the person from whom the TIN is solicited and for the person to certify 
under penalties of perjury that the TIN furnished is that person's 
correct TIN. The wording of the certification must be substantially 
similar to the following: ``Under penalties of perjury, I certify that 
the number shown on this statement is my correct taxpayer identification 
number.'' The requirements of this paragraph (l)(1)(ii) may be met by 
providing to the transferor a copy of Form W-9. In the case of a real 
estate transaction for which a Uniform Settlement Statement is used, the 
requirements of this paragraph (l)(1)(ii) may be met by providing to the 
transferor a copy of such statement that is modified to conform to the 
requirements of this paragraph (l)(1)(ii).
    (iii) Retention requirement. The solicitation shall be retained by 
the reporting person for four years following the close of the calendar 
year that includes the date of closing (as determined under paragraph 
(h)(2)(ii) of this section). Such solicitation must be made available 
for inspection upon request by the Internal Revenue Service.
    (2) No TIN provided. A reporting person that does not receive the 
transferor's TIN will not be subject to any penalty cross-referenced in 
paragraph (n) of this section by reason of failure to report such TIN if 
the reporting person has complied with the requirements of paragraph 
(l)(1) of this section in good faith (determined with proper regard for 
a course of conduct and the overall results achieved for the year).
    (m) Furnishing statements to transferors--(1)(i) Requirement of 
furnishing statements. A reporting person who is required to make a 
return of information under paragraph (a) of this section shall furnish 
to the transferor whose TIN is required to be shown on the return a 
written statement of the information required to be shown on such 
return. The written statement must bear either the legend shown on the 
recipient copy of Form 1099 or the following: ``This is important tax 
information and is being furnished to the Internal Revenue Service. If 
you are required to file a return, a negligence penalty or other 
sanction may be imposed on you if this item is required to be reported 
and the IRS determines that it has not been reported.''
    (ii) This requirement may be satisfied by furnishing to the 
transferor a copy of a completed Form 1099 (or substitute Form 1099 that 
complies with current revenue procedures). An IRS truncated taxpayer 
identifying number (TTIN) may be used as the identifying number of the 
transferor in lieu of the identifying number appearing on the 
information return filed with the Internal Revenue Service. For 
provisions relating to the use of TTINs, see Sec. 301.6109-4 of this 
chapter (Procedure and Administration Regulations).
    (iii) In the case of a real estate transaction for which a Uniform 
Settlement Statement is used, this requirement also may be satisfied by 
furnishing to the transferor a copy of a completed statement that is 
modified to comply with the requirements of this paragraph (m), and by 
designating on the Uniform Settlement Statement the items of information 
(such as gross proceeds or allocated gross proceeds) required to be set 
forth on the Form 1099. For purposes of this paragraph (m), a statement 
shall be considered furnished to a transferor if it is given to the 
transferor in person, either at the closing or thereafter, or is mailed

[[Page 332]]

to the transferor at the transferor's last known address.
    (2) Time for furnishing statement. The statement required under this 
paragraph (m) must be furnished to the transferor on or after the date 
of closing and on or before February 15 of the following calendar year.
    (3) Consolidated reporting. (i) The term consolidated reporting 
statement means a grouping of statements the same reporting person 
furnishes to the same transferor or group of transferors on the same 
date for the same reporting year that includes a statement required 
under this section. A consolidated reporting statement is limited to 
statements based on the same relationship of reporting person to 
transferor as the statement required to be furnished under this section.
    (ii) A consolidated reporting statement must be furnished on or 
before February 15 of the year following the calendar year reported. Any 
statement that otherwise must be furnished on or before January 31 must 
be furnished on or before February 15 if it is furnished in the 
consolidated reporting statement.
    (n) Cross-reference to penalties. See the following sections 
regarding penalties for failure to comply with the requirements of 
section 6045(e) and this section:
    (1) Section 6721 for failure to file a correct information return;
    (2) Section 6722 for failure to furnish a correct statement to the 
transferor;
    (3) Section 6723 for failure to comply with other information 
reporting requirements (including the requirement to furnish a TIN);
    (4) Section 6724 for definitions and rules relating to waiver and 
payment; and
    (5) Section 7203 for willful failure to supply information 
(including a taxpayer identification number).
    (o) No separate charge. A reporting person may not separately charge 
any person involved in a real estate transaction for complying with any 
requirements of this section.
    (p) Backup withholding requirements. [Reserved]
    (q) Federally-subsidized indebtedness. [Reserved]
    (r) Examples. The following examples illustrate the application of 
this section:

    Example 1. Sale or exchange. (i) On June 1, 1991, A, an individual, 
buys a house from B, an individual, for $200,000. The entire $200,000 is 
financed by B under an ``installment land contract,'' whereby A takes 
possession and assumes all significant economic benefits and burdens of 
ownership of the house, and B retains legal title to the property until 
A fully performs under the contract. On June 1, 1994, A refinances his 
purchase of the house with Z, a financial institution. The balance owed 
to B is repaid and B relinquishes title to the house. A retains 
possession and the benefits and burdens of ownership of the house.
    (ii) For federal income tax purposes, the transaction occurring on 
June 1, 1991 is considered a sale of the house by B, notwithstanding his 
retention of legal title to the property. B's sale is subject to 
information reporting under this section. However, the transaction 
occurring on June 1, 1994 is not a sale or exchange for federal income 
tax purposes, and notwithstanding the change in legal title upon the 
deeding over of the property, that transaction is not subject to 
information reporting under this section.
    Example 2. Sale or exchange. On August 10, 1991, C, an individual, 
accepts an offer from Y, a corporation that acts on behalf of T (C's 
employer) to facilitate moves of T's transferred employees from one part 
of the country to another. Under the offer, C transfers his residence to 
Y for $250,000 by executing a deed to the property in blank and giving Y 
a power of attorney to dispose of the residence. C also immediately 
vacates the residence, whereupon Y begins paying all costs associated 
with the residence and is entitled to all income from the residence, 
including sales proceeds. On October 1, 1991, Y sells the residence to D 
and inserts C's name in the deed previously executed by C. Thus, neither 
Y nor T ever become record owners of the residence. C's transfer of the 
residence to Y on August 10, 1991 is a sale of reportable real estate 
and is subject to information reporting under this section; however, the 
sale on October 1, 1991 is not required to be reported because Y (the 
transferor in that sale) is a corporation. See paragraph (d) of this 
section.
    Example 3. Definition of ownership interest. E, an individual, owns 
a perpetual timeshare interest in a residential unit of real property at 
an oceanfront resort. For consideration, on November 15, 1991, E sells 
her rights in the property for the period January 1, 1992 through 
December 31, 1992 to F. The transfer of E's property interest is not the 
transfer of an ownership interest, as defined in paragraph (b)(2) of 
this section and therefore is not reportable real estate under paragraph

[[Page 333]]

(b)(2) of this section. Accordingly, the transfer is not a real estate 
transaction under section (b)(1) of this section, and no return of 
information is required with respect to E's property transfer.
    Example 4. Gross proceeds (exchange). (i) G, an individual, agrees 
to transfer Blackacre, which has a fair market value of $100,000, plus 
$10,000 cash to H, an individual, in exchange for Whiteacre, which as a 
fair market value of $120,000 and is encumbered by a $10,000 liability 
(which is assumed by G). No other liabilities are involved in the 
transaction. P is the reporting person with respect to both sides of the 
transaction.
    (ii) With respect to the transfer of Blackacre by G to H, P must 
report gross proceeds of $-0- (even though the exchange agreement may 
recite total exchange value of $120,000). See paragraph (i)(1) of this 
section. In addition, (to the extent required by the Form 1099 and its 
instructions) P must indicate that G will receive property as part of 
the consideration for the transaction. See paragraph (h)(v)(A) of this 
section.
    (iii) With respect to the transfer of Whiteacre by H to G, P must 
report gross proceeds of $20,000 (the amount received by H consisting of 
cash ($10,000) and consideration treated as cash ($10,000) under 
paragraph (i) of this section). No other amount is reported under 
paragraph (i)(1) of this section even though the exchange agreement may 
recite total exchange value of $120,000. In addition, (to the extent 
required by the Form 1099 and its instructions) P must indicate that H 
will receive property as part of the consideration for the transaction. 
See paragraph (h)(v)(A) of this section.
    Example 5. Gross proceeds (deferred exchange). [Reserved]
    Example 6. Gross proceeds (contingencies). K, an individual, sells 
an unencumbered apartment building to L for $500,000, payable at 
closing, plus an amount equal to 2% of gross rents from the apartment 
building for each of the next 5 years, the contingent payments to be 
made annually with adequate stated interest. The agreement provides that 
the maximum amount K may receive (including the downpayment but 
excluding the interest) is $600,000. Under paragraph (i)(3)(ii) of this 
section the real estate transaction is a ``contingent payment 
transaction.'' Under paragraph (i)(3)(iii) of this section, the maximum 
amount of gross proceeds determined by assuming all contingencies are 
satisfied is $600,000. Thus, $600,000 is the ``maximum determinable 
proceeds'' and is the amount reported.
    Example 7. Gross proceeds (contingencies). The facts are the same as 
in example (6), except that the agreement does not provide for adequate 
stated interest. The result is the same as in example (6).
    Example 8. Gross proceeds (contingencies). The facts are same as in 
example (6), except that no maximum amount is stated in the agreement 
(or any other document available at closing). Under paragraph 
(i)(3)(iii) of this section, assuming all contingencies are satisfied, 
the maximum amount of gross proceeds cannot be determined with 
certainty. The greatest amount that can be determined with certainty at 
the time of the closing, assuming all contingencies are satisfied, is 
$500,000, the cash downpayment. Therefore, $500,000 is the ``maximum 
determinable proceeds'' under paragraph (i)(3)(iii) of this section and 
is the amount reported. In addition, (to the extent required by the Form 
1099 and its instructions) the reporting person must indicate that the 
gross proceeds cannot be determined with certainty. See paragraph 
(h)(1)(iv)(C) of this section.
    Example 9. Gross proceeds (contingencies). The facts are the same as 
in example (8), except that the agreement provides that the minimum 
amount K will receive (including the downpayment) is $570,000. Thus, 
under paragraph (i)(3)(iii) of this section, assuming all contingencies 
are satisfied, the maximum amount of gross proceeds cannot be determined 
with certainty. The greatest amount that can be determined with 
certainty at the time of the closing, assuming all contingencies are 
satisfied, is $570,000, the minimum amount stated in the agreement. 
Therefore, $570,000 is the ``maximum determinable proceeds'' under 
paragraph (i)(3)(iii) of this section and is the amount reported. In 
addition, (to the extent required by the Form 1099 and its instructions) 
the reporting person must indicate that the gross proceeds cannot be 
determined with certainty. See paragraph (h)(1)(iv)(C) of this section.
    (s) Effective/applicability date. This section applies for real 
estate transactions with dates of closing (as determined under paragraph 
(h)(2)(ii) of this section) that occur on or after January 1, 1991. The 
amendments to paragraphs (b)(2)(i)(E), (b)(2)(ii) and (c)(2)(i) of this 
section shall apply to sales or exchanges of standing timber for lump-
sum payments completed after May 28, 2009. The amendments to paragraph 
(m)(1) apply to payee statements due after December 31, 2014. For payee 
statements due before January 1, 2015, Sec. 1.6045-4(m)(1) (as 
contained in 26 CFR part 1, revised April 2013) shall apply.

[T.D. 8323, 55 FR 51284, Dec. 13, 1990; 56 FR 559, Jan. 7, 1991; 56 FR 
3419, Jan. 30, 1991; T.D. 8895, 65 FR 50407, Aug. 18, 2000; T.D. 9450, 
74 FR 25430, May 28, 2009; T.D. 9504, 75 FR 64097, Oct. 18, 2010; T.D. 
9675, 79 FR 41130, July 15, 2014]

[[Page 334]]



Sec. 1.6045-5  Information reporting on payments to attorneys.

    (a) Requirement of reporting--(1) In general. Except as provided in 
paragraph (c) of this section, every payor engaged in a trade or 
business who, in the course of that trade or business, makes payments 
aggregating $600 or more during a calendar year to an attorney in 
connection with legal services (whether or not the services are 
performed for the payor) must file an information return for such 
payments. The information return must be filed on the form and in the 
manner required by the Commissioner. For the time and place for filing 
the form, see Sec. 1.6041-6. For definitions of the terms under this 
section, see paragraph (d) of this section. The requirements of this 
paragraph (a)(1) apply whether or not--
    (i) A portion of a payment is kept by the attorney as compensation 
for legal services rendered; or
    (ii) Other information returns are required with respect to some or 
all of a payment under other provisions of the Internal Revenue Code and 
the regulations thereunder.
    (2) Information required. The information return required under 
paragraph (a)(1) of this section must include the following information:
    (i) The name, address, and taxpayer identifying number (TIN) (as 
defined in section 7701(a)) of the payor;
    (ii) The name, address, and TIN of the payee attorney;
    (iii) The amount of the payment or payments (as defined in paragraph 
(d)(5) of this section); and
    (iv) Any other information required by the Commissioner in forms, 
instructions or publications.
    (3) Requirement to furnish statement--(i) General requirements. A 
person required to file an information return under paragraph (a)(1) of 
this section must furnish to the attorney a written statement of the 
information required to be shown on the return. This requirement may be 
met by furnishing a copy of the return to the attorney. An IRS truncated 
taxpayer identifying number (TTIN) may be used as the identifying number 
of the attorney in lieu of the identifying number appearing on the 
information return filed with the Internal Revenue Service. For 
provisions relating to the use of TTINs, see Sec. 301.6109-4 of this 
chapter (Procedure and Administration Regulations). The written 
statement must be furnished to the attorney on or before February 15 of 
the year following the calendar year in which the payment was made.
    (ii) Consolidated reporting. (A) The term consolidated reporting 
statement means a grouping of statements the same payor furnishes to the 
same payee or group of payees on the same date for the same reporting 
year that includes a statement required under this section. A 
consolidated reporting statement is limited to statements based on the 
same relationship of payor to payee as the statement required to be 
furnished under this section.
    (B) A consolidated reporting statement must be furnished on or 
before February 15 of the year following the calendar year reported. Any 
statement that otherwise must be furnished on or before January 31 must 
be furnished on or before February 15 if it is furnished in the 
consolidated reporting statement.
    (b) Special rules--(1) Joint or multiple payees--(i) Check delivered 
to one payee attorney. If more than one attorney is listed as a payee on 
a check, an information return must be filed under paragraph (a)(1) of 
this section with respect to the payee attorney to whom the check is 
delivered.
    (ii) Check delivered to payee nonattorney. If an attorney is listed 
as a payee on a check but the check is delivered to a nonattorney who is 
a payee on the check, an information return must be filed under 
paragraph (a)(1) of this section with respect to the payee attorney 
listed on the check. If more than one attorney is listed as a payee on a 
check but the check is delivered to a nonattorney who is a payee on the 
check, the information return must be filed with respect to the first-
listed payee attorney on the check.
    (iii) Check delivered to nonpayee. If two or more attorneys are 
listed as payees on a check, but the check is delivered to a person who 
is not a payee on the check, an information return must be filed under 
paragraph (a)(1) of

[[Page 335]]

this section with respect to the first-listed payee attorney on the 
check.
    (2) Attorney required to report payments made to other attorneys. If 
an information return is required to be filed with respect to a payee 
attorney under paragraph (b)(1) of this section, the attorney with 
respect to whom the information return is required to be filed (tier-one 
attorney) must file an information return under this section for any 
payment that the tier-one attorney makes to other payee attorneys with 
respect to that check, regardless of whether the tier-one attorney is a 
payor under paragraph (d)(3) of this section.
    (c) Exceptions. Notwithstanding paragraphs (a) and (b) of this 
section, a return of information is not required under section 6045(f) 
with respect to the following payments:
    (1) Payments of wages or other compensation paid to an attorney by 
the attorney's employer.
    (2) Payments of compensation or profits paid or distributed to its 
partners by a partnership engaged in providing legal services.
    (3) Payments of dividends or corporate earnings and profits paid to 
its shareholders by a corporation engaged in providing legal services.
    (4) Payments made by a person to the extent that the person is 
required to report with respect to the same payee the payments or 
portions thereof under section 6041(a) and Sec. 1.6041-1(a) (or would 
be required to so report the payments or portions thereof but for the 
dollar amount limitation contained in section 6041(a) and Sec. 1.6041-
1(a)).
    (5) Payments made to a nonresident alien individual, foreign 
partnership, or foreign corporation that is not engaged in trade or 
business within the United States, and does not perform any labor or 
personal services in the United States, in the taxable year to which the 
payment relates. For how a payor determines whether a payment is subject 
to this exception, see Sec. 1.6041-4(a)(1).
    (6) Payments made to an attorney in the attorney's capacity as the 
person responsible for closing a transaction within the meaning of Sec. 
1.6045-4(e)(3) for the sale or exchange or financing of any present or 
future ownership interest in real estate described in Sec. 1.6045-
4(b)(2)(i) through (iv).
    (7) Payments made to an attorney in the attorney's capacity as a 
trustee in bankruptcy under title 11, United States Code.
    (d) Definitions. The following definitions apply for purposes of 
this section:
    (1) Attorney means a person engaged in the practice of law, whether 
as a sole proprietorship, partnership, corporation, or joint venture.
    (2) Legal services means all services related to, or in support of, 
the practice of law performed by, or under the supervision of, an 
attorney.
    (3) Payor means a person who makes a payment if that person is an 
obligor on the payment, or the obligor's insurer or guarantor. For 
example, a payor includes--
    (i) A person who pays a settlement amount to an attorney of a client 
who has asserted a tort, contract, violation of law, or workers' 
compensation claim against that person; and
    (ii) The person's insurer if the insurer pays the settlement amount 
to the attorney.
    (4) Payments to an attorney include payments by check or other 
method such as cash, wire or electronic transfer. Payment by check to an 
attorney means a check on which the attorney is named as a sole, joint, 
or alternative payee. The attorney is the payee on a check written to 
the attorney's client trust fund. However, the attorney is not a payee 
when the attorney's name is included on the payee line as ``in care 
of,'' such as a check written to ``client c/o attorney,'' or if the 
attorney's name is included on the check in any other manner that does 
not give the attorney the right to negotiate the check.
    (5) Amount of the payment means the amount tendered (e.g., the 
amount of a check) plus the amount required to be withheld from the 
payment under section 3406(a)(1), because a condition for withholding 
exists with respect to the attorney for whom an information return is 
required to be filed under paragraph (a)(1) of this section.
    (e) Attorney to furnish TIN. A payor that is required to file an 
information return under this section must solicit a TIN from the 
attorney at or before the

[[Page 336]]

time the payor makes a payment to the attorney. The attorney must 
furnish the correct TIN to the payor, but is not required to certify the 
TIN. A payment for which a return of information is required under this 
section is subject to backup withholding under section 3406 and the 
regulations thereunder.
    (f) Examples. The following examples illustrate the provisions of 
this section. The examples assume that P is not a payor with respect to 
A, the attorney, under section 6041. See section 6041 and the 
regulations thereunder for rules regarding whether P is required under 
section 6041 to file information returns with respect to C. The examples 
are as follows:

    Example 1. One check--joint payees--taxable to claimant. Employee C, 
who sues employer P for back wages, is represented by attorney A. P 
settles the suit for $300,000. The $300,000 represents taxable wages to 
C under existing legal principles. P writes a settlement check payable 
jointly to C and A in the amount of $200,000, net of income and FICA tax 
withholding with respect to C. P delivers the check to A. A retains 
$100,000 of the payment as compensation for legal services and disburses 
the remaining $100,000 to C. P must file an information return with 
respect to A for $200,000 under paragraph (a)(1) of this section. P also 
must file an information return with respect to C under sections 6041 
and 6051, in the amount of $300,000. See Sec. Sec. 1.6041-1(f) and 
1.6041-2.
    Example 2. One check--joint payees--excludable to claimant. C, who 
sues corporation P for damages on account of personal physical injuries, 
is represented by attorney A. P settles the suit for a $300,000 damage 
payment that is excludable from C's gross income under section 
104(a)(2). P writes a $300,000 settlement check payable jointly to C and 
A and delivers the check to A. A retains $120,000 of the payment as 
compensation for legal services and remits the remaining $180,000 to C. 
P must file an information return with respect to A for $300,000 under 
paragraph (a)(1) of this section. P does not file an information return 
with respect to tax-free damages paid to C.
    Example 3. Separate checks--taxable to claimant. C, an individual 
plaintiff in a suit for lost profits against corporation P, is 
represented by attorney A. P settles the suit for $300,000, all of which 
will be includible in C's gross income. A requests P to write two 
checks, one payable to A in the amount of $100,000 as compensation for 
legal services and the other payable to C in the amount of $200,000. P 
writes the checks in accordance with A's instructions and delivers both 
checks to A. P must file an information return with respect to A for 
$100,000 under paragraph (a)(1) of this section. Pursuant to Sec. 
1.6041-1(a) and (f), P must file an information return with respect to C 
for the $300,000.
    Example 4. Check made payable to claimant, but delivered to nonpayee 
attorney. Corporation P is a defendant in a suit for damages in which C, 
the plaintiff, has been represented by attorney A throughout the 
proceeding. P settles the suit for $300,000. Pursuant to a request by A, 
P writes the $300,000 settlement check payable solely to C and delivers 
it to A at A's office. P is not required to file an information return 
under paragraph (a)(1) of this section with respect to A, because there 
is no payment to an attorney within the meaning of paragraph (d)(4) of 
this section.
    Example 5. Multiple attorneys listed as payees. Corporation P, a 
defendant, settles a lost profits suit brought by C for $300,000 by 
issuing a check naming C's attorneys, Y, A, and Z, as payees in that 
order. Y, A, and Z do not belong to the same law firm. P delivers the 
payment to A's office. A deposits the check proceeds into a trust 
account and makes payments by separate checks to Y of $30,000 and to Z 
of $15,000, as compensation for legal services, pursuant to 
authorization from C to pay these amounts. A also makes a payment by 
check of $155,000 to C. A retains $100,000 as compensation for legal 
services. P must file an information return for $300,000 with respect to 
A under paragraphs (a)(1) and (b)(1)(i) of this section. A, in turn, 
must file information returns with respect to Y of $30,000 and to Z of 
$15,000 under paragraphs (a)(1) and (b)(2) of this section because A is 
not required to file information returns under section 6041 with respect 
to A's payments to Y and Z because A's role in making the payments to Y 
and Z is merely ministerial. See Sec. 1.6041-1(e)(1), (e)(2) and (e)(5) 
Example 7 for information reporting requirements with respect to A's 
payments to Y and Z. As described in Example 3, P must also file an 
information return with respect to C, pursuant to Sec. 1.6041-1(a) and 
(f).
    Example 6. Amount of the payment--attorney does not provide TIN. (i) 
Corporation P, a defendant, settles a suit brought by C for $300,000 of 
damages. P will pay the damages by a joint check to C and his attorney, 
A. A failed to furnish P with A's TIN. P is required to deduct and 
withhold 28 percent tax from the $300,000 under section 3406(a)(1)(A) 
and paragraph (e) of this section. P writes the check to C and A as 
joint payees, in the amount of $216,000. P also must file an information 
return with respect to A under paragraph (a)(1) of this section in the 
amount of $300,000, as prescribed in paragraph (d)(5) of this section. 
If the damages are reportable under section 6041 because they are not 
excludable from gross income under existing legal principles, and are 
not subject to any exception under section 6041, P must also file

[[Page 337]]

an information return with respect to C pursuant to Sec. 1.6041-1(a) 
and (f) in the amount of $300,000.
    (ii) Rather than paying by joint check to C and A, P will pay the 
damages by a joint check to C and F, A's law firm. F failed to furnish 
its TIN to P. P is required to deduct and withhold 28 percent tax from 
the $300,000 under section 3406(a)(1)(A) and paragraph (e) of this 
section. P writes the check to C and F as joint payees, in the amount of 
$216,000. P also must file an information return with respect to F under 
paragraph (a)(1) of this section in the amount of $300,000, as 
prescribed in paragraph (d)(5) of this section. If the damages are 
reportable under section 6041 because they are not excludable from gross 
income under existing legal principles, and are not subject to any 
exception under section 6041, P must also file an information return 
with respect to C pursuant to Sec. 1.6041-1(a) and (f) in the amount of 
$300,000.
    Example 7. Home mortgage lending transaction. (i) Individual P 
agrees to purchase a house that P will use solely as a residence. P 
obtains a loan from lender L to finance a portion of the cost of 
acquiring the house. L disburses loan proceeds of $300,000 to attorney 
A, who is the settlement agent, by a check naming A as the sole payee. 
A, in turn, writes checks from the loan proceeds and from other funds 
provided by P to the persons involved in the purchase of the house, 
including a check for $800 to attorney B, whom P hired to provide P with 
legal services relating to the closing.
    (ii) P, not L, is the payor of the payment to A under paragraph 
(d)(3) of this section. P, however, is not required to file an 
information return with respect to A under paragraph (a)(1) of this 
section because the payment was not made in the course of P's trade or 
business. Even if P made the payment in the course of P's trade or 
business, P would not be required to file an information return under 
section 6045(f) with respect to A because P is excepted under paragraph 
(c)(6) of this section.
    (iii) A is not required to file an information return under 
paragraph (a)(1) of this section with respect to the payment to B 
because A is not the payor as that term is defined under paragraph 
(d)(3) of this section. A is not required to file an information return 
under paragraph (b)(2) with respect to the payment to B because A was 
listed as sole payee on the check it received from P. See section 6041 
and Sec. 1.6041-1(e) for whether A or L must file information returns 
under that section. See section 6045(e) and Sec. 1.6045-4 for whether A 
is required to file an information return under that section.
    Example 8. Business mortgage lending transaction. The facts are the 
same as in Example 7 except that P buys real property that P will use in 
a trade or business. P, not L, is the payor of the payment to A under 
paragraph (d)(3) of this section. P, however, is not required to file an 
information return under section 6045(f) with respect to A because P is 
excepted under paragraph (c)(6) of this section. A is not required to 
file an information return under paragraphs (a) or (b)(2) of this 
section with respect to the payment to B. See section 6041 and Sec. 
1.6041-1(e) to determine whether P or L must file an information return 
under that section with respect to the payment to A, and whether P or A 
must file a return with respect to the payment to B. See section 6045(e) 
for rules regarding whether A is required to file information returns 
under that section.
    Example 9. Qualified settlement fund. Corporation P agrees to settle 
for $300,000 a class action lawsuit brought by attorney A on behalf of a 
claimant class. Pursuant to the settlement agreement and a preliminary 
order of approval by a court, A establishes a bank account in the name 
of Q Settlement Fund, which is a qualified settlement fund (QSF) under 
Sec. 1.468B-1. A is also designated by the court as the administrator 
of the QSF. Corporation P transfers $300,000 by wire in Year 1 to A, who 
deposits the funds into the Q Settlement Fund. In Year 2, the court 
approves an award of attorney's fees of $105,000 for A. In Year 2, Q 
Settlement Fund delivers $105,000 to A. P is required to file an 
information return under paragraph (a) of this section with respect to A 
for Year 1 for the $300,000 payment it made to A. The Q Settlement Fund 
is required to file an information return under section 6041(a) and 
Sec. 1.468B-2(l)(2) with respect to A for Year 2 for the $105,000 
payment it made to A.

    (g) Cross reference to penalties. See the following sections 
regarding penalties for failure to comply with the requirements of 
section 6045(f) and this section:
    (1) Section 6721 for failure to file a correct information return.
    (2) Section 6722 for failure to furnish a correct payee statement.
    (3) Section 6723 for failure to comply with other information 
reporting requirements (including the requirement to furnish a TIN).
    (4) Section 7203 for willful failure to supply information 
(including a TIN).
    (h) Effective/applicability date. The rules in this section apply to 
payments made on or after January 1, 2007. The amendments to paragraph 
(a)(3)(i) apply to payee statements due after December 31, 2014. For 
payee statements due before January 1, 2015, Sec. 1.6045-5(a)(3)(i) (as 
contained in 26

[[Page 338]]

CFR part 1, revised April 2013) shall apply.

[T.D. 9270, 71 FR 39551, July 13, 2006, as amended at 71 FR 47080, Aug. 
16, 2006; T.D. 9504, 75 FR 64097, Oct. 18, 2010; T.D. 9675, 79 FR 41130, 
July 15, 2014]



Sec. 1.6045A-1  Statements of information required in connection
with transfers of securities.

    (a) Duty to furnish transfer statement--(1) In general--(i) 
Transfers between accounts. Except as provided in paragraphs (a)(1)(ii) 
through (v) of this section, every applicable person (transferor) (as 
described in paragraph (a)(4) of this section) that transfers custody of 
a specified security to a broker (as described in paragraph (a)(5) of 
this section) must furnish to the receiving broker a transfer statement 
that includes the information described in paragraph (b) of this section 
with respect to the transferred security. Except as provided in 
paragraphs (b)(1)(vii) and (b)(3) of this section (relating to 
noncovered securities and certain securities for which basis is 
determined under an average basis method), a transferor must furnish a 
separate statement for each security and, if transferring custody of the 
same security acquired on different dates or at different prices, for 
each acquisition.
    (ii) Cash on delivery accounts and multiple broker arrangements--(A) 
Sales. A custodian or other transferor that transfers custody of a 
security to a broker solely to effect a sale must furnish a transfer 
statement only to the broker that effects the sale. However, no transfer 
statement is required if the transferor itself either effects the sale 
or is required to report the sale of the security under Sec. 1.6045-1.
    (B) Purchases. A broker that effects a purchase but does not receive 
custody of the security must furnish a transfer statement to the broker 
receiving custody. However, no transfer statement is required if the 
broker effects the purchase solely at the instruction of the broker 
receiving custody.
    (iii) Exempt recipients and exempt foreign payees. A transferor is 
not required to furnish a transfer statement for a security that, after 
the transfer, is held for a customer that is an exempt recipient under 
Sec. 1.6045-1(c)(3)(i) or an exempt foreign person under Sec. 1.6045-
1(g)(1)(i).
    (iv) Securities lending transactions--transferor as principal. A 
transferor that lends or borrows securities as a principal is not 
required to furnish a transfer statement for a security that is 
transferred pursuant to such lending or borrowing arrangement (for 
example, when a customer opens or closes a short sale). This exception 
does not apply when a transferor transfers a security under a lending or 
borrowing arrangement of the customer. This exception also does not 
apply when a transferor transfers a previously borrowed security to 
another account of the same customer (for example, to satisfy an 
existing short sale obligation). See paragraph (b)(4) of this section.
    (v) Certain money market funds. A transferor of stock in a regulated 
investment company described in Sec. 1.6045-1(c)(3)(vi) is not required 
to furnish a transfer statement.
    (2) Format of transfer statement. The transfer statement must be 
furnished in writing unless both the transferor and the receiving broker 
agree to a different format or method before the transfer. If a transfer 
occurs between accounts at the same or affiliated entities, a transfer 
statement is deemed to have been furnished and received if the required 
information, including any required adjustments, is incorporated into 
the records for the recipient account.
    (3) Time for furnishing statement. A transferor must furnish a 
transfer statement within fifteen days after the date of settlement for 
the transfer.
    (4) Applicable person effecting transfer. Applicable person means 
any transferor who is a person described in Sec. 1.6045-1(a)(1), a 
person that acts as a custodian of securities in the ordinary course of 
a trade or business, an issuer of securities, a trustee or custodian of 
an individual retirement plan, or any agent of these persons. Applicable 
person does not include the beneficial owner of a security or any agent 
substituted for an undisclosed beneficial owner, any governmental unit 
or agency or instrumentality of a governmental unit holding escheated 
securities, or any organization that holds and transfers obligations 
among members

[[Page 339]]

of the organization as a service to its members.
    (5) Broker receiving custody. Solely for purposes of this section, 
broker means any person described in Sec. 1.6045-1(a)(1), any person 
that acts as a custodian of securities in the ordinary course of a trade 
or business, any issuer of securities, and any agent of these persons. 
Broker does not include the beneficial owner of a security or any agent 
substituted for an undisclosed beneficial owner, any governmental unit 
or agency or instrumentality of a governmental unit holding escheated 
securities, or any organization that holds and transfers obligations 
among members of the organization as a service to its members.
    (6) Other terms. For purposes of this section, the terms sale, 
specified security, covered security, noncovered security, and customer 
have the same meaning as in Sec. 1.6045-1(a)(9), (a)(14), (a)(15), 
(a)(16), and (h)(1).
    (7) Examples. The following examples illustrate the rules of this 
paragraph (a). Unless otherwise stated, in each example the customer is 
not treated as an exempt recipient under Sec. 1.6045-1(c)(3)(i) or an 
exempt foreign person under Sec. 1.6045-1(g)(1)(i). The examples are as 
follows:

    Example 1. V, an entity treated as an exempt recipient under Sec. 
1.6045-1(c)(3)(i), owns a security in an account with E, a broker. On 
February 1, 2012, V instructs E to transfer custody of the security to 
an account V maintains with F, another broker. Because E may treat V as 
an exempt recipient under Sec. 1.6045-1(c)(3)(i), under paragraph 
(a)(1)(iii) of this section, E is not required to furnish a transfer 
statement.
    Example 2. W maintains an account with G, a custodial broker. On 
August 1, 2012, W instructs G to purchase a security. G places an order 
to purchase the security with H, a broker with which G has a clearing 
agreement. W does not maintain a direct account with H. H executes the 
purchase and has the security delivered to G. Under paragraph 
(a)(1)(ii)(B) of this section, H is not required to furnish a transfer 
statement because G received custody of the security and H purchased the 
security solely at the instruction of G.
    Example 3. Assume the same facts as in Example 2 except that W later 
instructs G to sell the security. G places an order with H to sell the 
security. H executes the sale. G delivers the security to settle the 
sale. G is required to report the sale of the security under Sec. 
1.6045-1. Therefore, under paragraph (a)(1)(ii)(A) of this section, G is 
not required to furnish a transfer statement.
    Example 4. (i) X maintains an account with J, an introducing broker. 
J contracts with K, a clearing broker, to allow K to execute trades on 
J's behalf under a clearing agreement. K uses L, a custodian of 
securities in the ordinary course of a trade or business, to hold 
custody of the securities of K's customers. K maintains a separate 
disclosed account for X as a clearing broker with custody at L. On May 
1, 2012, X instructs J to purchase a security for X as the beneficial 
owner. J instructs K to purchase the security. K effects the purchase 
and has the security delivered to L.
    (ii) K is a broker and therefore is an applicable person that is a 
transferor within the meaning of paragraph (a)(4) of this section. L 
acts as a custodian of securities in the ordinary course of a trade or 
business and therefore is a broker within the meaning of paragraph 
(a)(5) of this section. Because K effects the purchase of the security 
but does not receive custody of the security, under paragraphs (a)(1)(i) 
and (a)(1)(ii)(B) of this section, K must furnish a transfer statement 
to L.
    Example 5. (i) Assume the same facts as in Example 4 except that X 
later instructs J to sell the security. J instructs K to sell the 
security. K sells the security. L transfers custody of the security to 
settle X's sale in accordance with its custody arrangement with K by 
delivering the security to the purchasing broker. K deposits the sale 
proceeds in X's account with K. K is required to report the sale of the 
security under Sec. 1.6045-1.
    (ii) L acts as a custodian of securities in the ordinary course of a 
trade or business and therefore is an applicable person that is a 
transferor within the meaning of paragraph (a)(4) of this section. 
Because L transfers custody of the security to the purchaser's broker 
solely to effect the sale, under paragraphs (a)(1)(i) and (a)(1)(ii)(A) 
of this section, L must furnish a transfer statement to K.
    (iii) If the terms of their custody arrangement so provide, K may 
furnish the transfer statement as L's agent and satisfy L's duty to 
furnish the transfer statement under paragraphs (a)(1)(i) and 
(a)(1)(ii)(A) of this section. Under paragraph (a)(2) of this section, K 
may satisfy this duty by maintaining the information required on the 
transfer statement, including all required adjustments, in its records 
for X's account.
    Example 6. (i) Y, an investment advisor, wants to purchase shares of 
stock in C, a corporation, for several of Y's customers. Y establishes a 
delivery-on-payment account with M, a broker, and provides M a standing 
instruction to deliver stock purchased in the account to Y's account at 
N, a custodian of securities in the ordinary course of a trade

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or business. On November 1, 2012, Y enters into a cash-on-delivery 
transaction by instructing M to purchase shares of C stock. M executes 
the purchase and effects delivery of the C stock to N.
    (ii) M is a broker and therefore is an applicable person that is a 
transferor within the meaning of paragraph (a)(4) of this section. N 
acts as a custodian of securities in the ordinary course of a trade or 
business and therefore is a broker within the meaning of paragraph 
(a)(5) of this section. Because M effects the purchase of the stock and 
N receives custody of the stock, under paragraphs (a)(1)(i) and 
(a)(1)(ii)(B) of this section, M must furnish a transfer statement to N.
    Example 7. (i) Z owns shares of stock in C, a corporation, in an 
account with O, a broker. On February 1, 2013, Z instructs O to transfer 
the C stock to C so that ownership is held on the books of the issuer. C 
has an arrangement with D, a transfer agent, to keep records of 
ownership of the company's stock, how that stock is held, and how many 
shares each investor owns. O transfers the stock to D.
    (ii) O is a broker and therefore is an applicable person that is a 
transferor within the meaning of paragraph (a)(4) of this section. D is 
an agent of C, the issuer of the stock, and therefore is a broker within 
the meaning of paragraph (a)(5) of this section. Because O transfers 
custody of the stock to D, under paragraph (a)(1)(i) of this section, O 
must furnish a transfer statement to D.
    Example 8. Assume the same facts as in Example 7 except that Z later 
instructs D to transfer the stock to an account Z maintains with P, 
another broker. D transfers the stock to P. D is an agent of C, the 
issuer of the stock, and therefore is an applicable person that is a 
transferor within the meaning of paragraph (a)(4) of this section. 
Because P is a broker and D transfers custody of the stock to P, under 
paragraph (a)(1)(i) of this section, D must furnish a transfer statement 
to P.

    (b) Information required--(1) In general. For all specified 
securities, each transfer statement must include the information 
described in this paragraph (b)(1).
    (i) Statement date. The date the statement is furnished.
    (ii) Applicable person effecting transfer. The name, address, and 
telephone number of the applicable person furnishing the statement.
    (iii) Broker receiving custody. The name, address, and telephone 
number of the broker receiving custody of the security.
    (iv) Customers. The name and account number of the customer or 
customers for the account from which the security is transferred and, if 
different, the name and account number of the customer or customers for 
the account to which the security is transferred.
    (v) Security identifiers. The Committee on Uniform Security 
Identification Procedures (CUSIP) number of the security transferred (if 
applicable) or other security identifier number that the Secretary may 
designate by publication in the Federal Register or in the Internal 
Revenue Bulletin (see Sec. 601.601(d)(2) of this chapter), quantity of 
shares, units, or amounts, and classification of the security (such as 
stock or debt).
    (vi) Transfer dates. The date the transfer was initiated and the 
settlement date of the transfer (if known when furnishing the 
statement).
    (vii) Adjusted basis and acquisition date. The total adjusted basis 
of the security, the original acquisition date of the security, and, if 
applicable, the holding period adjustment required by section 1091. The 
transferor must determine this information as provided under Sec. Sec. 
1.6045-1(d), 1.6045-1(m), and 1.6045-1(n), including reporting the 
adjusted basis of the security in U.S. dollars. If the basis of the 
transferred security is determined using an average basis method (as 
described in Sec. 1.1012-1(e)), the transferor may report any 
securities acquired more than five years before the transfer on a single 
statement on which the original acquisition date is reported as 
``VARIOUS'' if the other information reported on the statement applies 
to all of the securities.
    (2) Examples. The following examples illustrate the rules of 
paragraph (b)(1) of this section:

    Example 1. (i) In a single account with P, a broker, Q purchases 
three lots of 100 shares of stock each in C, a corporation, at different 
prices on April 2, 2012, July 2, 2012, and October 2, 2012. Q instructs 
P to enroll the shares of the C stock in P's dividend reinvestment plan 
and to average the basis of the shares of the C stock. All of the C 
stock purchased by P has the same CUSIP number. On September 13, 2013, 
less than five years after the acquisition dates for all three lots, Q 
transfers all 300 shares of the C stock to an account with another 
broker.
    (ii) Under paragraph (a)(1)(i) of this section, P must furnish three 
transfer statements. Under paragraph (b)(1) of this section, one 
statement must report the transfer of

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100 shares with an original acquisition date of April 2, 2012, one 
statement must report the transfer of 100 shares with an original 
acquisition date of July 2, 2012, and one statement must report the 
transfer of 100 shares with an original acquisition date of October 2, 
2012.
    Example 2. Assume the same facts as in Example 1 except that Q 
transfers the shares to the account with the other broker on September 
13, 2017. For the 100 shares purchased on April 2, 2012, and the 100 
shares purchased on July 2, 2012, under paragraph (b)(1)(vii) of this 
section, P may furnish a single transfer statement reporting the 
transfer of 200 shares with the original acquisition date as ``VARIOUS'' 
instead of furnishing two separate transfer statements.
    Example 3. (i) Assume the same facts as in Example 1 except that, on 
June 15, 2012, Q sells the 100 shares purchased on April 2, 2012, at a 
loss.
    (ii) Under paragraph (a)(1)(i) of this section, P must furnish two 
transfer statements. Under paragraph (b)(1)(vii) of this section and 
Sec. 1.6045-1(d)(6)(iii) and (d)(7)(ii), P must determine the average 
basis for the 200 transferred shares and the date for computing whether 
any gain or loss with respect to the stock purchased on July 2, 2012, is 
long-term or short-term by applying the rules for broker reporting of 
wash sales to the stock purchased on July 2, 2012. Therefore, on both 
transfer statements, P must increase the average basis of the stock by 
the amount of loss disallowed under section 1091 on the sale of the 100 
shares purchased on April 2, 2012. On the transfer statement reporting 
the transfer of the 100 shares purchased on July 2, 2012, P must adjust 
the holding period of the July 2, 2012, shares in accordance with 
section 1091.
    Example 4. (i) R, an employee of C, a corporation, participates in 
C's employee stock purchase program that satisfies the requirements of 
section 423. D administers the plan. R purchases stock in the plan at a 
15 percent discount to the fair market value of the stock determined on 
the date of purchase. R purchases stock through the plan during 2012 
until R terminates employment on October 15, 2012. R later instructs D 
to transfer the plan shares to S, a broker.
    (ii) D is the agent of C, the issuer of the securities, and 
therefore is an applicable person within the meaning of paragraph (a)(4) 
of this section. Because S is a broker and D transfers custody of the 
stock to S, under paragraph (a)(1)(i) of this section, D must furnish a 
transfer statement to S.
    (iii) Under paragraph (b)(1)(vii) of this section and Sec. 1.6045-
1(d)(6)(ii)(A), D must report adjusted basis on the transfer statement 
based on the amount paid by R. Under paragraph (b)(1)(vii) of this 
section and Sec. 1.6045-1(d)(6)(ii)(A), D is permitted, but is not 
required, to increase the adjusted basis for the amount (if any) 
includible as wage income by R for R's purchases of the stock.

    (3) Additional information required for a transfer of a debt 
instrument. In addition to the information required in paragraph (b)(1) 
of this section, for a transfer of a debt instrument that is a covered 
security, the following additional information is required:
    (i) A description of the payment terms used by the broker to compute 
any basis adjustments under Sec. 1.6045-1(n);
    (ii) The issue price of the debt instrument;
    (iii) The issue date of the debt instrument (if different from the 
original acquisition date of the debt instrument);
    (iv) The adjusted issue price of the debt instrument as of the 
transfer date;
    (v) The customer's initial basis in the debt instrument;
    (vi) Any market discount that has accrued as of the transfer date 
(as determined under Sec. 1.6045-1(n));
    (vii) Any bond premium that has been amortized as of the transfer 
date (as determined under Sec. 1.6045-1(n));
    (viii) Any acquisition premium that has been amortized as of the 
transfer date (as determined under Sec. 1.6045-1(n));
    (ix) Whether the transferring broker has computed any of the 
information described in this paragraph (b)(3) by taking into account 
one or more elections described in Sec. 1.6045-1(n), and, if so, which 
election or elections were taken into account by the transferring 
broker; and
    (x) For a transfer that occurs on or after January 1, 2016, the last 
date on or before the transfer date that the transferor made an 
adjustment for a particular item (for example, the last date on or 
before the transfer date that bond premium was amortized). A broker, 
however, may rely on this paragraph (b)(3)(x) for a transfer of a 
covered security that occurs on or after June 30, 2015, and before 
January 1, 2016.
    (4) Additional information required for option transfers. In 
addition to the information required in paragraph (b)(1) of this 
section, for a transfer of an option that is a covered security, the 
following additional information is required:

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    (i) The date of grant or acquisition of the option;
    (ii) The amount of premium paid or received;
    (iii) Any other information required to fully describe the option, 
which may include a security identifier used by option exchanges, or 
details about the underlying asset, quantity covered, exercise type, 
strike price, and maturity date; and
    (iv) For a transfer of an option described in Sec. 1.6045-1(m)(3) 
(section 1256 option) that occurs on or after January 1, 2016, the 
original basis of the option and the fair market value of the option as 
of the end of the prior calendar year.
    (5) Format of identification. An applicable person furnishing a 
transfer statement and a broker receiving the transfer statement may 
agree to combine the information required in paragraphs (b)(1), (b)(3), 
and (b)(4) of this section in any format or to use a code in place of 
one or more required items. For example, a transferor and a receiving 
broker may agree to use a single code to represent the broker instead of 
the broker's name, address, and telephone number, or may use a security 
symbol or other identification number or scheme instead of the security 
identifier required by paragraphs (b)(1), (b)(3), and (b)(4) of this 
section. As another example, a transferor and a receiving broker may 
agree to use a security identifier for an exchange-traded option if that 
information would be sufficient to inform the receiving broker of the 
terms for that option.
    (6) Transfers of noncovered securities. The information described in 
paragraphs (b)(1)(vii), (b)(3), (b)(4), (b)(8), and (b)(9) of this 
section is not required for a transfer of a noncovered security if the 
transfer statement identifies the security as a noncovered security. A 
transferor that chooses to report nonrequired information is not subject 
to penalties under section 6722 for failure to report this information 
correctly if the transfer statement identifies the security as a 
noncovered security. A single transfer statement may report the transfer 
of multiple noncovered securities if the transfer statement clearly 
conveys, either specifically or generally, the information described in 
paragraph (b)(1)(v) of this section to identify each security. For 
purposes of this paragraph (b)(6), a transferor must treat a security 
for which a broker makes a single-account election described in Sec. 
1.1012-1(e)(11)(i) as a covered security.
    (7) Transfers of borrowed securities. The transfer statement must 
indicate that a transferred security is borrowed if the transferor knows 
that the security is transferred pursuant to a lending or borrowing 
arrangement. The transfer statement must not report an adjusted basis If 
the transferor knows that the transferred security is lent or borrowed 
pursuant to a short sale. The receiving broker may be subject to special 
transfer reporting rules upon receipt of a borrowed security if the 
security is used to satisfy an existing short sale obligation. See Sec. 
1.6045-1(c)(3)(xi)(C).
    (8) Transfers pursuant to an inheritance--(i) In general. A transfer 
statement for a transfer of a security from a decedent or decedent's 
estate must indicate that the security is inherited. The transfer 
statement must report the date of death as the original acquisition date 
and must report adjusted basis according to the instructions or 
valuations furnished by an authorized representative of the estate, 
including any required adjustments to basis for property acquired from a 
decedent. If a transferor has not received instructions or valuations 
from an authorized representative, the transferor must report basis as 
the fair market value of the security on the date of death.
    However, if the transferor neither knows nor can readily ascertain 
the fair market value of the security on the date of death at the time 
the transfer statement is prepared, the transfer statement must indicate 
that the transfer consists of an inherited security but may otherwise 
report the security as if it were a noncovered security. If the 
transferor cannot identify which securities in a joint account have been 
transferred from the decedent, the transferor must treat each security 
in the account as if it were a noncovered security but must not indicate 
that any security is an inherited security.
    (ii) Transfers of securities to satisfy a cash legacy. If a security 
is transferred from a decedent or a decedent's estate

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to satisfy a cash legacy, paragraphs (b)(1), (b)(3), and (b)(4) of this 
section apply and paragraph (b)(8)(i) of this section does not apply.
    (iii) Subsequent transfers of inherited securities. A transfer 
statement must indicate that the transfer consists of an inherited 
security if a prior transfer statement reported the security as 
inherited.
    (9) Gift or deemed gift transfers--(i) In general. A transfer 
statement for a security transferred to a different owner (other than a 
transfer that the transferor knows is pursuant to a lending or borrowing 
arrangement or is from a decedent or decedent's estate) must indicate 
that the security is a gift and must report the date of the gift (if 
known when furnishing the statement) and the fair market value of the 
gift on that date (if known or readily ascertainable at the time the 
transfer statement is prepared). The transfer statement must report the 
adjusted basis and original acquisition date of the security in the 
hands of the donor. However, if the transfer is between persons for whom 
gift-related basis adjustments are inapplicable or between accounts that 
share at least one common customer, the transferor must apply paragraph 
(b)(1) of this section as if the security were not a gift or deemed 
gift.
    (ii) Subsequent transfers of gifts by the same customer. If a 
transferor transfers to a different account of the same customer a 
security that a prior transfer statement reported as a gifted security, 
the transferor must include on the transfer statement the information 
described in paragraph (b)(9)(i) of this section for the date of the 
gift to the customer. If the prior transfer statement did not report a 
date for the gift, the transferor must treat the settlement date for the 
prior transfer as the date of the gift.
    (iii) Examples. The following examples illustrate the rules of this 
paragraph (b)(9):

    Example 1. X instructs S, a broker, to give to Y stock in a publicly 
traded company that X holds in an account with S. The stock is a covered 
security. On X's instruction, S transfers custody of the stock to T, Y's 
broker. The transfer settles on August 15, 2013. Under paragraph 
(b)(9)(i) of this section, S must provide a transfer statement to T that 
identifies the securities as gifted securities and indicates X's 
adjusted basis and original acquisition date. If S knows the settlement 
date, the transfer statement must also indicate that the date of the 
gift was August 15, 2013, and, because S can readily ascertain the fair 
market value of the stock on August 15, 2013, the fair market value of 
the stock on that date.
    Example 2. Assume the same facts as in Example 1 except that, one 
year later, Y transfers the stock to an account in his name with U, 
another broker. Under paragraph (b)(9)(ii) of this section, T must 
provide a transfer statement to U that identifies the securities as 
gifted securities and indicates X's adjusted basis and original 
acquisition date of the stock. The transfer statement must also indicate 
the date of the gift, August 15, 2013, and the fair market value of the 
stock on that date either by reporting the value that S reported to T 
or, because T can readily ascertain the fair market value of the stock 
on August 15, 2013, by determining the fair market value of the stock on 
that date.

    (10) Specific identification of securities. Except as provided in 
Sec. 1.1012-1(e)(7)(ii), a transfer statement must report a transfer of 
less than the entire position in an account of a security that was 
acquired on different dates or at different prices consistently with a 
customer's adequate and timely identification of the security to be 
transferred. See Sec. 1.1012-1(c). If the customer does not provide an 
adequate and timely identification for the transfer, a transferor must 
first report the transfer of any securities in the account for which the 
transferor does not know the acquisition or purchase date followed by 
the earliest securities purchased or acquired, whether covered 
securities or noncovered securities.
    (11) Information from other parties and other accounts--(i) Transfer 
and issuer statements and transfers pursuant to an inheritance. When 
reporting a transfer of a covered security, a transferor must take into 
account all information, other than the classification of the security 
(such as stock), furnished on a transfer statement, all information 
furnished or deemed furnished on an issuer statement (as described in 
Sec. 1.6045B-1), and all instructions and valuations furnished by an 
authorized representative of the estate of a decedent, unless the 
statement or instructions are incomplete or the broker has

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actual knowledge that they are incorrect. A transferor may treat a 
customer as a minority shareholder when taking the information on an 
issuer statement into account unless the transferor knows that the 
customer is a majority shareholder and the issuer statement reports the 
action's effect on the basis of majority shareholders. Any failure to 
report correct information that arises solely from reliance on 
information furnished on a transfer statement or issuer statement or by 
an authorized representative of the estate is deemed to be due to 
reasonable cause for purposes of penalties under section 6722. See Sec. 
301.6724-1(a)(1) of this chapter.
    (ii) Other information. A transferor is permitted, but not required, 
to take into account information about a covered security other than 
what is furnished on a transfer statement or issuer statement or by an 
authorized representative of the estate of a decedent, including any 
information the transferor has about securities held by the same 
customer in other accounts with the transferor. For purposes of 
penalties under section 6722, a transferor that takes into account 
information received from a customer or third party other than 
information furnished on a transfer statement or issuer statement or by 
an authorized representative of the estate of a decedent is deemed to 
have relied upon this information in good faith if the transferor 
neither knows nor has reason to know that the information is incorrect. 
See Sec. 301.6724-1(c)(6) of this chapter.
    (12) Failure to receive a complete transfer statement--(i) In 
general. A receiving broker that has not received a complete transfer 
statement as required under paragraph (a)(3) of this section for the 
transfer must request a complete statement from the transferor unless, 
under paragraph (a) of this section, the transferor has no duty to 
furnish a transfer statement for the transfer. The receiving broker is 
only required to make this request once. If the receiving broker does 
not receive a complete transfer statement after requesting it, the 
receiving broker may treat the security as a noncovered security upon 
its subsequent sale or transfer. A transfer statement for a covered 
security is complete if, in the view of the receiving broker, it 
provides sufficient information to comply with Sec. 1.6045-1 when 
reporting the sale of the security. A transfer statement for a 
noncovered security is complete if it indicates that the security is a 
noncovered security.
    (ii) Transition rules for transfers of debt instruments, options, 
and securities futures contracts. If an option described in Sec. 
1.6045-1(a)(14)(iii), a securities futures contract described in Sec. 
1.6045-1(a)(14)(iv), or a debt instrument described in Sec. 1.6045-
1(a)(15)(i)(C) is transferred in 2014 and no transfer statement is 
received, the receiving broker is not required to request a transfer 
statement from the transferor and may treat the security as a noncovered 
security. If a debt instrument described in Sec. 1.6045-1(a)(15)(i)(D) 
is transferred in 2016 and no transfer statement is received, the 
receiving broker is not required to request a transfer statement from 
the transferor and may treat the security as a noncovered security.
    (c) Reporting by other parties after a transfer--(1) In general. A 
transferor that has furnished a transfer statement must furnish a 
corrected statement for a covered security within fifteen days of 
receiving a transfer statement, an issuer statement (as described in 
Sec. 1.6045B-1), or instructions or valuations from an authorized 
representative of an estate, that provides information under paragraph 
(b) of this section that was not reported on the initial transfer 
statement.
    (2) Exception. A transferor is not required to furnish a corrected 
transfer statement for a covered security under this paragraph (c) if 
the transferor receives the transfer statement or issuer statement or 
receives the instructions or valuations from an authorized 
representative of an estate more than eighteen months after the 
transferor furnished the transfer statement.
    (d) Effective/applicability dates. This section applies to:
    (1) A transfer on or after January 1, 2011, of stock other than 
stock in a regulated investment company within the meaning of Sec. 
1.1012-1(e)(5);
    (2) A transfer on or after January 1, 2012, of stock in a regulated 
investment company;

[[Page 345]]

    (3) A transfer on or after January 1, 2015, of an option described 
in Sec. 1.6045-1(a)(14)(iii), a securities futures contract described 
in Sec. 1.6045-1(a)(14)(iv), or a debt instrument described in Sec. 
1.6045-1(a)(15)(i)(C); and
    (4) A transfer on or after January 1, 2017, of a debt instrument 
described in Sec. 1.6045-1(a)(15)(i)(D).

[T.D. 9504, 75 FR 64097, Oct. 18, 2010, as amended by T.D. 9616, 78 FR 
23132, Apr. 18, 2013; T.D. 9713, 80 FR 13238, Mar. 13, 2015; T.D. 9750, 
81 FR 8154, Feb. 18, 2016; 81 FR 24702, Apr. 27, 2016]



Sec. 1.6045B-1  Returns relating to actions affecting basis of
securities.

    (a) In general--(1) Information required. An issuer of a specified 
security (within the meaning of Sec. 1.6045-1(a)(14)) that takes an 
organizational action that affects the basis of the security must file 
an issuer return setting forth the following information and any other 
information specified in the return form and instructions:
    (i) Reporting issuer. The name and taxpayer identification number of 
the reporting issuer.
    (ii) Security identifiers. The identifiers of each security involved 
in the organizational action including, as applicable, the Committee on 
Uniform Security Identification Procedures (CUSIP) number or other 
security identifier number that the Secretary may designate by 
publication in the Federal Register or in the Internal Revenue Bulletin 
(see Sec. 601.601(d)(2) of this chapter), classification of the 
security (such as stock), account number, serial number, and ticker 
symbol, as well as any descriptions about the class of security 
affected.
    (iii) Contact at reporting issuer. The name, address, e-mail 
address, and telephone number of a contact person at the issuer.
    (iv) Information about action. The type or nature of the 
organizational action including, as applicable, the date of the action 
or the date against which shareholders' ownership is measured for the 
action.
    (v) Effect of the action. The quantitative effect of the 
organizational action on the basis of the security in the hands of a 
U.S. taxpayer as an adjustment per share or as a percentage of old 
basis, including a description of the calculation, the applicable 
Internal Revenue Code section and subsection upon which the tax 
treatment is based, the data supporting the calculation such as the 
market values of securities and valuation dates, any other information 
necessary to implement the adjustment including the reportable taxable 
year, and whether any resulting loss may be recognized.
    (2) Time for filing the return--(i) In general. An issuer must file 
an issuer return with the IRS pursuant to the prescribed form and 
instructions on or before the 45th day following the organizational 
action, or, if earlier, January 15 of the year following the calendar 
year of the organizational action. For purposes of this paragraph 
(a)(2), a redemption occurs on the last day a holder may redeem a 
security. The issuer may file the return before the organizational 
action if the quantitative effect on basis is determinable beforehand.
    (ii) Reasonable assumptions. To report the quantitative effect on 
basis by the due date in paragraph (a)(2)(i) of this section, an issuer 
may make reasonable assumptions about facts that cannot be determined 
before the due date. An issuer must file a corrected return within 
forty-five days of determining facts that result in a different 
quantitative effect on basis from what the issuer previously reported. 
However, for purposes of this paragraph (a)(2)(ii), an issuer must treat 
a payment that may be a dividend consistently with its treatment of the 
payment under section 6042(b)(3) and Sec. 1.6042-3(c).
    (3) Exception for public reporting. An issuer is not required to 
file a return with the IRS under this paragraph (a) if, by the due date 
described in paragraph (a)(2)(i) of this section, the issuer posts the 
return with the required information in a readily accessible format in 
an area of its primary public Web site dedicated to this purpose and 
keeps the return accessible for ten years to the public on its primary 
public Web site or the primary public Web site of any successor 
organization. An issuer may electronically sign a return that is 
publicly reported in accordance

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with this paragraph (a)(3). The electronic signature must identify the 
individual who attests to the declaration in the jurat.
    (4) Exception when holders are exempt recipients. No reporting is 
required under this paragraph (a) if the issuer reasonably determines 
that all of the holders of the security are exempt recipients under 
paragraph (b)(5) of this section.
    (5) Exception for certain money market funds. No reporting is 
required under this paragraph (a) by a regulated investment company 
described in Sec. 1.6045-1(c)(3)(vi).
    (b) Statements to nominees and certificate holders--(1) In general. 
An issuer required to file an information return under this section must 
furnish a written statement with the same information to each holder of 
record of the security or to the holder's nominee. This issuer statement 
must indicate that the information is being reported to the IRS. An 
issuer may satisfy this requirement by furnishing a copy of the 
information return.
    (2) Time for furnishing statements. An issuer must furnish each 
issuer statement on or before January 15 of the year following the 
calendar year of the organizational action. For purposes of this 
paragraph (b)(2), a redemption occurs on the last day a holder may 
redeem a security. An issuer may furnish the statement before the 
organizational action if the quantitative effect on basis is 
determinable beforehand. An issuer must furnish a statement that 
corresponds to a corrected return described in paragraph (a)(2)(ii) of 
this section by the later of the due date described in this paragraph 
(b)(2) or forty-five days after determining the facts that result in a 
different quantitative effect on basis from what the issuer previously 
reported on the return.
    (3) Recipients of statements. An issuer must furnish a separate 
statement to each holder of record of the security as of the date of the 
organizational action and all subsequent holders of record up to the 
date the issuer furnishes the statement required under this section. If 
the issuer records the security on its books in the name of a nominee, 
the issuer must furnish the statement to the nominee in lieu of the 
holder. However, if the nominee is the issuer, an agent of the issuer, 
or a plan operated by the issuer, the issuer must furnish the statement 
to the holder.
    (4) Exception for public reporting. An issuer is deemed to furnish 
an issuer statement under this paragraph (b) to all holders and nominees 
if the issuer satisfies the public reporting requirements of paragraph 
(a)(3) of this section.
    (5) Exempt recipients--(i) In general. An issuer is not required to 
furnish an issuer statement to a holder or its nominee if the holder is 
an exempt recipient under Sec. 1.6045-1(c)(3)(i)(B), provided the 
issuer has actual knowledge that the holder is described in that section 
or has a properly completed exemption certificate from the holder 
asserting that the holder is an exempt recipient (as provided in Sec. 
31.3406(h)-3 of this chapter). An issuer may treat a holder as an exempt 
recipient based on the applicable indicators described in Sec. 1.6049-
4(c)(1)(ii)(A) through (M).
    (ii) Limitation for corporate holders. For an organizational action 
occurring on or after January 1, 2012, an issuer may treat a holder as 
an exempt recipient based on the indicator described in Sec. 1.6049-
4(c)(1)(ii)(A) only if one of the following applies:
    (A) The name of the holder contains the term ``insurance company,'' 
``indemnity company,'' ``reinsurance company,'' or ``assurance 
company.''
    (B) The name of the holder indicates that it is an entity listed as 
a per se corporation under Sec. 301.7701-2(b)(8)(i) of this chapter.
    (C) The issuer receives a properly completed exemption certificate 
(as provided in Sec. 31.3406(h)-3 of this chapter) that asserts that 
the holder is not an S corporation as defined in section 1361(a).
    (D) The issuer receives a withholding certificate described in Sec. 
1.1441-1(e)(2)(i) that includes a certification that the person whose 
name is on the certificate is a foreign corporation.
    (iii) Foreign holders. An issuer may treat a holder as an exempt 
recipient if the issuer, prior to the transaction, associates the holder 
with documentation upon which the issuer may rely in order to treat 
payments to the holder

[[Page 347]]

as made to a foreign beneficial owner in accordance with Sec. 1.1441-
1(e)(1)(ii) or as made to a foreign payee in accordance with Sec. 
1.6049-5(d)(1) or presumed to be made to a foreign payee under Sec. 
1.6049-5(d)(2) or (3). For purposes of this paragraph (b)(5)(iii), the 
provisions in Sec. 1.6049-5(c) (regarding rules applicable to 
documentation of foreign status and definition of U.S. payor and non-
U.S. payor) apply. Rules similar to the rules of Sec. 1.1441-1 apply by 
substituting the terms ``issuer'' and ``holder'' in place of the terms 
``withholding agent'' and ``payee'' and without regard to the limitation 
to amounts subject to withholding under chapter 3 of the Internal 
Revenue Code. Rules similar to the rules of Sec. 1.6049-5(d) apply by 
substituting the terms ``issuer'' and ``holder'' in place of the terms 
``payor'' and ``payee.''
    (c) Special rule for S corporations. An S corporation (as defined in 
section 1361(a)) is deemed to satisfy the requirements of paragraphs (a) 
and (b) of this section for any organizational action affecting the 
basis of its stock if the corporation reports the effect of the 
organizational action on a timely filed Schedule K-1 (Form 1120S), 
``Shareholder's Share of Income, Deductions, Credits, etc.,'' for each 
shareholder and timely furnishes copies of these schedules to all proper 
parties.
    (d) Special rule for certain regulated investment companies and real 
estate investment trusts. A regulated investment company (RIC) that 
reports undistributed capital gains to shareholders under section 
852(b)(3)(D) or a real estate investment trust (REIT) that reports 
undistributed capital gains to shareholders under section 857(b)(3)(D) 
is deemed to have satisfied the requirements of paragraphs (a) and (b) 
of this section for undistributed capital gains affecting the basis of 
its stock if the RIC or REIT timely files and furnishes the information 
returns required under section 852(b)(3)(D) or section 857(b)(3)(D) to 
all proper parties for the organizational action.
    (e) Acquiring and successor entities. An acquiring or successor 
entity of an issuer that fails to satisfy the reporting obligations of 
paragraphs (a) or (b) of this section must satisfy these reporting 
obligations. If neither the issuer nor the acquiring or successor entity 
satisfies these reporting obligations, both parties are jointly and 
severally liable for any applicable penalties.
    (f) Penalties. An issuer may use an agent to satisfy the 
requirements of this section for the issuer. Nonetheless, the issuer 
remains liable for penalty for any failure to comply unless it is shown 
that the failure is due to reasonable cause and not willful neglect. See 
sections 6721 through 6724.
    (g) Examples. The following examples illustrate the rules of this 
section:

    Example 1. (i) C, a corporation, distributes stock to shareholders 
on March 31, 2013.
    (ii) Under paragraph (a)(2)(i) of this section, C must file an 
issuer return with the IRS on or before May 15, 2013 (45 days after the 
distribution date), reporting the quantitative effect of this 
distribution on the basis of C's stock. Under paragraph (b)(2) of this 
section, C must furnish issuer statements to its nominees and 
certificate holders on or before January 15, 2014.
    (iii) Alternatively, under paragraphs (a)(3) and (b)(4) of this 
section, C may post by May 15, 2013, and maintain for ten years, the 
return with the required information in a readily accessible format in 
an area of its primary public Web site dedicated to this purpose.
    Example 2. (i) D, a corporation, makes a cash distribution to 
shareholders on December 10, 2013.
    (ii) Under paragraphs (a)(2)(i) and (b)(2) of this section, D is 
required to file an issuer return with the IRS and furnish issuer 
statements to its nominees and certificate holders on or before January 
15, 2014.
    (iii) On January 15, 2014, D is unsure whether the distribution will 
exceed its earnings and profits for the fiscal year. For purposes of 
section 6042(b)(3) and Sec. 1.6042-3(c), D must treat the distribution 
as a dividend. Therefore, under paragraph (a)(2)(ii) of this section, D 
is not required to file an issuer return. If D later determines that 
dividend treatment was incorrect, D must file an issuer return reporting 
the correct quantitative effect on basis.
    Example 3. E, a corporation, undertakes a stock split as of April 1, 
2014. E furnishes issuer statements under paragraph (b) of this section 
on April 1, 2014, at which time the books and records of E show that 90 
percent of its outstanding stock is owned by shareholders through a 
clearing organization as their nominee, 7 percent is owned by 5,000 
individuals, and the remaining 3 percent is owned by a dividend 
reinvestment plan operated by E that has 1,000 members. Under

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paragraph (b)(3) of this section, E must furnish statements to the 
clearing organization, the 5,000 individuals, and the 1,000 members of 
the dividend reinvestment plan.

    (h) Rule for options--(1) In general. For an option granted or 
acquired on or after January 1, 2014, if the original contract is 
replaced by a different number of option contracts, the following rules 
apply:
    (i) If the option is an exchange-traded option, any clearinghouse or 
clearing facility that serves as a counterparty is treated as the issuer 
of the option for purposes of section 6045B.
    (ii) If the option is not an exchange-traded option, the option 
writer is treated as the issuer of the option for purposes of section 
6045B.
    (2) Examples. The following examples illustrate the rules of 
paragraph (h)(1) of this section:

    Example 1. On January 15, 2014, F, an individual, purchases a one-
year exchange-traded call option on 100 shares of Company X stock, with 
a strike price of $110. The call option is cleared through Clearinghouse 
G. Company X executes a 2-for-1 stock split as of April 1, 2014. Due to 
the stock split, the terms of F's option are altered, resulting in two 
option contracts, each on 100 shares of Company X stock with a strike 
price of $55. All other terms remain the same. Under paragraph (h)(1)(i) 
of this section, Clearinghouse G is required to prepare an issuer report 
for F.
    Example 2. On January 31, 2014, J, an individual, purchases from K a 
non-exchange traded 7-month call option on 100 shares of Company X 
stock, with a strike price of $110. Company X executes a 2-for-1 stock 
split as of April 1, 2014. Due to the stock split, the terms of J's 
option are altered, resulting in one option contract on 200 shares of 
Company X stock with a strike price of $55. All other terms of the 
option remain the same. Under paragraph (h)(1) of this section, because 
the number of option contracts did not change, K is not required to 
prepare an issuer report for J.

    (i) [Reserved]
    (j) Effective/applicability dates. This section applies to--
    (1) Organizational actions occurring on or after January 1, 2011, 
that affect the basis of specified securities within the meaning of 
Sec. 1.6045-1(a)(14)(i) other than stock in a regulated investment 
company within the meaning of Sec. 1.1012-1(e)(5);
    (2) Organizational actions occurring on or after January 1, 2012, 
that affect the basis of stock in a regulated investment company;
    (3) Organizational actions occurring on or after January 1, 2014, 
that affect the basis of debt instruments described in Sec. 1.6045-
1(n)(2)(i) (not including the debt instruments described in Sec. 
1.6045-1(n)(2)(ii));
    (4) Organizational actions occurring on or after January 1, 2016, 
that affect the basis of debt instruments described in Sec. 1.6045-
1(n)(3);
    (5) Organizational actions occurring on or after January 1, 2014, 
that affect the basis of options described in Sec. 1.6045-
1(a)(14)(iii); and
    (6) Organizational actions occurring on or after January 1, 2014, 
that affect the basis of securities futures contracts described in Sec. 
1.6045-1(a)(14)(iv).

[T.D. 9504, 75 FR 64101, Oct. 18, 2010, as amended by T.D. 9616, 78 FR 
23133, Apr. 18, 2013]



Sec. 1.6046-1  Returns as to organization or reorganization of foreign
corporations and as to acquisitions of their stock.

    (a) Officers or directors--(1) When liability arises on January 1, 
1963. Each U.S. citizen or resident who is on January 1, 1963, an 
officer or director of a foreign corporation shall make a return on Form 
5471 (or subsequent form) showing the name, address, and identifying 
number of each U.S. person who, on January 1, 1963, owns 5 percent or 
more in value of the outstanding stock of such foreign corporation.
    (2) When liability arises after January 1, 1963--(i) Requirement of 
return. Each United States citizen or resident who is at any time after 
January 1, 1963, an officer or director of a foreign corporation shall 
make a return on Form 5471 setting forth the information described in 
paragraph (a)(2)(ii) of this section with respect to each United States 
person who, during the time such citizen or resident is such an officer 
or director--
    (a) Acquires (whether in one or more transactions) outstanding stock 
of such corporation which equals, or which when added to any such stock 
then owned by him equals, 10 percent or more of the total combined 
voting

[[Page 349]]

power of all classes of stock of the foreign corporation entitled to 
vote or the total value of the stock of the foreign corporation;
    (b) Acquires (whether in one or more transactions) an additional 10 
percent or more of the total combined voting power of all classes of 
stock of the foreign corporation entitled to vote or the total value of 
the stock of the foreign corporation; or
    (c) Is not described in paragraph (a)(2)(i)(a) or (b) of this 
section, and who, at any time after January 1, 1987, is treated as a 
United States shareholder under section 953(c) with respect to such 
foreign corporation.
    (ii) Information required to be shown on return. The return required 
under subdivision (i) of this subparagraph shall contain the following 
information:
    (a) Name, address, and identifying number of each shareholder with 
respect to whom the return is filed;
    (b) A statement showing that the shareholder is either described in 
subdivision (i)(a) or (i)(b) of this subparagraph; and
    (c) The date on which the shareholder became a person described in 
subdivision (i)(a) or (i)(b) of this subparagraph.
    (3) Application of rules. The provisions of this paragraph may be 
illustrated by the following examples:

    Example 1. A, a United States citizen, is, on January 1, 1963, a 
director of M, a foreign corporation. X, on January 1, 1963, is a United 
States person owning 5 percent in value of the outstanding stock of M 
Corporation. A must file a return under the provisions of subparagraph 
(1) of this paragraph.
    Example 2. (i) Facts. A, a United States citizen, is, on January 1, 
2014, a director of M Corporation, a foreign corporation. X, on January 
1, 2014, is a United States person owning 4% of the outstanding stock of 
M Corporation. On July 1, 2014, X acquires 4% of the outstanding stock 
of M Corporation and on September 1, 2014, he acquires an additional 4% 
of such stock.
    (ii) Results. The July 1, 2014, transaction does not give rise to 
liability for A to file a return; however, A must file a return as a 
result of the September 1, 2014, transaction because X's holdings now 
exceed 10%.
    Example 3. (i) Facts. The facts are the same as in Example 2 and, on 
September 15, 2014, X acquires an additional 8% in value of the 
outstanding stock of M Corporation. (X's total holdings are now 20%.) On 
November 1, 2014, X acquires an additional 4% of the outstanding stock 
of M Corporation.
    (ii) Results. The September 15, 2014, transaction does not give rise 
to liability to file a return since X has not acquired 10% in value of 
the outstanding stock of M Corporation since A last became liable to 
file a return. However, A must file a return as a result of the November 
1, 2014, transaction because X has now acquired an additional 10% of the 
outstanding stock of M Corporation.
    Example 4. (i) Facts. The facts are the same as in Examples 2 and 3 
and, in addition, B, a United States citizen, becomes an officer of M 
Corporation on September 10, 2014.
    (ii) Results. B is not required to file a return either as a result 
of the facts set forth in Example 2 or as a result of the September 15, 
2014, transaction described in Example 3. However, B is required to file 
a return as a result of the November 1, 2014, transaction described in 
Example 3 because X has acquired an additional 10% in value of the 
outstanding stock of M Corporation while B is an officer or director.

    (b) Returns required of U.S. persons when liability to file arises 
on January 1, 1963. Each U.S. person who, on January 1, 1963, owns 5 
percent or more in value of the outstanding stock of a foreign 
corporation, shall make a return on Form 959 with respect to such 
foreign corporation setting forth the following information:
    (1) The name, address, and identifying number of the shareholder (or 
shareholders) filing the return, and the internal revenue district in 
which such shareholder filed his most recent United States income tax 
return;
    (2) The name, business address, and employer identification number, 
if any, of the foreign corporation, the name of the country under the 
laws of which it is incorporated, and the name of the country in which 
is located its principal place of business;
    (3) The date of organization and, if any, of each reorganization of 
the foreign corporation if such reorganization occurred on or after 
January 1, 1960, while the shareholder owned 5 percent or more in value 
of the outstanding stock of such corporation;
    (4) The name and address of the foreign corporation's statutory or 
resident agent in the country of incorporation;
    (5) The name, address, and identifying number of any branch office 
or agent of the foreign corporation located in the United States;

[[Page 350]]

    (6) If the foreign corporation has filed a United States income tax 
return, or participated in the filing of a consolidated return, for any 
of its last three calendar or fiscal years immediately preceding January 
1, 1963, state each year for which a return was filed (including, in the 
case of a consolidated return, the name of the corporation filing such 
return), the type of form used, the internal revenue office to which it 
was sent, and the amount of tax, if any, paid;
    (7) The name and address of the person (or persons) having custody 
of the books of account and records of the foreign corporation, and the 
location of such books and records if different from such address;
    (8) The names, addresses, and identifying numbers of all United 
States persons who are principal officers (for example, president, vice 
president, secretary, treasurer, and comptroller) or members of the 
board of directors of the foreign corporation as of January 1, 1963;
    (9) A complete description of the principal business activities in 
which the foreign corporation is actually engaged and, if the foreign 
corporation is a member of a group constituting a chain of ownership 
with respect to each unit of which the shareholder owns 5 percent or 
more in value of the outstanding stock, a chart showing the foreign 
corporation's position in the chain of ownership and the percentages of 
ownership;
    (10) The following information prepared in accordance with generally 
accepted accounting principles and in such detail as is customary for 
the corporation's accounting records:
    (i) The corporation's profit and loss statement for the most recent 
complete annual accounting period; and
    (ii) The corporation's balance sheet as of the end of the most 
recent complete annual accounting period;
    (11) A statement showing as of January 1, 1963, the amount and type 
of any indebtedness of the foreign corporation:
    (i) To any United States person owning 5 percent or more in value of 
its stock, or
    (ii) To any other foreign corporation owning 5 percent or more in 
value of the outstanding stock of the foreign corporation with respect 
to which the return is filed provided that the shareholder filing the 
return owns 5 percent or more in value of the outstanding stock of such 
other foreign corporation,


together with the name, address, and identifying number, if any, of each 
such shareholder or entity;
    (12) A statement, as of January 1, 1963, showing the name, address, 
and identifying number, if any, of each person who is, on January 1, 
1963, a subscriber to the stock of the foreign corporation, and the 
number of shares subscribed to by each;
    (13) A statement showing the number of shares of each class of stock 
of the foreign corporation owned by each shareholder filing the return 
and:
    (i) If such stock was acquired after December 31, 1953, the dates of 
acquisition, the amounts paid or value given therefor, the method of 
acquisition, i.e., by original issue, purchase on open market, direct 
purchase, gift, inheritance, etc., and from whom acquired; or
    (ii) If such stock was acquired before Janaury 1, 1954, a statement 
that such stock was acquired before such date, and the value at which 
such stock is carried on the books of such shareholder;
    (14) A statement showing as of January 1, 1963, the name, address, 
and identifying number of each United States person who owns 5 percent 
or more in value of the outstanding stock of the foreign corporation, 
the classes of stock held, the number of shares of each class held, 
including the name, address, and identifying number, if any, of each 
actual owner if such person is different from the shareholder of record 
and a statement of the nature and amount of the interests of each such 
actual owner; and
    (15) The total number of shares of each class of outstanding stock 
of the foreign corporation (or other data indicating the shareholder's 
percentage of ownership).
    (c) Returns required of United States persons when liability to file 
arises after January 1, 1963--(1) United States persons required to 
file. A return on Form 5471, containing the information required by 
paragraph (c)(4) of this section, shall be

[[Page 351]]

made by each United States person when at any time after January 1, 
1963:
    (i) Such person acquires (whether in one or more transactions) 
outstanding stock of such foreign corporation which equals, or which 
when added to any such stock then owned by him equals, 10 percent or 
more of the total combined voting power of all classes of stock of the 
foreign corporation entitled to vote or the total value of the stock of 
the foreign corporation;
    (ii) Such person, having already acquired the interest referred to 
in paragraph (b) of this section or in paragraph (c)(1)(i) of this 
section--
    (a) Acquires (whether in one or more transactions) an additional 10 
percent or more of the total combined voting power of all classes of 
stock of the foreign corporation entitled to vote or the total value of 
the stock of the foreign corporation;
    (b) Owns 10 percent or more of the total combined voting power of 
all classes of stock of the foreign corporation entitled to vote or the 
total value of the stock of the foreign corporation when such foreign 
corporation is reorganized (as defined in paragraph (f)); or
    (c) Disposes of sufficient stock in such foreign corporation to 
reduce his interest to less than 10 percent of the total combined voting 
power of all classes of stock of the foreign corporation entitled to 
vote or the total value of the stock of the foreign corporation; or
    (iii) Such person is, at any time after January 1, 1987, treated as 
a United States shareholder under section 953(c) with respect to a 
foreign corporation.
    (2) Examples. The provisions of paragraph (c)(1) of this section may 
be illustrated by the following examples:

    Example 1. (i) Facts. On January 15, 2014, A, a United States 
person, acquires 10% of the outstanding stock of M, a foreign 
corporation.
    (ii) Results. A must file a return under the provisions of paragraph 
(c)(1) of this section.
    Example 2. (i) Facts. On January 1, 2014, B, a United States person, 
owns 4% of the outstanding stock of M, a foreign corporation. On 
February 1, 2015, B acquires an additional 6% of the outstanding stock 
of M Corporation.
    (ii) Results. B is not required to file a return for 2014 under the 
provisions of this section because he does not own 10% or more of the 
outstanding stock of M Corporation. B must file a return for 2015 under 
the provisions of paragraph (c)(1) of this section.
    Example 3. (i) Facts. On January 1, 2014, C, a United States person, 
owns 12% of the outstanding stock of M Corporation, a foreign 
corporation. On February 1, 2014, C acquires an additional 4% of the 
outstanding stock of M Corporation in a transaction not involving a 
reorganization.
    (ii) Results. C is not required to file a return under the 
provisions of paragraph (c)(1) of this section with respect to the 
acquisition of the additional 4% of M Corporation.
    Example 4. (i) Facts. The facts are the same as in Example 3 except 
that, in addition, on April 1, 2014, C acquires 4% of the outstanding 
stock of M Corporation in a transaction not involving a reorganization. 
(C's total holdings are now 20%.) On May 1, 2014, C acquires 2% of the 
outstanding stock of M Corporation.
    (ii) Results. C is not required to file a return under the 
provisions of paragraph (c)(1) of this section as a result of the April 
1, 2014, acquisition because he has not acquired 10% or more of the 
outstanding stock of M Corporation since he last became liable to file a 
return. C must file a return under the provisions of paragraph (c)(1) of 
this section as a result of the May 1, 2014, acquisition because C 
acquired 10% of the outstanding stock of M Corporation during 2014.
    Example 5. (i) Facts. On June 1, 2014, D, a United States person, 
owns 24% of the outstanding stock of M Corporation, a foreign 
corporation. Also, on June 1, 2014, M Corporation is reorganized and, as 
a result of such reorganization, D owns only 12% of the outstanding 
stock of such foreign corporation.
    (ii) Results. D must file a return under the provisions of paragraph 
(c)(1) of this section.
    Example 6. (i) Facts. The facts are the same as in Example 5 except 
that, in addition, on November 1, 2015, D donates 4% of the outstanding 
stock of M Corporation to a charity.
    (ii) Results. Since D has disposed of sufficient stock to reduce his 
interest in M Corporation to less than 10% of the outstanding stock of 
such corporation, D must file a return under the provisions of paragraph 
(c)(1) of this section.

    (3) Shareholders who become United States persons. A return on Form 
5471, containing the information required by paragraph (c)(4) of this 
section, shall be made by each person who at any time after January 1, 
1963, becomes a United States person while owning 10 percent or more of 
the total combined voting power of all classes of stock of the foreign 
corporation entitled to vote or the total value of the stock of the 
foreign corporation.

[[Page 352]]

    (4) Information required to be shown on return--(i) In general. The 
return on Form 5471, required to be filed by persons described in 
paragraph (c)(1) or (3) of this section, shall set forth the same 
information as is required by the provisions of paragraph (b) of this 
section except that where such provisions require information with 
respect to January 1, 1963, such information shall be furnished with 
respect to the date on which liability arises to file the return 
required under this paragraph.
    (ii) Additional information. In addition to the information required 
under paragraph (c)(4)(i) of this section, the following information 
shall also be furnished in the return required under this paragraph:
    (a) The date on or after January 1, 1963, if any, on which such 
shareholder (or shareholders) last filed a return under this section 
with respect to the corporation;
    (b) If a return is filed by reason of becoming a United States 
person, the date the shareholder became a United States person;
    (c) If a return is filed by reason of the disposition of stock, the 
date and method of such disposition and the person to whom such 
disposition was made; and
    (d) If a return is filed by reason of the organization or 
reorganization of the foreign corporation on or after January 1, 1963, 
the following information with respect to such organization or 
reorganization:
    (1) A statement showing a detailed list of the classes and kinds of 
assets transferred to the foreign corporation including a description of 
the assets (such as a list of patents, copyrights, stock, securities, 
etc.), the fair market value of each asset transferred (and, if such 
asset is transferred by a United States person, its adjusted basis), the 
date of transfer, the name, address, and identifying number, if any, of 
the owner immediately prior to the transfer, and the consideration paid 
by the foreign corporation for such transfer;
    (2) A statement showing the assets transferred and the notes or 
securities issued by the foreign corporation, the name, address, and 
identifying number, if any, of each person to whom such transfer or 
issue was made, and the consideration paid to the foreign corporation 
for such transfer or issue; and
    (3) An analysis of the changes in the corporation's surplus accounts 
occurring on or after January 1, 1963.
    (iii) Exclusion of information previously furnished. In any case 
where any identical item of information required to be filed under this 
paragraph by a shareholder with respect to a foreign corporation has 
previously been furnished by such shareholder in any return made in 
accordance with the provisions of this section, such shareholder may 
satisfy the requirements of this paragraph by filing Form 5471, 
identifying such item of information, the date furnished, and stating 
that it is unchanged.
    (d) Associations, etc. Returns are required to be filed in 
accordance with the provisions of this section with respect to any 
foreign association, foreign joint-stock company, or foreign insurance 
company, etc., which would be considered to be a corporation under Sec. 
301.7701-2 of this chapter (Regulations on Procedure and 
Administration). Persons who would qualify by the nature of their 
functions and ownership in such associations, etc., as officers, 
directors, or shareholders thereof will be treated as such for purposes 
of this section without regard to their designations under local law.
    (e) Special provisions--(1) Return jointly made. Any two or more 
persons required under paragraph (a) of this section to make a return 
with respect to one or more shareholders of the same corporation, or 
under paragraph (b) or (c) of this section to make a return with respect 
to the same corporation, may in lieu of making several returns, jointly 
make one return.
    (2) Separate return for each corporation. When returns are required 
with respect to more than one foreign corporation, a separate return 
must be made for each corporation.
    (3) Use of power of attorney by officers or directors--(i) In 
general. Any two or more persons required under paragraph (a) of this 
section to make a return with respect to one or more shareholders of the 
same corporation may, by means of one or more duly executed powers of 
attorney, constitute one of their number as attorney in fact for

[[Page 353]]

the purpose of making such returns or for the purpose of making a joint 
return under subparagraph (1) of this paragraph.
    (ii) Nature of power of attorney. The power of attorney referred to 
in subdivision (i) of this subparagraph shall be limited to the making 
of returns required under paragraph (a) of this section and shall be 
limited to a single calendar year with respect to which such returns are 
required.
    (iii) Manner of execution of power of attorney. The use of technical 
language in the preparation of the power of attorney referred to in 
subdivision (i) of this subparagraph is not necessary. Such power of 
attorney shall be signed by the individual United States citizen or 
resident required to file a return or returns under paragraph (a) of 
this section. Such power of attorney must be acknowledged before a 
notary public or, in lieu thereof, witnessed by two disinterested 
persons. The notarial seal must be affixed unless such seal is not 
required under the laws of the state or country wherein such power of 
attorney is executed.
    (iv) Manner of execution of return under authority of power of 
attorney. A return made under authority of one or more powers of 
attorney referred to in subdivision (i) of this subparagraph shall be 
signed by the attorney in fact for each principal for which such 
attorney in fact is acting. A copy of such one or more powers of 
attorney shall be kept at a convenient and safe location accessible to 
internal revenue officers, and shall at all times be available for 
inspection by such officers.
    (v) Effect on penalties. The fact that a return is made under 
authority of a power of attorney referred to in subdivision (i) of this 
subparagraph shall not affect the principal's liability for penalties 
provided for failure to file a return required under paragraph (a) of 
this section or for filing a false or fraudulent return.
    (4) Persons excepted from filing returns--(i) Return required of 
officer or director under paragraph (a)(1). Notwithstanding paragraph 
(a)(1) of this section, any U.S. citizen or resident required to make a 
return under such paragraph with respect to shareholders of a foreign 
corporation, need not make such return if, on January 1, 1963, three or 
fewer U.S. persons own 95 percent or more in value of the outstanding 
stock of such foreign corporation and file a return or returns with 
respect to such corporation under paragraph (b) of this section.
    (ii) Return required of officer or director under paragraph (a)(2). 
Notwithstanding paragraph (a)(2) of this section, any U.S. citizen or 
resident required to make a return under such paragraph with respect to 
a person acquiring stock of a foreign corporation in an acquisition 
described in subdivision (i)(a) or (b) of such paragraph need not make 
such return, if:
    (a) As a result of such acquisition of stock of such foreign 
corporation, a U.S. person files a return as a shareholder under 
paragraph (c)(1) of this section, and
    (b) Immediately after such acquisition of stock, three or fewer U.S. 
persons own 95 percent or more in value of the outstanding stock of such 
foreign corporation.
    (iii) Return required by reason of attribution rules. 
Notwithstanding paragraph (b) or (c) of this section, any person 
required to make a return under such paragraph with respect to a foreign 
corporation need not make such return, if:
    (a) Such person does not directly own an interest in the foreign 
corporation,
    (b) Such person is required to furnish the information solely by 
reason of attribution of stock ownership from a U.S. person under 
paragraph (i) of this section, and
    (c) The person from whom the stock ownership is attributed furnishes 
all of the information required under paragraph (b) or (c) of this 
section of the person to whom such stock ownership is attributed.
    (iv) Return required of officer or director with respect to person 
described in subdivision (iii). Notwithstanding paragraph (a) of this 
section, any U.S citizen or resident required to make a return under 
such paragraph with respect to a person exempted under subdivision (iii) 
of this subparagraph from making a return need not make a return with 
respect to such person.

[[Page 354]]

    (5) Persons excepted from furnishing items of information. Any 
person required to furnish any item of information under paragraph (b) 
or (c) of this section with respect to a foreign corporation may, if 
such item of information is furnished by another person having an equal 
or greater stock interest (measured in terms of either the total 
combined voting power of all classes of stock of the foreign corporation 
entitled to vote or the total value of the stock of the foreign 
corporation) in such foreign corporation, satisfy such requirement by 
filing a statement with his return on Form 5471 indicating that such 
requirement has been satisfied and identifying the return in which such 
item of information was included. This paragraph (e)(5) does not apply 
to persons excepted from filing a return by reason of the provisions of 
paragraph (e)(4) of this section.
    (f) Meaning of terms. For purposes of this section:
    (1) Acquisition. Stock in a foreign corporation shall be considered 
acquired when a person has an unqualified right to receive such stock 
even though such stock is not actually issued. For example, when under 
the law of a foreign country, all the necessary steps for incorporation 
are completed but stock in the corporation will not be issued within 30 
days, every United States citizen or resident who is an officer or a 
director of such corporation, provided a United States person has an 
interest of 10 percent or more in such corporation, and every such 
United States person shall, within 90 days of the date of incorporation, 
file the returns required under section 6046 and this section. In the 
case of a reorganization, new stock may be acquired, depending on the 
type of reorganization, whether or not any stock certificates are 
surrendered or exchanged or the designation of such stock is altered.
    (2) Reorganization. With respect to a foreign corporation, the term 
``reorganization'' shall mean not only a transaction described in 
section 368(a)(1) and the regulations thereunder but also any other 
transaction or series of transactions which has the same effect.
    (3) U.S. person--(i) In general. For purposes of section 6046 and 
this section, the term United States person has the meaning assigned to 
it by section 7701(a)(30), except as provided in paragraphs (f)(3)(ii) 
and (iii) of this section.
    (ii) Special rule for individuals residing in certain possessions. 
(A) With respect to an individual who is a bona fide resident of Puerto 
Rico, the term United States person has the meaning assigned to it by 
Sec. 1.957-3 except that the rules of Sec. 1.937-2(g)(1) will apply.
    (B) With respect to individuals who are bona fide residents of any 
section 931 possession, as defined in Sec. 1.931-1(c)(1), the term 
United States person has the meaning assigned to it by Sec. 1.957-3.
    (iii) Special rule for certain nonresident aliens. An individual for 
whom an election under section 6013(g) or (h) is in effect will, subject 
to the exceptions contained in paragraph (f)(3)(ii) of this section, be 
considered a United States person for purposes of section 6046 and this 
section.
    (4) [Reserved]
    (5) Accounting period and taxable year. In the case of a specified 
foreign corporation (as defined in section 898), the taxable year of 
such corporation shall be treated as its annual accounting period.
    (g) Method of reporting. All amounts furnished in returns prescribed 
under this section shall be expressed in United States currency with a 
statement of the exchange rates used. All statements required to be 
submitted on or with returns under this section shall be rendered in the 
English language. For taxable years ending after December 31, 1994, with 
respect to returns filed after December 31, 1995, all amounts furnished 
under paragraph (c) of this section shall be expressed in United States 
dollars computed and translated in conformity with United States 
generally accepted accounting principles. Amounts furnished under 
paragraph (c)(3)(i) of this section shall also be furnished in the 
foreign corporation's functional currency as required on the form. 
Information described in paragraphs (b)(10) and (c)(3) of this section 
shall be submitted in such form or manner as the form shall prescribe. 
If an individual who is a United States person required to make a return 
with respect to a foreign corporation under section 6046 is entitled

[[Page 355]]

under a treaty to be treated as a nonresident of the United States, and 
if the individual claims this treaty benefit, and if there are no other 
United States persons that are required to furnish information under 
section 6046 with respect to the foreign corporation, then the 
individual may satisfy the requirements of paragraphs (b)(10), (11) and 
(12), (c)(3)(ii)(d), and (g) of this section by filing the audited 
foreign financial statements of the foreign corporation with the 
individual's return required under section 6046.
    (h) Actual ownership of stock. If any shareholder, referred to in 
this section, is not the actual owner of the stock of the foreign 
corporation, the information required under this section shall be 
furnished in the name of and by such actual owner. For example, in the 
case of stock held by a nominee, the information required under this 
section shall be furnished by the actual owner of such stock.
    (i) Constructive ownership of stock--(1) In general. Stock owned 
directly or indirectly by or for a foreign corporation or a foreign 
partnership shall be considered as being owned proportionately by its 
shareholders or partners. Thus, any United States person who is a member 
of a nonresident foreign partnership which becomes a shareholder in a 
foreign corporation shall be considered to be a shareholder in such 
foreign corporation to the extent of his proportionate share in such 
partnership.
    (2) Members of family. An individual shall be considered as owning 
the stock owned directly or indirectly by or for his brothers and 
sisters (whether by the whole or half blood), his spouse, his ancestors, 
and his lineal descendants. However, when stock is treated as owned by 
an individual under the rule provided in this subparagraph, it shall not 
be treated as owned by him for the purpose of again applying such rule 
in order to make another the constructive owner of such stock. The 
provisions of this subparagraph may be illustrated by the following 
example:

    Example. H, W, and HF are United States citizens. W, wife of H, owns 
20 percent of the value of the outstanding stock of X, a foreign 
corporation. X Corporation owns 90 percent of the value of the 
outstanding stock of Y Corporation, a foreign corporation. Y Corporation 
becomes the owner of 50 percent of the value of the outstanding stock of 
each of two newly organized foreign corporations, M and N. In applying 
the ``members of family'' rule, H is considered to own 20 percent of the 
value of the outstanding stock of X Corporation, and 18 percent of the 
value of the outstanding stock of Y Corporation, and 9 percent of M 
Corporation and N Corporation. However, HF, the father of H, is not 
considered to own stock of X, Y, M, or N since his son, H, is not 
treated as the owner of such stock for purposes of again applying the 
``members of family'' rule.

    (j) Time and place for filing return--(1) Time for filing. Any 
return required by section 6046 and this section shall be filed on or 
before the 90th day after the date on which a United States citizen, 
resident, or person becomes liable to file such return under any 
provision of section 6046(a) and of paragraph (a), (b), or (c) of this 
section. With respect to returns filed after September 3, 1982, such 
return shall be filed on or before such later date (if any) as may be 
authorized by the return form. The Director of the Internal Revenue 
Service Center where the return is required to be filed is authorized to 
grant reasonable extensions of time for filing returns under section 
6046 and this section in accordance with the applicable provisions of 
section 6081(a) and Sec. 1.6081-1.
    (2) Place for filing. Returns required by section 6046 and this 
section shall be filed with the Internal Revenue Service Center 
designated in the instructions of the applicable form.
    (k) Penalties. (1) For criminal penalties for failure to file a 
return and filing a false or fraudulent return, see sections 7203, 7206, 
and 7207.
    (2) For civil penalty for failure to file return, or failure to show 
information required on a return, under this section, see section 6679.
    (l)(1) Effective/applicability date. Paragraph (f)(3) of this 
section applies to taxable years ending after April 9, 2008.
    (2) Paragraph (c)(1)(iii) of this section applies to taxable years 
ending on or after December 31, 2013.
    (3) Paragraph (e)(5) of this section applies to returns filed on or 
after December 31, 2013. See paragraph (e)(5) of Sec. 1.6046-1, as 
contained in 26 CFR part 1

[[Page 356]]

revised as of April 1, 2012, for returns filed before December 31, 2013.

(Approved by the Office of Management and Budget under control number 
1545-0794)

[T.D. 6623, 27 FR 11882, Dec. 1, 1962, as amended by T.D. 6997, 34 FR 
932, Jan. 22, 1969; T.D. 7322, 39 FR 30932, Aug. 27, 1974; T.D. 7925, 48 
FR 55454, Dec. 13, 1983; T.D. 8573, 59 FR 64302, Dec. 14, 1994; T.D. 
8733, 62 FR 53385, Oct. 14, 1997; T.D. 9194, 70 FR 18946, Apr. 11, 2005; 
T.D. 9391, 73 FR 19376, Apr. 9, 2008; T.D. 9650, 78 FR 79611, Dec. 31, 
2013; 79 FR 26837, May 12, 2014; T.D. 9806, 81 FR 95470, Dec. 28, 2016]



Sec. 1.6046A-1  Return requirement for United States persons who
acquire or dispose of an interest in a foreign partnership, or 
whose proportional interest in a foreign partnership changes 
substantially
          .

    (a) Return requirement--(1) General rule. If a United States person 
has a reportable event (as defined in paragraph (b)(1) of this section) 
during the person's tax year, then, except as provided in paragraph (f) 
of this section, the United States person is required to complete and 
file Form 8865, ``Return of U.S. Persons With Respect to Certain Foreign 
Partnerships,'' containing the information described in paragraph (c) of 
this section.
    (2) Separate return for each partnership. If a United States person 
has a reportable event with respect to an interest in more than one 
foreign partnership, the United States person must file a separate Form 
8865 for each foreign partnership.
    (b) Definitions--(1) Reportable event. There are three categories of 
reportable events under section 6046A: acquisitions, dispositions, and 
changes in proportional interests.
    (i) Acquisitions. A United States person that acquires a foreign 
partnership interest has a reportable event if--
    (A) The person did not own a ten-percent or greater direct interest 
in the partnership and as a result of the acquisition the person owns a 
ten-percent or greater direct interest in the partnership. For purposes 
of this paragraph (b)(1)(i)(A), an acquisition includes an increase in a 
person's direct proportional interest; or
    (B) Subject to paragraph (b)(2) of this section, compared to the 
person's direct interest when the person last had a reportable event, 
after the acquisition the person's direct interest has increased by at 
least a ten-percent interest.
    (ii) Dispositions. A United States person that disposes of a foreign 
partnership interest has a reportable event if--
    (A) The person owned a ten-percent or greater direct interest in the 
partnership before the disposition and as a result of the disposition 
the person owns less than a ten-percent direct interest. For purposes of 
this paragraph (b)(1)(ii)(A), a disposition includes a decrease in a 
person's direct proportional interest; or
    (B) Subject to paragraph (b)(2) of this section, compared to the 
person's direct interest when the person last had a reportable event, 
after the disposition the person's direct interest has decreased by at 
least a ten-percent interest.
    (iii) Changes in proportional interests not otherwise reportable as 
acquisitions or dispositions under paragraph (b)(1)(i)(A) or 
(b)(1)(ii)(A) of this section. A United States person has a reportable 
event if, subject to paragraph (b)(2) of this section, compared to the 
person's direct proportional interest the last time the person had a 
reportable event, the person's direct proportional interest has 
increased or decreased by at least the equivalent of a ten-percent 
interest.
    (2) Special rule for foreign partnership interests owned on December 
31, 1999. If a United States person owned a ten-percent or greater 
direct interest in a foreign partnership on December 31, 1999, then to 
determine whether the person has a reportable event under paragraph 
(b)(1)(i)(B), (b)(1)(ii)(B), or (b)(1)(iii) of this section, the 
comparison should be made to the person's direct interest on December 
31, 1999. Once the person has a reportable event after December 31, 
1999, future comparisons should be made by reference to the last 
reportable event.
    (3) Change in a proportional interest. A partner's proportional 
interest in a foreign partnership may change for a number of reasons, 
for example, the change may be caused by changes in other partners' 
interests resulting from a partner withdrawing from the partnership. A 
proportional change may also occur by operation of the partnership 
agreement, for example, if the

[[Page 357]]

partnership agreement provides that a partner's interest in profits will 
change on a set date or when the partnership has earned a specified 
amount of profits and one of those events occurs.
    (4) Ten-percent interest. Under section 6046A(d) and this section, a 
ten-percent interest in a foreign partnership, as described in section 
6038(e)(3)(C) and the regulations thereunder, means an interest equal to 
ten percent of the capital interest in such partnership, an interest 
equal to ten percent of the profits interest in such partnership, or an 
interest to which ten percent of the deductions or losses of such 
partnership are allocated.
    (5) United States person. United States person means a person 
described in section 7701(a)(30).
    (6) Foreign partnership. Foreign partnership means any partnership 
that is a foreign partnership under sections 7701(a)(2) and (5).
    (7) Examples. The rules of paragraph (a) of this section and this 
paragraph (b) are illustrated by the following examples:

    Example 1. Acquisition of an indirect interest. FP, a foreign 
partnership, has two partners, FC1 and FC2, both foreign corporations. 
FC1 owns a 40% interest in FP, and FC2 owns a 60% interest in FP. No 
United States person owns an interest in FP, either directly, or 
constructively under section 6038(e)(3)(C) and section 267(c). On 
January 1, 2001, US, a United States person and calendar year taxpayer, 
acquires by purchase 100% of FC2's stock. US has acquired an indirect 
interest of 60% in FP. See sections 6038(e)(3)(C) and 267(c)(1). 
However, US is not required to report the January 1, 2001 indirect 
acquisition under section 6046A. US did not own a 10% or greater direct 
interest in FP before the acquisition, and US does not own a 10% or 
greater direct interest as a result of the acquisition. (US must, 
however, comply with the reporting requirements under section 6038 
(controlled foreign corporation and controlled foreign partnership 
reporting) with respect to FC2 and FP.)
    Example 2. Acquisition of direct interests. (i) Assume the same 
facts as Example 1. In addition, on June 1, 2001, US purchases a 5% 
direct interest in FP from FC1. US did not own a 10% or greater direct 
interest in FP before the acquisition. After the acquisition, US does 
not own a direct interest of 10% or more. US owns a 10% or greater total 
interest (direct and indirect), but only a 5% direct interest. 
Therefore, US is not required to report the June 1, 2001, acquisition 
under section 6046A.
    (ii) On September 1, 2001, US purchases a 7% direct interest in FP 
from FC1. The September 1, 2001 acquisition constitutes a reportable 
event under paragraph (b)(1)(i)(A) of this section. Before the September 
1 acquisition, US did not own a 10% or greater direct interest in FP. 
After the September 1 acquisition, US owns a 12% direct interest, and 
therefore, as a result of the September 1 acquisition, US now owns a 10% 
or greater direct interest in FP. Consequently, US must report its 
September 1 acquisition under section 6046A on Form 8865 filed with US's 
2001 income tax return.
    (iii) On December 1, 2001, US acquires an additional 4% direct 
interest in FP from FC1, so that US's total direct interest has 
increased from 12% to 16%. This acquisition does not constitute a 
reportable event. Compared to US's direct interest when US last had a 
reportable event (12% on September 1, 2001), after acquiring the 4% 
interest US's direct interest has not increased by at least a 10% direct 
interest (i.e., its direct interest increased by only 4%). Therefore, US 
does not have to report the December 1, 2001, acquisition under section 
6046A. On April 1, 2002, FC2 distributes a 6% direct interest in FP to 
US. US now owns a 22% direct interest in FP. Compared to US's direct 
interest when US last had a reportable event (12% on September 1, 2001), 
after the April 1 acquisition US's direct interest has increased by at 
least a 10% interest (12% to 22%). US must report the April 1, 2002 
acquisition on a Form 8865 attached to US's 2002 income tax return.
    Example 3. Change in proportional interest resulting from withdrawal 
of a partner. Assume the same facts as Example 3. In addition, on 
January 5, 2003, FC2 withdraws entirely from FP. As a result, the direct 
interests of US and FC1 in FP each increase by at least the equivalent 
of 10% interests. Compared to US's direct interest the last time US had 
a reportable event (22% on April 1, 2002), US's direct interest has 
increased by at least the equivalent of a ten percent interest. 
Therefore, US has had a reportable event pursuant to paragraph 
(b)(1)(iii) of this section, and US must report the change in its 
interest resulting from FC2's withdrawal from the partnership on US's 
Form 8865 filed with US's 2003 tax year income tax return.
    Example 4. Change in proportional interest constituting an 
acquisition. FP is a foreign partnership that has no United States 
persons as direct or constructive partners. US is a United States person 
and a calendar year taxpayer. On January 1, 2001, US purchases an 8% 
direct interest in FP. US is not required to report this acquisition. US 
did not own a 10% or greater direct interest in FP, and US does not own 
a 10% or greater direct interest as a result of the acquisition. On 
March 1, 2001, FC, a foreign partner of FP, withdraws from FP, and as 
result, US's direct interest in FP increases by a 7% interest.

[[Page 358]]

The increase in US's direct interest is considered an acquisition of an 
interest under paragraph (b)(1)(i)(A) of this section. US did not own a 
10% or greater direct interest in FP before FC withdrew, and as a result 
of the increase in US's direct interest because of FC's withdrawal from 
FP, US now owns a 10% or greater direct interest in FP. Therefore, US 
must report under section 6046A the increase in US's direct interest 
resulting from the withdrawal of FC from FP on Form 8865 filed with US's 
tax return for US's 2001 tax year.

    (c) Content of return. The Form 8865 that must be filed under 
paragraph (a)(1) of this section must contain the following information 
in such form and manner and to the extent that Form 8865 and its 
instructions prescribe--
    (1) The name, address, and taxpayer identification number of the 
United States person required to file the return;
    (2) Information about other persons (foreign or domestic) whose 
interests in the foreign partnership the person reporting under section 
6046A is considered to own under section 6038(e)(3)(C) and section 
267(c);
    (3) Information about all foreign entities that were disregarded as 
entities separate from their owners under Sec. Sec. 301.7701-2 and 
301.7701-3 of this chapter that were owned by the foreign partnership 
during the partnership's tax year ending with or within the tax year of 
the person filing Form 8865 pursuant to section 6046A;
    (4) For each reportable event, the date of the event, the type of 
event (acquisition, disposition, or change in proportional interest), 
and the United States person's direct percentage interest in the foreign 
partnership immediately before and immediately after the event;
    (5) The fair market value of the interest acquired or disposed of;
    (6) Information about partnerships (foreign and domestic) in which 
the foreign partnership owned a direct interest, or a constructive 
interest of ten percent or more under sections 267(c)(1) and (5) and the 
regulations thereunder, during the partnership's tax year ending with or 
within the tax year of the person filing Form 8865 pursuant to section 
6046A; and
    (7) Any other information required to be submitted by Form 8865 and 
its instructions.
    (d) Time and manner for filing returns. The Form 8865 must be filed 
with the timely filed (including extensions) income tax return of the 
United States person for the tax year in which the reportable event 
occurs. If the United States person is not required to file an income 
tax return for its tax year in which the reportable event occurs, but is 
required to file an information return for that year (for example, Form 
1065, ``U.S. Partnership Return of Income,'' or Form 990, ``Return of 
Organization Exempt from Income Tax''), the United States person should 
attach the Form 8865 to its information return filed for that tax year.
    (e) Duplicate returns. If required by the instructions to Form 8865, 
a duplicate Form 8865 (including attachments and schedules) must also be 
filed.
    (f) Persons excepted from filing return--(1) Section 6038B overlap. 
If a United States person acquires an interest in a foreign partnership 
as a result of a section 721 contribution required to be reported under 
section 6038B, and the person properly reports the contribution under 
section 6038B, then the United States person is not required to report 
the acquisition of the partnership interest under section 6046A(a) 
should it constitute a reportable event under paragraph (b)(1) of this 
section. The acquisition will still constitute a reportable event for 
purposes of making future comparisons pursuant to paragraphs 
(b)(1)(i)(B), (b)(1)(ii)(B) and (b)(1)(iii) of this section. A person 
that fails to properly report the section 721 contribution under section 
6038B and the regulations thereunder and that fails to properly report 
the acquisition of the partnership interest under section 6046A may be 
subject to the penalties applicable to a failure to comply with the 
requirements of section 6038B, as well as the penalties applicable for a 
failure to comply with the requirements of section 6046A. See paragraph 
(h) of this section for more information about the penalties for failure 
to comply with the requirements of section 6046A.
    (2) Trusts relating to state and local government employee 
retirement plans. The return requirement of section 6046A does not apply 
to trusts relating

[[Page 359]]

to state and local government employee retirement plans, unless the 
instructions to Form 8865 provide otherwise.
    (3) Reporting under this section not required of partnerships 
excluded from the application of subchapter K. The reporting 
requirements of this section will not apply to any United States person 
in respect of an eligible partnership as described in Sec. 1.761-2(a) 
in which that United States person is a partner, if such partnership has 
validly elected to be excluded from all of the provisions of subchapter 
K of chapter 1 of the Internal Revenue Code in the manner specified in 
Sec. 1.761-2(b)(2)(i), or is deemed to have elected to be excluded from 
all of the provisions of subchapter K of chapter 1 of the Internal 
Revenue Code in accordance with the provisions of Sec. 1.761-
2(b)(2)(ii).
    (4) Exclusion for satellite organizations. The return requirement of 
section 6046A does not apply to the International Telecommunications 
Satellite Organization (or a successor organization) or the 
International Maritime Satellite Organization (or a successor 
organization).
    (g) Method of reporting. Except as otherwise provided on Form 8865, 
or the accompanying instructions, any amounts required to be reported 
under section 6046A and this section must be expressed in United States 
dollars, with a statement of the exchange rates used. All statements 
required on or with Form 8865 pursuant to this section must be in 
English.
    (h) Penalties for violating section 6046A. For penalties for 
violating section 6046A, see sections 6679 and 7203.
    (i) Statute of limitations. For exceptions to the limitations on 
assessment in the event of a failure to provide information under 
section 6046A, see section 6501(c)(8).
    (j) Effective date. This section applies to reportable events 
occurring after December 31, 1999. No reporting under section 6046A is 
required for reportable events occurring on or before December 31, 1999.

[T.D. 8851, 64 FR 72556, Dec. 28, 1999]



Sec. 1.6046-2  Returns as to foreign corporations which are created
or organized, or reorganized, on or after September 15, 1960, 
and before January 1, 1963.

    (a) Requirement of returns. In the case of any foreign corporation 
which is created or organized, or reorganized, on or after September 15, 
1960, and before January 1, 1963:
    (1) Each United States citizen or resident who was an officer or 
director of such corporation at any time within 60 days after such 
creation or organization, or reorganization, and
    (2) Each United States shareholder of such corporation by or for 
whom, at any time within 60 days after such creation or organization, or 
reorganization, 5 percent or more in value of such corporation's then 
outstanding stock was owned directly or indirectly (including, in the 
case of an individual stock owned by members of his family),


shall file a return on Form 959 (Rev. Oct. 1960), United States 
Information Return With Respect to the Creation or Organization, or 
Reorganization, of a Foreign Corporation.
    (b) Information required to be shown on return. The return required 
by section 6046, prior to its amendment by section 20(b) of the Revenue 
Act of 1962, and this section shall set forth the following information:
    (1) The name and address of the person (or persons) filing the 
return, and an indication that he is a United States shareholder, 
officer, or director;
    (2) The name and business address of the foreign corporation;
    (3) The name of the country under the laws of which the foreign 
corporation was created or organized, or reorganized;
    (4) The name and address of the foreign corporation's statutory or 
resident agent in the country of incorporation;
    (5) The date of the foreign corporation's creation or organization, 
or reorganization;
    (6) A statement of the manner in which the creation or organization, 
or reorganization, of the foreign corporation was effected;
    (7) A complete statement of the reasons for, and the purposes sought 
to be

[[Page 360]]

accomplished by, the creation or organization, or reorganization, of the 
foreign corporation;
    (8) A statement showing the classes and kinds of assets transferred 
to the foreign corporation in connection with its creation or 
organization, or reorganization, including a list completely describing 
each asset or group of assets, its value, date of transfer, and the name 
and address of person (or persons) owning such asset or group 
immediately prior to the transfer;
    (9) A statement showing the assets transferred and the securities 
issued by the foreign corporation in its creation or organization or 
reorganization, as well as the name and address of each person to whom 
such a transfer or issuance was made;
    (10) A statement specifying the amount and type of any indebtedness 
due from the foreign corporation to each of its shareholders and the 
name of each such shareholder;
    (11) The names and addresses of the shareholders of the foreign 
corporation at the time of its creation or organization or 
reorganization, and the classes of stock and number of shares held by 
each;
    (12) The names and addresses of subscribers to the stock of the 
foreign corporation, and the number of shares subscribed to by each; and
    (13) The name and address of the person (or persons) having custody 
of the books of account and records of the foreign corporation, and the 
location of such books and records if different from such address.
    (c) Time and place for filing return. The return required by section 
6046, prior to its amendment by section 20(b) of the Revenue Act of 
1962, and this section shall be filed with the Internal Revenue Service 
Center designated in the instructions of the applicable form. Such 
return shall be filed on or before the 90th day after the date such 
foreign corporation is created or organized, or reorganized.

[T.D. 6623, 27 FR 11882, Dec. 1, 1962, as amended by T.D. 7322, 39 FR 
30932, Aug. 27, 1974]



Sec. 1.6046-3  Returns as to formation or reorganization of foreign
corporations prior to September 15, 1960.

    (a) Requirement of returns. Every attorney, accountant, fiduciary, 
bank, trust company, financial institution, or other person, who, on or 
before September 14, 1960, aids, assists, counsels, or advises in, or 
with respect to, the formation, organization, or reorganization of any 
foreign corporation shall file an information return on Form 959 (as in 
use prior to the October 1960 revision). The return must be filed in 
every such case regardless of:
    (1) The nature of the counsel or advice given, whether for or 
against the formation, organization, or reorganization of the foreign 
corporation, or the nature of the aid or assistance rendered, and
    (2) The action taken upon the advice or counsel, that is, whether 
the foreign corporation is actually formed, organized or reorganized.
    (b) Special provisions--(1) Employers. In the case of aid, 
assistance, counsel, or advice in, or with respect to, the formation, 
organization, or reorganization of a foreign corporation given by a 
person in whole or in part through the medium of employees (including, 
in the case of a corporation, the officers thereof), the return made by 
the employer must set forth in detail the information required by this 
section including that which, as an incident to such employment, is 
within the possession or knowledge or under the control of such 
employees.
    (2) Employees. The obligation of an employee (including, in the case 
of a corporation, the officers thereof) to file a return with respect to 
any aid, assistance, counsel, or advice in or with respect to the 
formation, organization, or reorganization of a foreign corporation, 
given as an incident to his employment, will be satisfied if a return as 
prescribed by this section is duly filed by the employer. Clerks, 
stenographers, and other employees rendering aid or assistance solely of 
a clerical or mechanical character in or with respect to the formation, 
organization, or reorganization of a foreign corporation are not 
required to file returns by reason of such services.

[[Page 361]]

    (3) Partners. In the case of aid, assistance, counsel, or advice in, 
or with respect to, the formation, organization, or reorganization of a 
foreign corporation given by one or more members of a partnership in the 
course of its business, the obligation of each such individual member to 
file a return will be satisfied if a return as prescribed by this 
section is duly filed by the partnership executed by all the members of 
the firm who gave any such aid, assistance, counsel, or advice. If, 
however, the partnership has been dissolved at the time the return is 
due, individual returns must be filed by each member of the former 
partnership who gave any such aid, assistance, counsel, or advice.
    (4) Return jointly made. If two or more persons aid, assist, 
counsel, or advise in, or with respect to, the formation, organization, 
or reorganization of a particular foreign corporation, any two or more 
of such persons may, in lieu of filing several returns, jointly execute 
and file one return.
    (5) Separate return for each corporation. If a person aids, assists, 
counsels, or advises in, or with respect to, the formation, 
organization, or reorganization of more than one foreign corporation, a 
separate return must be filed with respect to each foreign corporation.
    (c) Information required to be shown on return. The return required 
by section 6046, prior to its amendment by section 7(a) of the Act of 
September 14, 1960, and this section shall set forth the following 
information to the extent the information is within the possession or 
knowledge, or under the control, of the person filing the return:
    (1) The name and address of the person (or persons) to whom, and the 
person (or persons) for whom, or on whose behalf, the aid, assistance, 
counsel, or advice was given;
    (2) The name and address of the foreign corporation and the country 
under the laws of which it was formed, organized, or reorganized;
    (3) The month and year when the foreign corporation was formed, 
organized, or reorganized;
    (4) A statement of the manner in which the formation, organization, 
or reorganization of the foreign corporation was effected;
    (5) A complete statement of the reasons for, and the purposes sought 
to be accomplished by, the formation, organization, or reorganization of 
the foreign corporation;
    (6) A statement showing the classes and kinds of assets transferred 
to the foreign corporation in connection with its formation, 
organization, or reorganization, including a detailed list of any stock 
or securities included in such assets, and a statement showing the names 
and addresses of the persons who were the owners of such assets 
immediately prior to the transfer;
    (7) The names and addresses of the shareholders of the foreign 
corporation at the time of the completion of its formation, 
organization, or reorganization, showing the classes of stock and number 
of shares held by each and, in the case of Forms 959 filed after 
December 31, 1958, the names and addresses of the subscribers to the 
stock of the foreign corporation and the number of shares subscribed to 
by each;
    (8) The name and address of the person (or persons) having custody 
of the books of account and records of the foreign corporation; and
    (9) Such other information as is required by the return form.
    (d) Privileged communications. An attorney-at-law is not required to 
file a return with respect to any advice given or information obtained 
through the relationship of attorney and client.
    (e) Time and place for filing return--(1) Time for filing. Returns 
required by section 6046, prior to its amendment by section 7(a) of the 
Act of September 14, 1960, and this section shall be filed within 30 
days after the first performance of any of the functions referred to in 
paragraph (a) of this section. If in a particular case, the aid, 
assistance, counsel, or advice given by any person extends over a period 
of more than one day, such person, to avoid multiple filing of returns, 
shall file a return within 30 days after either of the following events:
    (i) The formation, organization, or reorganization of the foreign 
corporation, or
    (ii) The termination of his aid, assistance, counsel, or advice in, 
or with respect to, the formation, organization,

[[Page 362]]

or reorganization of the foreign corporation.
    (2) Place for filing. Returns required by section 6046 of the 
Internal Revenue Code of 1954 and this section shall be filed with the 
Internal Revenue Service Center designated in the instructions of the 
applicable form.
    (f) Penalties. For criminal penalties for failure to file a return 
and filing a false or fraudulent return, see sections 7203, 7206, and 
7207.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6623, 27 FR 
11882, Dec. 1, 1962; T.D. 7322, 39 FR 30932, Aug. 27, 1974]



Sec. 1.6047-1  Information to be furnished with regard to employee 
retirement plan covering an owner-employee.

    (a) Trustees and insurance companies--(1) Requirement of return. (i) 
Every trustee of a trust described in section 401(a) and exempt from tax 
under section 501(a) which makes payments of amounts described in 
subparagraph (2) of this paragraph aggregating $10 or more during any 
calendar year to an individual (or his beneficiary) who was covered, 
within the meaning of paragraph (a)(2) of Sec. 1.401-10, as an owner-
employee under the plan of which such trust is a part shall make a 
return on Forms 1096 and 1099 for such year showing the name and address 
of the person to whom paid, the aggregate amount of such payments, 
specifically identified as an amount to which this paragraph applies, 
and such other information as is required by the forms. A separate Form 
1099 shall be filed with respect to each payee. The term ``owner-
employee'' means an owner-employee as defined in section 401(c)(3) and 
paragraph (d) of Sec. 1.401-10. Any custodial account which satisfies 
the requirements of section 401(f) shall be treated as a qualified trust 
and the custodian of such a custodial account must comply with the 
requirements of this section as if he were the trustee.
    (ii) Every issuer of a contract which is treated as an annuity 
contract under sections 401 through 404 purchased by a trust described 
in section 401(a) and exempt from tax under section 501(a) or under a 
plan described in section 403(a) which makes payments of amounts 
described in subparagraph (2) of this paragraph aggregating $10 or more 
during any calendar year to an individual (or his beneficiary) who was 
covered, within the meaning of paragraph (a)(2) of Sec. 1.401-10, as an 
owner-employee under the plan of which such trust is a part or under 
which such contract was purchased shall make a return on Forms 1096 and 
1099 for such year showing the name and address of the person to whom 
paid, the aggregate amount of such payments, specifically identified as 
an amount to which this paragraph applies, and such other information as 
is required by the form. A separate Form 1099 shall be filed with 
respect to each payee.
    (2) Amounts subject to this section. The amounts subject to 
reporting under subparagraph (1) of this paragraph include all amounts 
distributed or made available to which section 402(a) (relating to 
employees' trusts) or section 403(a) (relating to employee annuity 
plans) applies, whether or not such amounts are includible in gross 
income and whether or not attributable to contributions made while the 
individual to whom they relate was an owner-employee. However, amounts 
subject to reporting do not include any amounts distributed or made 
available by the trustee of any trust or the issuer of any contract 
under any plan with respect to which he has not received the 
notification provided in either subparagraph (3) of this paragraph or 
paragraph (b) of this section. Amounts distributed or made available 
under the plan include, for example, amounts received by the individual 
as loans on contracts purchased under the plan, and payments made to the 
individual by reason of the surrender of contracts purchased under the 
plan, whether or not prior to their maturity.
    (3) Notification by trustee. The trustee of any trust described in 
section 401(a) and exempt from tax under section 501(a) who receives 
notification from any owner-employee that contributions have been made 
to the trust on behalf of that owner-employee as an owner-employee shall 
notify in writing the issuer of any contract which is treated as an 
annuity contract under sections 401 through 404 purchased by the trust 
for the benefit of that owner-employee that such contributions have been 
made to such trust. Such notification

[[Page 363]]

shall be delivered to such issuer at the time such contract is purchased 
or within 90 days after the notification required by paragraph (b) of 
this section is received by the trustee, whichever is later. Only one 
such notification must be made with respect to any contract.
    (4) Record keeping. Any trustee, insurance company, or other person, 
which is referred to in subparagraph (1) of this paragraph and which is 
notified under section 6047(b) that contributions to the trust or under 
the plan have been made on behalf of an owner-employee shall maintain a 
record of such notification until all funds of the trust or under the 
plan on behalf of the owner-employee have been distributed.
    (5) Inclusion of other payments. The Form 1099 filed under this 
section by any person with respect to payments to another person during 
a calendar year may, at the election of the maker, include other 
payments made by him to such other person during such year which are 
required to be reported on Form 1099.
    (6) Time and place for filing. The return required under this 
section for any calendar year shall be filed after the close of that 
year and on or before February 28 (March 31 if filed electronically) of 
the following year with any of the Internal Revenue Service Centers, the 
addresses of which are listed in the instructions for Form 1096. For 
extensions of time for filing returns under this section, see Sec. 
1.6081-1.
    (b) Notification by owner-employee. Any owner-employee on behalf of 
whom contributions are made to a trust described in section 401(a) and 
exempt under section 501(a) or under a plan described in section 403(a) 
shall notify in writing:
    (1) The trustee of such a trust, or
    (2) The issuer of any contract which is treated as an annuity 
contract under sections 401 through 404 under such plan,


that such contributions have been made to such trust or plan. Such 
notification shall be delivered to such trustee or such issuer during 
the first calendar year in which such contributions are made or on or 
before February 28 of the year following such year. Only one such 
notification must be made with respect to any contract or any trust.
    (c) Penalties. For civil penalty for failure to file a return 
required by this section, and for criminal penalty for furnishing 
fraudulent information under this section, see Sec. Sec. 301.6652-3 and 
301.7207-1 respectively.
    (d) Permission to submit information required by Form 1099 on 
magnetic tape. For rules relating to permission to submit the 
information required by Form 1099 on magnetic tape or other media, see 
Sec. 1.9101-1.

[T.D. 6677, 28 FR 10147, Sept. 17, 1963, as amended by T.D. 6883, 31 FR 
6589, May 3, 1966; T.D. 7551, 43 FR 29292, July 7, 1978; T.D. 8895, 65 
FR 50407, Aug. 18, 2000]



Sec. 1.6047-2  Information relating to qualifying longevity annuity
contracts.

    (a) Requirement and form of report--(1) In general. Any person 
issuing any contract that is intended to be a qualifying longevity 
annuity contract (QLAC), defined in A-17 of Sec. 1.401(a)(9)-6, shall 
make the report required by this section. This requirement applies only 
to contracts purchased or held under any plan, annuity, or account 
described in section 401(a), 403(a), 403(b), or 408 (other than a Roth 
IRA) or eligible governmental plan under section 457(b).
    (2) Annual report. The issuer shall make annual calendar-year 
reports on the applicable form prescribed by the Commissioner for this 
purpose concerning the status of the contract. The report shall identify 
that the contract is intended to be a QLAC and shall contain the 
following information--
    (i) The name, address, and identifying number of the issuer of the 
contract, along with information on how to contact the issuer for more 
information about the contract;
    (ii) The name, address, and identifying number of the individual in 
whose name the contract has been purchased;
    (iii) If the contract was purchased under a plan, the name of the 
plan, the plan number, and the Employer Identification Number (EIN) of 
the plan sponsor;
    (iv) If payments have not yet commenced, the annuity starting date 
on

[[Page 364]]

which the annuity is scheduled to commence, the amount of the periodic 
annuity payable on that date, and whether that date may be accelerated;
    (v) For the calendar year, the amount of each premium paid for the 
contract and the date of the premium payment;
    (vi) The total amount of all premiums paid for the contract through 
the end of the calendar year;
    (vii) The fair market value of the QLAC as of the close of the 
calendar year; and
    (viii) Such other information as the Commissioner may require.
    (b) Manner and time for filing--(1) Timing. The report required by 
paragraph (a)(2) of this section shall be filed in accordance with the 
forms and instructions prescribed by the Commissioner. Such a report 
must be filed for each calendar year beginning with the year in which 
premiums for a contract are first paid and ending with the earlier of 
the year in which the individual in whose name the contract has been 
purchased attains age 85 (as adjusted pursuant to A-17(d)(2)(ii) of 
Sec. 1.401(a)(9)-6) or dies.
    (2) Surviving spouse. If the individual dies and the sole 
beneficiary under the contract is the individual's spouse (in which case 
the spouse's annuity would not be required to commence until the 
individual would have commenced benefits under the contract had the 
individual survived), the report must continue to be filed for each 
calendar year until the calendar year in which the distributions to the 
spouse commence or in which the spouse dies, if earlier.
    (c) Issuer statements. Each issuer required to file the annual 
report required by paragraph (a)(2) of this section shall furnish to the 
individual in whose name the contract has been purchased a statement 
containing the information required to be included in the report, except 
that such statement shall be furnished to a surviving spouse to the 
extent that the report is required to be filed under paragraph (b)(2) of 
this section. A copy of the required form may be used to satisfy the 
statement requirement of this paragraph (c). If a copy of the required 
form is not used to satisfy the statement requirement of this paragraph 
(c), the statement shall contain the following language: ``This 
information is being furnished to the Internal Revenue Service.'' The 
statement required by this paragraph (c) shall be furnished on or before 
January 31 following the calendar year for which the report required by 
paragraph (a)(2) of this section is required.
    (d) Penalty for failure to file report. Section 6652(e) prescribes a 
penalty for failure to file the report required by paragraph (a)(2) of 
this section.
    (e) Effective/applicability date. This section applies to contracts 
purchased on or after July 2, 2014.

[T.D. 9673, 79 FR 37643, July 2, 2014]



Sec. 1.6049-1  Returns of information as to interest paid in calendar
years before 1983 and original issue discount includible in gross 
income for calendar years before 1983.
          

    (a) Requirement of reporting--(1) In general. (i) Every person who 
makes payments of interest (as defined in Sec. 1.6049-2) aggregating 
$10 or more to any other person during a calendar year before 1983 shall 
make an information return on Forms 1096 and 1099 for such calendar year 
showing the aggregate amount of such payments, the name and address of 
the person to whom paid, the total of such payments for all persons, and 
such other information as is required by the forms. In the case of 
interest paid during calendar years beginning with 1963 and continuing 
until such time as the Commissioner determines that it is feasible to 
aggregate payments on two or more accounts, insurance contracts, or 
investment certificates and this subdivision is amended accordingly to 
provide for reporting on an aggregate basis, the requirement of this 
subdivision for the filing of Form 1099 will be met if a person making 
payments of interest to another person on two or more such accounts, 
insurance contracts, or investment certificates, files a separate Form 
1099 with respect to each such account, contract, or certificate on 
which $10 or more of interest is paid to such other person during the 
calendar year. In the case of evidences of indebtedness described in 
section 6049(b)(1)(A), separate Forms 1099 may be filed as provided in 
the preceding sentence with

[[Page 365]]

respect to holdings in different issues. Thus, if a bank pays to a 
person interest totaling $15 on one account and $20 on a second account, 
it may file separate Forms 1099 with respect to the payments of $15 and 
$20. If the interest on the second account totaled $5 instead of $20, no 
return would be required with respect to the $5.
    (ii)(a) Every person which is a corporation that has outstanding any 
bond, debenture, note, or certificate or other evidence of indebtedness 
(referred to in this section and Sec. 1.6049-2 as an obligation) in 
``registered form'' (as defined in paragraph (d) of Sec. 1.6049-2) 
issued after May 27, 1969 (other than an obligation issued by a 
corporation pursuant to a written commitment which was binding on May 
27, 1969, and at all times thereafter) and on or before December 31, 
1982, as to which there is during any calendar year before 1983 an 
amount of original issue discount (as defined in Sec. 1.6049-2) 
aggregating $10 or more includible as interest in the gross income for 
such calendar year of any holder (determined, if semiannual record date 
reporting is being used under (b)(1) of this subdivision, by treating 
each holder as holding the obligation on every day it was outstanding 
during the calendar year), shall make an information return on Forms 
1096 and 1099-OID for such calendar year showing the following:
    (1) The name and address of each record holder for whom such 
aggregate amount of original issue discount is $10 or more and, for 
calendar years subsequent to 1972, the account, serial, or other 
identifying number of each obligation for which a return is being made.
    (2) The aggregate amount of original issue discount includible by 
each such holder for the period during the calendar year for which the 
return is made (or, if the aggregation rules of (b)(2) of this 
subdivision are being used, that he held the obligations). If however, 
the semiannual record date reporting rules are being used under (b)(1) 
of this subdivision, such aggregate amount shall be determined by 
treating each such record date holder as if he held each such obligation 
on every day it was outstanding during the calendar year. For purposes 
of this section, an obligation shall be considered to be outstanding 
from the date of original issue (as defined in paragraph (b)(3) of Sec. 
1.1232-3). In the case of a time deposit open account arrangement to 
which paragraph (e)(5) of Sec. 1.1232-3A applies, for example, the 
amount to be shown under this subdivision (2) on the Forms 1096 and 
1099-OID is the sum (computed under such paragraph (e)(5)) of the 
amounts separately computed for each deposit made pursuant to the 
arrangement.
    (3) The issue price of the obligation (as defined in paragraph 
(b)(2) of Sec. 1.1232-3).
    (4) The stated redemption price of the obligation at maturity (as 
defined in paragraph (b)(1)(iii) of Sec. 1.1232-3).
    (5) The ratable monthly portion of original issue discount with 
respect to the obligation as defined in section 1232(a)(3)(A) 
(determined without regard to a reduction for a purchase allowance or 
whether the holder purchased at a premium).
    (6) The name and address of the person filing the form.
    (7) Such other information as is required by the form. And,
    (8) The sum, for all such holders of the aggregate amounts of such 
original issue discount includible for such calendar year for each such 
holder.
    (b) With respect to any obligation (other than an obligation to 
which paragraph (e) or (f) of Sec. 1.1232-3A applies (relating 
respectively to deposits in banks and similar financial institutions and 
to face-amount certificates)), the issuing corporation (or an agent 
acting on its behalf):
    (1) Shall be permitted (until this subdivision (1) is amended) to 
prepare a Form 1099-OID only for each person who is a holder of record 
of the obligation on the semiannual record date (if any) used by the 
corporation (or agent) for the payment of stated interest or, if there 
is no such date, the semiannual record dates shall be considered to be 
June 30, and December 31.
    (2) Shall be permitted to aggregate all original issue discount with 
respect to 2 or more obligations of the same issue for which the amounts 
specified in (a)(2), (a)(3), (a)(4), and (a)(5) of this subdivision are 
proportional and, therefore, may file one Form 1099-OID

[[Page 366]]

for all such obligations being aggregated, except that for calendar year 
1971 this aggregation rule shall apply only where such specified amounts 
are identical. For an illustration of proportional aggregation, see 
example (4) in (d) of this subdivision.
    (c) In any case in which any one holder of a particular obligation 
for the calendar year held such obligation on more than one record date, 
only one Form 1099-OID shall be filed for that year with respect to that 
holder and that obligation. This provision applies only in the case in 
which any corporation prepares Forms 1099-OID in accordance with the 
record date reporting rule of (b)(1) of this subdivision.
    (d) The requirements of (a)(3), (a)(4), and (a)(5) of this 
subdivision shall not apply to a time deposit open account arrangement 
to which paragraph (e)(5) of Sec. 1.1232-3A applies, or to a face-
amount certificate to which paragraph (f) of Sec. 1.1232-3A applies.
    (e) The provisions of this subdivision (ii) may be illustrated by 
the following examples:

    Example 1. On January 1, 1971, a corporation issued a 10-year bond 
in registered form which pays stated interest to the holder of record on 
June 30 and December 31. The bond has an issue price (as defined in 
paragraph (b)(2) of Sec. 1.1232-3) of $7,600, a stated redemption price 
(as defined in paragraph (b)(1) of Sec. 1.1232-3) at maturity of 
$10,000, and a ratable monthly portion of original issue discount (as 
defined in section 1232(a)(3)(A)) of $20. The corporation's books 
indicate that A was the holder of record on June 30, 1971, and B was the 
holder on December 31, 1971. Under (b)(1) of this subdivision, the 
corporation is permitted to file separate Forms 1099-OID for both A and 
B showing, on each form, all items required by (a) of this subdivision, 
including the total original issue discount of $240 for the entire 
calendar year (which includes original issue discount for all holders), 
the issue price of $7,600, the stated redemption price at maturity of 
$10,000, and the ratable monthly portion of original issue discount of 
$20.
    Example 2. Assume the facts stated in Example (1), except that A is 
recorded on the books of the corporation as holding the bond on June 30 
and December 31, 1971. The corporation shall complete and file only one 
Form 1099-OID for A.
    Example 3. Assume the facts stated in Example (1), except that the 
books of the corporation show that A held 2 of the bonds at all times in 
1971. The amounts of the items listed in (a)(2), (a)(3), (a)(4), and 
(a)(5) of this subdivision are identical for the 2 bonds. Under (b)(2) 
of this subdivision, the corporation is permitted to treat the 2 bonds 
as one for purposes of completing and filing a Form 1099-OID for 1971 
and aggregate the amounts being reported.
    Example 4. On January 1, 1972, a corporation issued to C 3 bonds in 
registered form of the same issue with stated redemption prices of 
$1,000, $5,000, and $10,000. The aggregate amounts of original issue 
discount for each year, the issue prices, the stated redemption prices, 
and the monthly portions of original issue discount are the same for 
each $1,000 of stated redemption price. Thus, all relevant amounts for 
any one bond are proportional to such amounts for any other bond. 
Therefore, so long as C holds the bonds the corporation shall be 
permitted to aggregate on one Form 1099-OID all original issue discount 
with respect to such obligations in accordance with (b)(2) of this 
subdivision.
    Example 5. On June 1, 1971, a corporation issues a 10-year bond to 
D, for which the ratable monthly portion of original issue discount is 
$10. For 1971, the corporation uses the record date reporting system 
permitted by (b)(1) of this subdivision. The corporation's books show 
that E held the bond on June 30, 1971, and that F held the bond on 
December 31, 1971, the dates on which the corporation pays stated 
interest on the bond. The corporation shall file a Form 1099-OID for 
both E and F showing on each form the aggregate amount of original issue 
discount includible for 1971 or $70 since E and F are each treated as if 
each held the bond every day it was outstanding and it was outstanding 7 
months in 1971. As to D, the corporation is not required to file a Form 
1099-OID since D did not hold the bond on either of the 2 record dates.

    (iii) Every person who during a calendar year before 1983 receives 
payments of interest as a nominee on behalf of another person 
aggregating $10 or more shall make an information return on Forms 1096 
and 1087 for such calendar year showing the aggregate amount of such 
interest, the name and address of the person on whose behalf received, 
the total of such interest received on behalf of all persons, and such 
other information as is required by the forms.
    (iv) Except with respect to an obligation to which paragraph (e) or 
(f) of Sec. 1.1232-3A applies (relating respectively to deposits in 
banks and similar financial institutions and to face-amount 
certificates), every person who is a nominee on behalf of the actual 
owner of an obligation as to which

[[Page 367]]

there is original issue discount aggregating $10 or more includible in 
the gross income of such owner during a calendar year before 1983, 
regardless of whether he receives a Form 1099-OID with respect to such 
discount, shall make an information return on Forms 1096 and 1087-OID 
for such calendar year showing in the manner prescribed on such forms 
the same information for the actual owner as is required or permitted in 
subdivision (ii) of this subparagraph for the record holder.
    (v) Notwithstanding the provisions of subdivisions (iii) and (iv) of 
this subparagraph, the filing of Form 1087 or Form 1087-OID is not 
required if:
    (a) The record owner is required to file a fiduciary return on Form 
1041 disclosing the name, address, and identifying number of the actual 
owner;
    (b) The record owner is a nominee of a banking institution or trust 
company exercising trust powers, and such banking institution or trust 
company is required to file a fiduciary return on Form 1041 disclosing 
the name, address, and identifying number of the actual owner; or
    (c) The record owner is a banking institution or trust company 
exercising trust powers, or a nominee thereof, and the actual owner is 
an organization exempt from taxation under section 501(a) for which such 
banking institution or trust company files an annual return,


but only if the name, address, and identifying number of the record 
owner are included on or with the Form 1041 fiduciary return filed for 
the estate or trust or the annual return filed for the tax exempt 
organization.
    (vi) Every person carrying on the banking business who makes 
payments of interest to another person (whether or not aggregating $10 
or more) during a calendar year with respect to a certificate of deposit 
issued in bearer form (other than such a certificate issued in an amount 
of $100,000 or more) shall make an information return on Forms 1096 and 
1099-BCD for such calendar year. The preceding sentence applies whether 
such payments are made during the term of the certificate or at its 
redemption. The information return required by this subdivision for the 
calendar year shall show the following:
    (a) The name, address, and taxpayer identification number of the 
person to whom the interest is paid;
    (b) The aggregate amount of interest paid to such person during the 
calendar year with respect to the certificate of deposit;
    (c) The name, address, and taxpayer identification number of the 
person to whom the certificate was originally issued;
    (d) The portion of the interest with respect to the certificate 
reported under (b) that is attibutable to the current calendar year; and
    (e) Such other information as is required by the form.


The application of this subdivision (vi) may be illustrated by the 
following examples:

    Example 1. On June 1, 1978, X Bank issues a $1,000 bearer 
certificate of deposit to A. The certificate of deposit is not 
redeemable until May 31, 1979, and no interest is to be paid on the 
instrument until its redemption. On September 1, 1978. A transfers the 
bearer certificate to B and on May 31, 1979, B presents the certificate 
to X for payment and receives the $1,000 principal amount plus all the 
accrued interest. Under paragraph (a)(1)(vi) of this section, X is not 
required to make an information return for 1978 with respect to the 
bearer certificate of deposit because no interest is actually paid to a 
holder of the certificate during 1978. X is required to file an 
information return for 1979 with respect to the certificate, identifying 
B as the payee of the entire amount of the interest and A as the 
original purchaser of the certificate. (For rules relating to statements 
to be made to recipients of interest payments, see Sec. 1.6049-3.)
    Example 2. On July 1, 1978, Y Bank issues a $5,000 bearer 
certificate of deposit to C. The certificate of deposit is not 
redeemable until June 30, 1981, and no interest is to be paid on the 
instrument until its redemption. C holds the certificate for the entire 
term and on June 30, 1981, presents it to Y for payment and receives the 
$5,000 principal amount plus the accrued interest. Under paragraph 
(a)(1)(vi) of this section, Y is not required to file an information 
return for calendar years 1978, 1979, or 1980 with respect to this 
bearer certificate of deposit because no interest is acutally paid to C 
during those calendar years. Y is required to file an information return 
for 1981 with respect to the certificate identifying C as the payee of 
the entire amount of the interest and as the original purchaser. 
(Although Y is not required to file an information return for interest 
paid on the certificate until its redemption in 1981, C

[[Page 368]]

must report as income on his tax returns for 1978, 1979, 1980, and 1981 
the ratable portion of such interest includible in income under section 
1232.)

    (2) Definitions. (i) The term ``person'' when used in this section 
does not include the United States, a State, the District of Columbia, a 
foreign government, a political subdivision of a State or of a foreign 
government, or an international organization. Therefore, interest paid 
by or to one of these entities need not be reported. Similarly, original 
issue discount in respect of an obligation issued by or to one of these 
entities need not be reported.
    (ii) For purposes of this section, a person who receives interest 
shall be considered to have received it as a nominee if he is not the 
actual owner of such interest and if he was required under Sec. 1.6109-
1 to furnish his identifying number to the payer of the interest (or 
would have been so required if the total of such interest for the year 
had been $10 or more), and such number was (or would have been) required 
to be included on an information return filed by the payer with respect 
to the interest. However, a person shall not be considered to be a 
nominee as to any portion of an interest payment which is actually owned 
by another person whose name is also shown on the information return 
filed by the payer or nominee with respect to such interest payment. 
Thus, in the case of a savings account jointly owned by a husband and 
wife, the husband will not be considered as receiving any portion of the 
interest on that account as a nominee for his wife if his wife's name is 
included on the information return filed by the payer with respect to 
the interest.
    (iii) For purposes of this section, in the case of a person who 
receives a Form 1099-OID, the determination of who is considered a 
nominee shall be made in a manner consistent with the principles of 
subdivision (ii) of this subparagraph.
    (iv) For purposes of this section and Sec. 1.6049-3, the term 
``Form 1099-OID'' means the appropriate Form 1099 for original issue 
discount prescribed for the calendar year.
    (3) Determination of person to whom interest is paid or for whom it 
is received. For purposes of applying the provisions of this section, 
the person whose identifying number is required to be included by the 
payer of interest on an information return with respect to such interest 
shall be considered the person to whom the interest is paid. In the case 
of interest received by a nominee on behalf of another person, the 
person whose identifying number is required to be included on an 
information return made by the nominee with respect to such interest 
shall be considered the person on whose behalf such interest is received 
by the nominee. Thus, in the case of interest made payable to a person 
other than the record owner of the obligation with respect to which the 
interest is paid, the record owner of the obligation shall be considered 
the person to whom the interest is paid for purposes of applying the 
reporting requirements of this section, since his identifying number is 
required to be included on the information return filed under such 
section by the payer of the interest. Similarly, if a stockbroker 
receives interest on a bond held in street name for the joint account of 
a husband and wife, the interest is considered as received on behalf of 
the husband since his identifying number should be shown on the 
information return filed by the nominee under this section. Thus, if the 
wife has a separate account with the same stockbroker, any interest 
received by the stockbroker for her separate account should not be 
aggregated with the interest received for the joint account for purposes 
of information reporting. For regulations relating to the use of 
identifying numbers, see Sec. 1.6109-1.
    (4) Determination of person by whom original issue discount is 
includible or for whom a Form 1099-OID showing original issue discount 
is received. For purposes of applying the provisions of this section, 
the determination of the person by whom original issue discount is 
includible or for whom a Form 1099-OID is received shall be made in a 
manner consistent with the principles of subparagraph (3) of this 
paragraph.
    (5) Inclusion of other payments. The Form 1099 filed by any person 
with respect to payments of interest to another person during a calendar 
year

[[Page 369]]

prior to 1972 may, at the election of the maker, include payments other 
than interest made by him to such other person during such year which 
are required to be reported on Form 1099. Similarly, the Form 1087 filed 
by a nominee with respect to payments of interest received by him on 
behalf of any other person during a calendar year prior to 1972 may 
include payments of dividends received by him on behalf of such person 
during such year which are required to be reported on Form 1087. 
However, except as provided in subparagraph (1)(ii)(b) of this 
paragraph, a separate Form 1087-OID or 1099-OID shall be filed for each 
obligation in respect of which original issue discount is required to be 
reported for any calendar year before 1983. In addition, any person 
required to report payments on both Forms 1087, 1087-OID, 1099, and 
1099-OID, for any calendar year may use one Form 1096 to summarize and 
transmit such forms.
    (b) When payment deemed made. For purposes of section 6049, interest 
is deemed to have been paid when it is credited or set apart to a person 
without any substantial limitation or restriction as to the time or 
manner of payment or condition upon which payment is to be made, and is 
made available to him so that it may be drawn at any time, and its 
receipt brought within his own control and disposition.
    (c) Time and place for filing--(1) Payment of interest. The returns 
required under this section for any calendar year for the payment of 
interest shall be filed after September 30 of such year, but not before 
the payer's final payment for the year, and on or before February 28 of 
the following year with any of the Internal Revenue Service Centers, the 
addresses of which are listed in the instructions for Form 1096. For 
extensions of time for filing returns under this section, see Sec. 
1.6081-1.
    (2) Original issue discount. (i) The returns required under this 
section for any calendar year for original issue discount shall be filed 
after December 31 of such year and on or before February 28 of the 
following year with any of the Internal Revenue Service Centers, the 
addresses of which are listed in the instructions for Form 1096. For 
extensions of time for filing returns under this section, see Sec. 
1.6081-1.
    (ii) The time for filing returns for the calendar year 1971 required 
under this section for original issue discount in respect of obligations 
to which paragraph (e) of Sec. 1.1232-3A applies (relating to deposits 
in banks and other similar financial institutions) is extended to April 
15, 1972.
    (d) Penalty. For penalty for failure to file the statements required 
by this section, see Sec. 301.6652-1 of this chapter (Regulations on 
Procedure and Administration).
    (e) Permission to submit information required by Form 1087 or 1099 
on magnetic tape. For rules relating to permission to submit the 
information required by Form 1087 or 1099 on magnetic tape or other 
media, see Sec. 1.9101-1.

(Secs. 6049 (a), (b), and (d) and 7805 of the Internal Revenue Code of 
1954 (96 Stat. 592, 594; 26 U.S.C. 6049 (a), (b), and (d); 68A Stat. 
917, 26 U.S.C. 7805), and in sec. 309 of the Tax Equity and Fiscal 
Responsibility Act of 1982 (96 Stat. 591)

[T.D. 6628, 27 FR 12800, Dec. 28, 1962, as amended by T.D. 6879, 31 FR 
3494, Mar. 8, 1966; T.D. 6883, 31 FR 6589, May 8, 1966; T.D. 7000, 34 FR 
996, Jan. 23, 1969, T.D. 7154, 36 FR 25009, Dec. 28, 1971; 37 FR 527, 
Jan. 13, 1972; T.D. 7311, 39 FR 11881, Apr. 1, 1974; T.D. 7584, 44 FR 
1103, Jan. 4, 1979; T.D. 7881, 48 FR 12968, Mar. 28, 1983]



Sec. 1.6049-2  Interest and original issue discount subject to
reporting in calendar years before 1983.

    (a) Interest in general. Except as provided in paragraph (b) of this 
section, the term ``interest'' when used in this section and Sec. Sec. 
1.6049-1 and 1.6049-3 means:
    (1) Interest on evidences of indebtedness issued by a corporation in 
``registered form'' (as defined in paragraph (d) of this section). The 
phrase ``evidences of indebtedness'' includes bond, debentures, notes, 
certificates and other similar instruments regardless of how 
denominated.
    (2) Interest on deposits (except deposits evidenced by negotiable 
time certificates of deposit issued in an amount of $100,000 or more) 
paid (or credited) by persons carrying on the banking business. In the 
case of a certificate of deposit issued in bearer form, the term 
``interest'', as used in the preceding

[[Page 370]]

sentence and in paragraph (a)(1)(vi) of Sec. 1.6049-1, has the same 
meaning as in Sec. 1.61-7 (regardless of whether taxable to the payee 
in the year the information return is made).
    (3) Amounts, whether or not designated as interest, paid (or 
credited) by mutual savings banks, savings and loan associations, 
building and loan associations, cooperative banks, homestead 
associations, credit unions, or similar organizations in respect of 
deposits, face amount certificates, investment certificates, or 
withdrawable or repurchasable shares. Thus, even though amounts paid or 
credited by such organizations with respect to deposits are designated 
as ``dividends'', such amounts are included in the definition of 
interest for purposes of section 6049.
    (4) Interest on amounts held by insurance companies under agreements 
to pay interest thereon. This includes interest paid by insurance 
companies with respect to policy ``dividend'' accumulations (see 
sections 61 and 451 and the regulations thereunder for rules as to when 
such interest is considered paid), and interest paid with respect to the 
proceeds of insurance policies left with the insurer. The so-called 
``interest element'' in the case of annuity or installment payments 
under life insurance or endowment contracts does not constitute interest 
for purposes of this section.
    (5) Interest on deposits with stockbrokers, bondbrokers, and other 
persons engaged in the business of dealing in securities.
    (b) Exceptions. The term ``interest'' when used in section 6049 does 
not include:
    (1) Interest on obligations described in section 103(a) (1) or (3), 
relating to certain governmental obligations.
    (2) Any payment by:
    (i) A foreign corporation,
    (ii) A nonresident alien individual, or
    (iii) A partnership composed in whole or in part of nonresident 
aliens,


if such corporation, individual, or partnership is not engaged in trade 
or business within the United States and does not have an office or 
place of business or a fiscal or paying agent in the United States.
    (3) Any interest which is subject to withholding under section 1441 
or 1442 (relating to withholding of tax on nonresident aliens and 
foreign corporations, respectively) by the person making the payment, or 
which would be so subject to withholding but for the provisions of a 
treaty, or for the fact that under section 861(a)(1) it is not from 
sources within the United States, or for the fact that withholding is 
not required by reason of paragraph (a) or (f) of Sec. 1.1441-4.
    (4) In the case of a nominee, any interest which he receives and 
with respect to which he is required to withhold under section 1441 or 
1442, or would be so required to withhold but for the provisions of a 
treaty, or for the fact that under section 861(a)(1) it is not from 
sources within the United States, or for the fact that withholding is 
not required by reason of paragraph (a) or (f) of Sec. 1.1441-4.
    (5) Any amount on which the person making the payment is required to 
deduct and withhold a tax under section 1451 (relating to tax-free 
covenant bonds), or would be so required but for section 1451(d) 
(relating to benefit of personal exemptions).
    (6) Any amount which is subject to reporting as original issue 
discount.
    (c) Original issue discount--(1) In general. The term ``original 
issue discount'' when used in this section and Sec. Sec. 1.6049-1 and 
1.6049-3 means original issue discount subject to the ratable inclusion 
rules of paragraph (a) of Sec. 1.1232-3A, determined without regard to 
any reduction by reason of a purchase allowance under paragraph 
(a)(2)(ii) of Sec. 1.1232-3A or a purchase at a premium as defined in 
paragraph (d)(2) of Sec. 1.1232-3.
    (2) Coordination with interest reporting. In the case of an 
obligation issued after May 27, 1969 (other than an obligation issued 
pursuant to a written commitment which was binding on May 27, 1969, and 
at all times thereafter) and on or before December 31, 1982, original 
issue discount which is not subject to the reporting requirements of 
paragrah (a)(1)(ii) of Sec. 1.6049-1 is interest within the meaning of 
pargraph (a) of this section. Original issue discount which is subject 
to the reporting requirements of paragraph (a)(1)(ii) of Sec. 1.6049-1 
is not

[[Page 371]]

interest within the meaning of paragraph (a) of this section.
    (3) Exceptions. Reporting of original issue discount is not required 
in respect of an obligation which paragraph (b)(2) of this section 
except from interest reporting.
    (d) Definition of ``in registered form.'' For purposes of Sec. 
1.6049-1 and this section, an evidence of indebtedness is in registered 
form if it is registered as to both principal and interest (or, for 
purposes of reporting with respect to original issue discount, if it is 
registered as to principal) and if its transfer must be effected by the 
surrender of the old instrument and either the reissuance by the 
corporation of the old instrument to the new holder or the issuance by 
the corporation of a new instrument to the new holder.

(Secs. 6049 (a), (b), and (d) and 7805 of the Internal Revenue Code of 
1954 (96 Stat. 592, 594; 26 U.S.C. 6049 (a), (b), and (d); 68A Stat. 
917, 26 U.S.C. 7805), and in sec. 309 of the Tax Equity and Fiscal 
Responsibility Act of 1982 (96 Stat. 591)

[T.D. 6628, 27 FR 12801, Dec. 28, 1962, as amended by T.D. 6908, 31 FR 
16774, Dec. 31, 1966; T.D. 6966, 33 FR 11262, Aug. 8, 1968; T.D. 7154, 
36 FR 25011, Dec. 28, 1971; T.D. 7584, 44 FR 1104, Jan. 4, 1979; T.D. 
7881, 48 FR 12968, Mar. 28, 1983]



Sec. 1.6049-3  Statements to recipients of interest payments 
and holders of obligations to which there is attributed original 
issue discount in calendar years before 1983.
          

    (a) Requirement. Every person filing (1) a Form 1099 or 1087 under 
section 6049(a)(1) and Sec. 1.6049-1 with respect to payments of 
interest or (2) a Form 1099-OID or 1087-OID with respect to original 
issue discount includible in gross income, shall furnish to the person 
whose identifying number is (or should be) shown on the form a written 
statement showing the information required by paragraph (b) of this 
section. With respect to interest, no statement is required to be 
furnished under section 6049(c) and this section to any person if the 
aggregate of the payments to (or received on behalf of) such person 
shown on the form would be less than $10. With respect to original issue 
discount, no statement is required to be furnished under section 6049(c) 
and this section to any person if the aggregate amount of original issue 
discount on the statement to such person with respect to the obligation 
would be less than $10. References in this section to Form 1099 shall be 
construed to include Form 1099-BCD, except that in applying paragraph 
(b)(2) of this section no information relating to the person to whom the 
certificate of deposit was originally issued shall be disclosed to 
another person to whom the payment of interest is made.
    (b) Form of statement--(1) In general. The written statement 
required to be furnished to a person under paragraph (a) of this section 
shall show:
    (i) With respect to payments of interest (as defined in Sec. 
1.6049-2) aggregating $10 or more to any person during a calendar year 
before 1983:
    (a) The aggregate amount of payments shown on the Form 1099 or 1087 
as having been made to (or received on behalf of) such person and a 
legend stating that such amount is being reported to the Internal 
Revenue Service, and
    (b) The name and address of the person filing the form, and
    (ii) With respect to original issue discount (as defined in Sec. 
1.6049-2) which would aggregate $10 or more on the statement to the 
holder during a calendar year after 1970 and prior to calendar year 
1983:
    (a) The aggregate amount or original issue discount includible by 
(or on behalf of) such person with respect to the obligation, as shown 
on Form 1099-OID or Form 1087-OID for such calendar year (determined by 
applying the rules of paragraph (a)(1)(ii) of Sec. 1.6049-1 for 
purposes of completing either form),
    (b) All other items shown on such Form 1099-OID or Form 1087-OID for 
such calendar year (so determined), and
    (c) A legend stating that such amount and such items are being 
reported to the Internal Revenue Service.
    (2) Special rule. The requirements of this section for the 
furnishing of a statement to any person, including the legend 
requirement of this paragraph, may be met by the furnishing to such 
person of a copy of the Form 1099, 1099-OID, 1087, or 1087-OID filed 
pursuant to Sec. 1.6049-1, or a reasonable facsimile

[[Page 372]]

thereof, in respect of such person. However, in the case of Form 1087-
OID or 1099-OID, a copy of the instructions must also be sent to such 
person. A statement shall be considered to be furnished to a person 
within the meaning of this section if it is mailed to such person at his 
last known address.
    (c) Time for furnishing statements--(1) In general--(i) Payment of 
interest. Each statement required by this section to be furnished to any 
person for a calendar year for the payment of interest shall be 
furnished to such person after November 30 of the year and on or before 
January 31 of the following year, but no statement may be furnished 
before the final interest payment for the calendar year has been paid. 
However, the statement may be furnished at any time after April 30 if it 
is furnished with the final interest payment for the calendar year.
    (ii) Original issue discount. (a) Except as otherwise provided in 
this subdivision (ii), each statement required by this section to be 
furnished to any person for a calendar year for original issue discount 
shall be furnished to such person after December 31 of the year and on 
or before January 31 of the following year.
    (b) The time for furnishing each statement required by this section 
to be furnished to any person for the calendar year 1971 for original 
issue discount in respect of obligations to which paragraph (e) of Sec. 
1.1232-3A applies (relating to deposits in banks and other similar 
financial institutions) is extended to March 15, 1972.
    (c) The time for furnishing each statement required by this section 
to be furnished by a nominee to any person for the calendar year 1971 
for original issue discount is extended to February 28, 1972.
    (2) Extensions of time. For good cause shown upon written 
application of the person required to furnish statements under this 
section, the district director may grant an extension of time not 
exceeding 30 days in which to furnish such statements. The application 
shall be addressed to the district director with whom the income tax 
returns of the applicant are filed and shall contain a full recital of 
the reasons for requesting the extension to aid the district director in 
determining the period of the extension, if any, which will be granted. 
Such a request in the form of a letter to the district director signed 
by the applicant will suffice as an application. The application shall 
be filed on or before the date prescribed in subparagraph (1) of this 
paragraph for furnishing the statements required by this section.
    (3) Last day for furnishing statement. For provisions relating to 
the time for performance of an act when the last day prescribed for 
performance falls on Saturday, Sunday, or a legal holiday, see Sec. 
301.7503-1 of this chapter (Regulations on Procedure and 
Administration).
    (d) Penalty. For provisions relating to the penalty provided for 
failure to furnish a statement under this section see Sec. 301.6678-1 
of this chapter (Regulations on Procedure and Administration).

(Secs. 6049 (a), (b), and (d) and 7805 of the Internal Revenue Code of 
1954 (96 Stat. 592, 594; 26 U.S.C. 6049 (a), (b), and (d); 68A Stat. 
917, 26 U.S.C. 7805), and in sec. 309 of the Tax Equity and Fiscal 
Responsibility Act of 1982 (96 Stat. 591)

[T.D. 6628, 27 FR 12801, Dec. 28, 1962, as amended by T.D. 7154, 36 FR 
25011, Dec. 28, 1971; 37 FR 527, Jan. 13, 1972; T.D. 7584, 44 FR 1104, 
Jan. 4, 1979; T.D. 7624, 44 FR 31012, May 30, 1979; T.D. 7881, 48 FR 
12968, Mar. 28, 1983]



Sec. 1.6049-4  Return of information as to interest paid and original
issue discount includible in gross income after December 31, 1982.

    (a) Requirement of reporting--(1) In general. Except as provided in 
paragraph (c) of this section, an information return shall be made by a 
payor, as defined in paragraph (a)(2) of this section, of amounts of 
interest and original issue discount paid after December 31, 1982. Such 
return shall contain the information described in paragraph (b) of this 
section.
    (2) Payor. For payments made after December 31, 2002, a payor is a 
person described in paragraph (a)(2)(i) or (ii) of this section.
    (i) Every person who makes a payment of the type and of the amount 
subject to reporting under this section (or under an applicable section 
under this chapter) to any other person during a calendar year.

[[Page 373]]

    (ii) Every person who collects on behalf of another person payments 
of the type and of the amount subject to reporting under this section 
(or under an applicable section under this chapter), or who otherwise 
acts as a middleman (as defined in paragraph (f)(4) of this section) 
with respect to such payment.
    (b) Information to be reported--(1) Interest payments. Except as 
provided in paragraphs (b)(3) and (5) of this section, in the case of 
interest other than original issue discount treated as interest under 
Sec. 1.6049-5(f), an information return on Form 1099 shall be made for 
the calendar year showing the aggregate amount of the payments, the 
name, address, and taxpayer identification number of the person to whom 
paid, the amount of tax deducted and withheld under section 3406 from 
the payments, if any, and such other information as required by the 
forms. An information return is generally not required if the amount of 
interest paid to a person aggregates less than $10 or if the payment is 
made to a person who is an exempt recipient described in paragraph 
(c)(1)(ii) of this section, unless the payor backup withholds under 
section 3406 on such payment (because, for example, the payee (i.e., 
exempt recipient) has failed to furnish a Form W-9 on request), in which 
case the payor must make a return under this section, unless the payor 
refunds the amount withheld pursuant to Sec. 31.6413(a)-3 (Employment 
Tax Regulations). For reporting interest paid to certain nonresident 
alien individuals, see Sec. 1.6049-8.
    (2) Original issue discount. Except as provided in paragraph (b)(3) 
and (b)(5) of this section, in the case of original issue discount, an 
information return on Forms 1096 and 1099 shall be made for each 
calendar year of any holder of an obligation as to which there is 
original issue discount includible in gross income aggregating $10 or 
more. For calendar years before 1992, semiannual record date reporting 
under Sec. 1.6049-1(a)(1)(ii)(b)(1) may be used, and if it is used, the 
original issue discount includible in gross income is determined by 
treating each holder as holding the obligation on every day it was 
outstanding during the calendar year. An information return shall be 
made, however, in any case in which an amount of tax is required to be 
deducted and withheld under section 3406. In such case, the amount 
required to be reported is the amount subject to withholding even if the 
amount of original issue discount includible in gross income is less 
than $10. With respect to an obligation described in Sec. 1.1232-3A (e) 
or (f) (relating respectively to deposits in banks and similar financial 
institutions and to face-amount certificates), Sec. 1.6049-
1(a)(1)(ii)(d) and the last sentence of Sec. 1.6049-1(a)(1)(ii)(a)(2) 
shall apply. The information return shall show:
    (i) The name, address, and taxpayer identification number of each 
record holder for whom an amount of original issue discount is 
includible in gross income;
    (ii) The account, serial, or other identifying number of each 
obligation with respect to which a return is being made;
    (iii) The aggregate amount of original issue discount includible in 
the gross income of each holder for the period during the calendar year 
for which the return is made (or, if the aggregation rules of Sec. 
1.6049-1(a)(1)(ii)(b)(2) are being used, the aggregate amount or 
original issue discount for the period such holder held the 
obligations). For calendar years before 1992, semiannual record date 
reporting under Sec. 1.6049-1(a)(1)(ii)(b)(1) may be used, and if it is 
used, the original issue discount includible in gross income is 
determined by treating each holder as holding the obligation on every 
day it was outstanding during the calendar year. For purposes of this 
section, an obligation shall be considered to be outstanding from the 
date of original issue (as defined in Sec. 1.1232-3(b)(3));
    (iv) The amount of tax withheld under section 3406, if any;
    (v) The name and address of the person filing the return: and
    (vi) Such other information as is required by the forms.

    Section 1.6049-1(a)(1)(ii)(b)(2) and, for calendar years before 
1992, Sec. 1.6049-1(a)(1)(ii)(b)(1), and (c), apply for purposes of 
this paragraph.
    (3) Returns made by middleman--(i) In general. Except as provided in 
paragraph (b)(5) of this section, every person acting as a middleman (as 
defined

[[Page 374]]

in paragraph (f)(4) of this section) shall make an information return 
for the calendar year. In the case of interest payments (other than 
original issue discount and other than interest described in Sec. 
1.6049-8), the information return shall be made on Form 1099 and shall 
show the aggregate amount of the interest, the name, address, and 
taxpayer identification number of the person on whose behalf received, 
the amount of tax withheld under section 3406, if any, and such other 
information as required by the forms. In the case of original issue 
discount, the information return shall show the information required to 
be shown for the person on whose behalf received, as described in 
paragraph (b)(2) of this section. See Sec. 1.6049-5(f) to determine 
whether a middleman is required to make an information return with 
respect to original issue discount. A middleman shall make an 
information return regardless of whether the middleman receives a Form 
1099. A middleman shall not be required to make an information return if 
the payment of interest aggregates less than $10 or if the payment is 
made to an exempt recipient described in paragraph (c)(1)(ii) of this 
section, unless the payor backup withholds under section 3406 on such 
payment (because, for example, the payee has failed to furnish a Form W-
9 on request), in which case the payor must make a return under this 
section, unless the payor refunds the amount withheld pursuant to Sec. 
31.6413(a)-3 of this chapter (Employment Tax Regulations).
    (ii) Forwarding of interest coupons and original issue discount 
obligations. In the case of a middleman who, from within the United 
States, forwards an interest coupon or discount obligation on behalf of 
a payee for presentation, collection or payment outside the United 
States, the middleman shall make an information return on Form 1099 for 
the calendar year showing, in the case of an interest coupon, the 
information required under paragraph (b)(3)(i) of this section and, in 
the case of a discount obligation, information required under paragraph 
(b)(2) of this section. For purposes of this paragraph (b)(3)(ii), a 
middleman is considered to forward an interest coupon or discount 
obligation on behalf of a payee for presentation, collection or payment 
outside the United States if the middleman forwards the coupon or 
obligations outside the United States on or after the date when the 
payee is entitled to be paid or at an earlier date that is within 90 
days of such date or if the middleman has actual knowledge that the 
coupon or obligation is being forwarded outside the United States for 
presentation, collection, or payment outside the United States. However, 
the transfer, although subject to information reporting under this 
section, is not subject to backup withholding under section 3406.
    (iii) Example. The following example illustrates the provisions of 
paragraph (b)(3)(ii) of this section:

    Example. Individual F, who is entitled to payment on an interest 
coupon, instructs an office of Bank M in the United States to forward 
the coupon to Bank N for collection by Bank N outside the United States. 
Bank M in the United States forwards the interest coupon to Bank N 
outside the United States. Bank M is required to make an information 
return for the calendar year under paragraph (b)(3)(ii) of this section 
showing the aggregate amount of the interest coupon forwarded, the name, 
address of the permanent residence, and the taxpayer identification 
number, if any, of Individual F and such other information as the form 
requires.

    (4) Returns made with respect to payments on certificates of deposit 
issued in bearer form. Except as provided in paragraph (b)(5) of this 
section, every person carrying on the banking business who makes 
payments of interest to another person (whether or not aggregating $10 
or more) during a calendar year with respect to a certificate of deposit 
issued in bearer form shall make an information return on Forms 1096 and 
1099. The information return shall show the information required in 
Sec. 1.6049-1(a)(1)(vi) (a) through (e) inclusive and a statement as to 
the amount of tax withheld under section 3406, if any.
    (5) Interest payments to certain nonresident alien individuals--(i) 
General rule. In the case of interest aggregating $10 or more paid to a 
nonresident alien individual (as defined in section 7701(b)(1)(B)) that 
is reportable under Sec. 1.6049-8(a), the payor shall make an 
information return on Form 1042-S,

[[Page 375]]

``Foreign Person's U.S. Source Income Subject to Withholding,'' for the 
calendar year in which the interest is paid. The payor or middleman 
shall prepare and file Form 1042-S at the time and in the manner 
prescribed by section 1461 and the regulations under that section and by 
the form and its accompanying instructions. See Sec. Sec. 1.1461-1(b) 
(rules regarding the preparation of a Form 1042) and 1.6049-6(e)(4) 
(rules for furnishing a copy of the Form 1042-S to the recipient). To 
determine whether an information return is required for original issue 
discount, see Sec. Sec. 1.6049-5(f) and 1.6049-8(a).
    (ii) Effective/applicability date. Paragraph (b)(5)(i) of this 
section shall be applicable for payments made on or after January 1, 
2013. (For interest paid to a Canadian nonresident alien individual on 
or before December 31, 2012, see paragraph (b)(5) of this section as in 
effect and contained in 26 CFR part 1 revised April 1, 2000.)
    (c) Information returns not required--(1) Payment to exempt 
recipient--(i) In general. No information return is required with 
respect to any payment made to an exempt recipient described in 
paragraph (c)(1)(ii) of this section, except to the extent otherwise 
provided in Sec. 1.6049-5(d)(3) (ii) and (iii). However, if the payor 
backup withholds under section 3406 on such payment (because, for 
example, the payee has failed to furnish a Form W-9 on request), then 
the payor is required to make a return under this section, unless the 
payor refunds the amount withheld in accordance with Sec. 31.6413(a)-3 
of this chapter (Employment Tax Regulations).
    (ii) Exempt recipient defined. The term exempt recipient means any 
person described in paragraphs (c)(1)(ii)(A) through (Q) of this 
section. An exempt recipient is generally exempt from information 
reporting without filing a certificate claiming exempt status unless the 
provisions of this paragraph (c)(1)(ii) require a payee to file a 
certificate.


A payor may, in any case, require a payee that is a U.S. person not 
otherwise required to file a certificate under this paragraph (c)(1)(ii) 
to file a certificate in order to qualify as an exempt recipient. See 
Sec. 31.3406(h)-3(a)(1)(iii) and (c)(2) of this chapter for the 
certificate that a payee that is a U.S. person must provide when a payor 
requires the certificate to treat the payee as an exempt recipient under 
this paragraph (c)(1)(ii). A payor may treat a payee as an exempt 
recipient based upon a properly completed form as described in Sec. 
31.3406(h)-3(e)(2) of this chapter, its actual knowledge that the payee 
is a person described in this paragraph (c)(1)(ii), or the indicators 
described in this paragraph (c)(1)(ii).
    (A) Corporation. A corporation, as defined in section 7701(a)(3), 
whether domestic or foreign, is an exempt recipient. In addition, for 
purposes of this paragraph (c)(1), the term corporation includes a 
partnership all of whose members are corporations described in this 
paragraph (c)(1), but only if the partnership files with the payor a 
certificate stating that each member of the partnership meets one of the 
requirements of paragraph (c)(1)(ii)(A) (1) through (4) of this section. 
Absent actual knowledge otherwise, a payor may treat a payee as a 
corporation (and, therefore, as an exempt recipient) if one of the 
requirements of paragraph (c)(1)(ii)(A) (1), (2), (3), or (4), of this 
section are met before a payment is made.
    (1) The name of the payee contains an unambiguous expression of 
corporate status that is Incorporated, Inc., Corporation, Corp., P.C., 
(but not Company or Co.) or contains the term insurance company, 
indemnity company, reinsurance company, or assurance company, or its 
name indicates that it is an entity listed as a per se corporation under 
Sec. 301.7701-2(b)(8)(i) of this chapter.
    (2) The payor has on file a corporate resolution or similar document 
clearly indicating corporate status. For this purpose, a similar 
document includes a copy of Form 8832, filed by the entity to elect 
classification as an association under Sec. 301.7701-3(b) of this 
chapter.
    (3) The payor receives a Form W-9 which includes an EIN and a 
statement from the payee that it is a domestic corporation.
    (4) The payor receives a withholding certificate described in Sec. 
1.1441-1(e)(2)(i), that includes a certification that the person whose 
name is on the certificate is a foreign corporation.

[[Page 376]]

    (B) Tax exempt organization--(1) In general. Any organization that 
is exempt from taxation under section 501(a) is an exempt recipient. A 
custodial account under section 403(b)(7) shall be considered an exempt 
recipient under this paragraph. A payor may treat an organization as an 
exempt recipient under this paragraph (c)(1)(ii)(B) without requiring a 
certificate if the organization's name is listed in the compilation by 
the Commissioner of organizations for which a deduction for charitable 
contributions is allowed, if the name of the organization contains an 
unambiguous indication that it is a tax-exempt organization, or if the 
organization is known to the payor to be a tax-exempt organization.
    (2) Examples. The application of the provisions of this paragraph 
(c)(1)(ii)(B) may be illustrated by the following examples:

    Example 1. The following persons maintain accounts at M Bank: N 
College, O University, and P Church. M may treat N, O, and P as exempt 
recipients even though such persons have not filed an exemption 
certificate with M because the names of the organizations contain an 
unambiguous indication that they are tax exempt organizations.
    Example 2. Q is listed in the current edition of Internal Revenue 
Service Publication 78 as an organization for which deductions are 
permitted for charitable contributions under section 170(c). Such 
listing has not been revoked by an announcement published in the 
Internal Revenue Bulletin (see Sec. 601.601(d)(2) of this chapter). A 
payor may treat Q as an exempt recipient even though Q has not filed an 
exemption certificate with the payor.
    Example 3. Employer R maintains a section 403(b)(7) custodial 
account with Regulated Investment Company S on behalf of R's employees. 
S may treat the account as an exempt recipient even though R or its 
employees have not filed an exemption certificate with S.

    (C) Individual retirement plan. An individual retirement plan as 
defined in section 7701(a)(37) is an exempt recipient. A payor may treat 
any such plan of which it is the trustee or custodian as an exempt 
recipient under this paragraph (c)(1) without requiring a certificate.
    (D) United States. The United States Government and any wholly-owned 
agency or instrumentality thereof are exempt recipients. A payor may 
treat a person as an exempt recipient under this paragraph (c)(1) 
without requiring a certificate if the name of such person reasonably 
indicates it is described in this paragraph (c)(1).
    (E) State. A State, the District of Columbia, a possession of the 
United States, a political subdivision of any of the foregoing, wholly-
owned agency or instrumentality of any one or more of the foregoing, and 
a pool or partnership composed exclusively of any of the foregoing are 
exempt recipients. A payor may treat a person as an exempt recipient 
under this paragraph (c)(1) without requiring a certificate if the name 
of such person reasonably indicates it is described in this paragraph 
(c)(1) or if such person is known generally in the community to be a 
State, the District of Columbia, a possession of the United States or a 
political subdivision or a wholly-owned agency or instrumentality of any 
one or more of the foregoing (for example, an account held in the name 
of ``Town of S'' or ``County of T'' may be treated as held by an exempt 
recipient under this paragraph (c)(1)(ii)(E)).
    (F) Foreign government. A foreign government, a political 
subdivision of a foreign government, and any wholly-owned agency or 
instrumentality of either of the foregoing are exempt recipients. A 
payor may treat a foreign government or a political subdivision thereof 
as an exempt recipient under this paragraph (c)(1) without requiring a 
certificate provided that its name reasonably indicates that it is a 
foreign government or provided that it is known to the payor to be a 
foreign government or a political subdivision thereof (for example, an 
account held in the name of the ``Government of V'' may be treated as 
held by a foreign government).
    (G) International organization. An international organization and 
any wholly-owned agency or instrumentality thereof are exempt 
recipients. The term international organization shall have the meaning 
ascribed to it in section 7701(a)(18). A payor may treat a payee as an 
international organization without requiring a certificate if the payee 
is designated as an international organization by executive

[[Page 377]]

order (pursuant to 22 U.S.C. 288 through 288(f)).
    (H) Foreign central bank of issue. A foreign central bank of issue 
is an exempt recipient. A foreign central bank of issue is a bank which 
is by law or government sanction the principal authority, other than the 
government itself, issuing instruments intended to circulate as 
currency. See Sec. 1.895-1(b)(1). A payor may treat a person as a 
foreign central bank of issue (and, therefore, as an exempt recipient) 
without requiring a certificate provided that such person is known 
generally in the financial community as a foreign central bank of issue 
or if its name reasonably indicates that it is a foreign central bank of 
issue.
    (I) Securities or commodities dealer. A dealer in securities, 
commodities, or notional principal contracts, that is registered as such 
under the laws of the United States or a State or under the laws of a 
foreign country is an exempt recipient. A payor may treat a dealer as an 
exempt recipient under this paragraph (c)(1) without requiring a 
certificate if the person is known generally in the investment community 
to be a dealer meeting the requirements set forth in this paragraph 
(c)(1) (for example, a registered broker-dealer or a person listed as a 
member firm in the most recent publication of members of the National 
Association of Securities Dealers, Inc.).
    (J) Real estate investment trust. A real estate investment trust, as 
defined in section 856 and Sec. 1.856-1, is an exempt recipient. A 
payor may treat a person as a real estate investment trust (and, 
therefore, as an exempt recipient) without requiring a certificate if 
the person is known generally in the investment community as a real 
estate investment trust.
    (K) Entity registered under the Investment Company Act of 1940. An 
entity registered at all times during the taxable year under the 
Investment Company Act of 1940, as amended (15 U.S.C. 80a-1), (or during 
such portion of the taxable year that it is in existence), is an exempt 
recipient. An entity that is created during the taxable year will be 
treated as meeting the registration requirement of the preceding 
sentence provided that such entity is so registered at all times during 
the taxable year for which such entity is in existence. A payor may 
treat such an entity as an exempt recipient under this paragraph (c)(1) 
without requiring a certificate if the entity is known generally in the 
investment community to meet the requirements of the preceding sentence.
    (L) Common trust fund. A common trust fund, as defined in section 
584(a), is an exempt recipient. A payor may treat the fund as an exempt 
recipient without requiring a certificate provided that its name 
reasonably indicates that it is a common trust fund or provided that it 
is known to the payor to be a common trust fund.
    (M) Financial institution. A financial institution such as a bank, 
mutual savings bank, savings and loan association, building and loan 
association, cooperative bank, homestead association, credit union, 
industrial loan association or bank, or other similar organization, 
whether organized in the United States or under the laws of a foreign 
country is an exempt recipient. A financial institution also includes a 
clearing organization defined in Sec. 1.163-5(c)(2)(i)(D)(8) and the 
Bank for International Settlements. A payor may treat any person 
described in the preceding sentence as an exempt recipient without 
requiring a certificate if the person's name (including a foreign name, 
such as ``Banco'' or ``Banque'') reasonably indicates the payee is a 
financial institution described in the preceding sentence. In the case 
of a foreign person, a payor may also treat a person on such list as the 
Internal Revenue Service may publish or approve (such as in the Thomson 
Bank Directory or a list approved by the Federal Reserve Board).
    (N) Trust. A trust which is exempt from tax under section 664(c) 
(i.e., a charitable remainder annuity trust or a charitable remainder 
unitrust) or is described in section 4947(a)(1) (relating to certain 
charitable trusts) is an exempt recipient. A payor which is a trustee of 
the trust may treat the trust as an exempt recipient without requiring a 
certificate.
    (O) Nominees or custodians. A nominee or custodian.

[[Page 378]]

    (P) Brokers. A broker as defined in section 6045(c) and Sec. 
1.6045-1(a)(1).
    (Q) Swap dealers. A dealer in notional principal contracts as 
defined in Sec. 1.446-3(c)(4)(iii).
    (iii) Exempt recipient no longer exempt. Any person who ceases to be 
an exempt recipient shall, no later than 10 days after such cessation, 
notify the payor in writing when it ceases to be an exempt recipient 
unless it reasonably appears that the person formerly qualifying as an 
exempt recipient will not thereafter receive a reportable payment from 
the payor. If a payor treats a person as an exempt recipient by 
requiring the exempt recipient to file a certificate claiming exempt 
status, that person shall revoke the certificate as provided in the 
preceding sentence. If the exempt recipient terminates its relationship 
with the payor prior to the time that the notice of change in status is 
otherwise required, the exempt recipient is not required to notify the 
payor. If, however, the person who formerly qualified as an exempt 
recipient later reinstates the relationship with the payor, the person 
must, prior to receiving a reportable payment from such relationship, 
notify the payor that it no longer qualifies as an exempt recipient in 
case the payor relies upon the previous treatment.
    (2) Payments by certain middlemen. An information return shall not 
be required if:
    (i) The record owner is required to file a fiduciary return on Form 
1041 disclosing the name, address, and taxpayer identification number of 
the actual owner, and furnishes Form K-1 to each actual owner containing 
the information required to be shown on the form, including amounts 
withheld under section 3406;
    (ii) The record owner is a nominee of a banking institution or trust 
company exercising trust powers, and such banking institution or trust 
company is required to file a fiduciary return on Form 1041 disclosing 
the name, address, and identifying number of the actual owner, and 
furnishes Form K-1 to each actual owner containing the information 
required to be shown on the form, including amounts withheld under 
section 3406;
    (iii) The record owner is a banking institution or trust company 
exercising trust powers, or a nominee thereof, and the actual owner is 
an organization exempt from taxation under section 501(a) for which such 
banking institution or trust company files an annual return, but only if 
the name, address, and taxpayer identification number of the record 
owner is included on or with the Form 1041 fiduciary return filed for 
the estate or trust or the annual return filed for the tax exempt 
organization.
    (3) Coordination with reporting rules for widely held fixed 
investment trusts under Sec. 1.671-5 of this chapter. See Sec. 1.671-5 
for the reporting rules for widely held fixed investment trusts (as 
defined under that section).
    (4) Coordination of reporting with chapter 4 reporting or an 
applicable IGA--(i) U.S. accounts reported by FFIs that are non-U.S. 
payors. An information return shall not be required with respect to an 
interest payment made by a participating FFI (including a reporting 
Model 2 FFI), or registered deemed-compliant FFI (including a reporting 
Model 1 FFI), that is a non-U.S. payor (as defined in Sec. 1.6049-
5(c)(5)) to an account holder of an account maintained by the FFI, when 
the payment is not subject to withholding under chapter 4 or to backup 
withholding under section 3406, and the conditions of paragraphs 
(c)(4)(i)(A), (B), or (C) of this section, as applicable, are met. See 
paragraph (c)(4)(iii) of this section for circumstances in which an FFI 
may allocate a payment described in this paragraph (c)(4)(i) to a 
chapter 4 withholding rate pool of U.S. payees.
    (A) The FFI is a participating FFI (including a reporting Model 2 
FFI) reporting the account holder of the U.S. account (as defined in 
Sec. 1.1471-1(b)(133)) pursuant to either Sec. 1.1471-4(d)(3) or (5) 
for the year in which the payment is made (including reporting of the 
account holder's TIN).
    (B) The FFI is a registered deemed-compliant FFI (other than a 
reporting Model 1 FFI) reporting the account holder of the U.S. account 
pursuant to the conditions of its applicable deemed-compliant status 
under Sec. 1.1471-

[[Page 379]]

5(f)(1) for the year in which the payment is made (including reporting 
of the account holder's TIN).
    (C) The FFI is a reporting Model 1 FFI reporting the account holder 
of the reportable U.S. account pursuant to an applicable Model 1 IGA for 
the year in which the payment is made (including reporting of the 
account holder's TIN).
    (ii) Other accounts reported by FFIs under chapter 4. An information 
return shall not be required under this section with respect to a 
payment that is not subject to withholding under chapter 3 (as defined 
in Sec. 1.1441-2(a)) or backup withholding under Sec. 31.3406(g)-1(e) 
and that is made to a recalcitrant account holder of a participating FFI 
or registered deemed-compliant FFI (or non-consenting U.S. account of a 
reporting Model 2 FFI), provided that the FFI reports such account 
holder in accordance with the classes of account holders described in 
Sec. 1.1471-4(d)(6) for the year in which the payment is made. See 
paragraph (c)(4)(iii) of this section for circumstances in which an FFI 
may allocate a payment described in this paragraph (c)(4)(ii) to a 
chapter 4 withholding rate pool of U.S. payees. In the case of a payment 
made by an FFI that is a reporting Model 1 FFI, an information return 
shall not be required with respect to a payment that is not subject to 
withholding under chapter 3 or backup withholding under Sec. 
31.3406(g)-1(e) and that is made to an account holder of the FFI if the 
account--
    (A) Has U.S. indicia for which appropriate documentation sufficient 
to treat the account as held by other than a specified U.S. person has 
not been provided pursuant to the due diligence requirements described 
in an applicable Model 1 IGA, and
    (B) Is therefore treated as a U.S. reportable account that the FFI 
is required to report pursuant to the applicable Model 1 IGA.
    (iii) Coordination of reporting exceptions with reporting of chapter 
4 withholding rate pools. For purposes of paragraphs (c)(4)(i) and (ii) 
of this section, a participating FFI (including a reporting Model 2 FFI) 
or registered deemed-compliant FFI (including a reporting Model 1 FFI) 
receiving a payment from another payor may provide a withholding 
statement to the payor allocating the payment to a chapter 4 withholding 
rate of pool of U.S. payees only if the payment is excepted from 
reporting under paragraph (c)(4)(i) of this section or if the payment is 
both excepted from reporting under paragraph (c)(4)(ii) of this section 
and not subject to withholding under chapter 4. See Sec. 1.6049-
5(b)(14) (providing an exception from reporting under section 6049 to a 
payor that has been furnished a withholding statement from an 
participating FFI (including a reporting Model 2 FFI) or registered 
deemed-compliant FFI (including a reporting Model 1 FFI) and that 
allocates the payment to a chapter 4 withholding rate pool). Thus, for 
example, a U.S. payor that is a participating FFI may not allocate a 
payment to a chapter 4 withholding rate pool of U.S. payees on a 
withholding statement described in Sec. 1.6049-5(b)(14) when the 
payment is made to a U.S. account maintained by the FFI, regardless of 
whether the FFI reports the account in accordance with Sec. 1.1471-
4(d)(3) because the U.S. payor is not excepted from reporting under this 
section pursuant to paragraph (c)(4)(i) of this section.
    (iv) Example. The application of the provisions of paragraphs 
(c)(4)(ii) and (iii) of this section may be illustrated by the following 
example:

    Example. USP is a payor that makes an interest payment that is not a 
withholdable payment (as defined in paragraph (f)(15) of this section) 
to RM2, a U.S. payor and reporting Model 2 FFI. The payment is paid and 
received outside of the United States and is not an amount subject to 
withholding under chapter 3. RM2 receives the payment as an intermediary 
with respect to a preexisting account held by A. RM2 has account 
information with respect to A which includes U.S. indicia as described 
in Sec. 1.1441-7(b)(5) or (8). A does not provide consent for RM2 to 
report A's account. Under the presumption rules described in Sec. 
1.6049-5(d)(2)(i), RM2 is required to treat A as a U.S. non-exempt 
recipient. Despite this presumption rule, and because backup withholding 
does not apply under Sec. 31.3406(g)-1(e), no information return shall 
be required with respect to the payment under paragraph (c)(4)(ii) of 
this section if A is reported by RM2 consistent with Sec. 1.1471-
4(d)(6) as a non-consenting account holder. Additionally, RM2 may 
include A in the chapter 4 withholding rate pool of U.S. payees on the 
withholding statement provided to USP consistent with the requirements 
of paragraph (c)(4)(iii) of this section.


[[Page 380]]


    (d) Special rules--(1) Aggregation of payments. For purposes of 
paragraph (b) of this section, until such time as the Commissioner 
determines that it is feasible to require aggregation of payments on two 
or more accounts, insurance contracts, or investment certificates, and, 
until this section is amended accordingly to provide for reporting on an 
aggregate basis, the requirement for filing Form 1099 under this section 
will be met if a person making payments of interest subject to reporting 
files a separate Form 1099 with respect to each account, insurance 
contract, or investment certificate. In the case of obligations 
described in section 6049(b)(1)(A), separate Forms 1099 may be filed as 
provided in the preceding sentence with respect to holdings in different 
issues.
    (2) Treatment of original issue discount. The amount of original 
issue discount subject to reporting under section 6049 shall be the 
amount of original issue discount includible in the gross income of any 
holder that is treated as paid under Sec. 1.6049-5(f).
    (3) Conversion into United States dollars of amounts paid in foreign 
currency--(i) Conversion rules. When a payment is made in foreign 
currency, the U.S. dollar amount of the payment shall be determined by 
converting such foreign currency into U.S. dollars on the date of 
payment at the spot rate (as defined in Sec. 1.988-1(d)(1)) or pursuant 
to a reasonable spot rate convention. For example, a withholding agent 
may use a month-end spot rate or a monthly average spot rate. A spot 
rate convention must be used consistently with respect to all non-dollar 
amounts withheld and from year to year. Such convention cannot be 
changed without the consent of the Commissioner or the Commissioner's 
delegate.
    (ii) Special rule for Sec. 1.988-5(a) transactions where the payor 
on both components of a qualified hedging transaction is the same 
person--(A) In general. Interest or original issue discount on a 
qualified debt instrument that is part of a qualified hedging 
transaction under Sec. 1.988-5(a) shall be computed for section 6049 
reporting purposes under the rules described in Sec. 1.988-5(a)(9)(ii) 
if--
    (1) The payor on the qualified debt instrument and the counterparty 
to the Sec. 1.988-5(a) hedge are the same person; and
    (2) The payee complies with the requirements of Sec. 1.988-5(a) and 
so notifies its payor prior to the date required for filing Form 1099 as 
required by this section.
    (B) Effective date. The provisions of this paragraph (d)(3)(ii) 
apply to transactions entered into after December 31, 2000.
    (4) Determination of person to whom interest or original issue 
discount is paid or for whom it is received. Section 1.6049-1(a)(3) and 
(4) shall apply with respect to payments of interest and original issue 
discount after December 31, 1982.
    (5) Payments by governmental units. In the case of payments made by 
any governmental unit or any agency or instrumentality thereof, the 
officer or employee having control of the payment of interest or 
original issue discount (or the person appropriately designated for 
purposes of this section) shall make the returns and statements required 
under section 6049.
    (6) When payment deemed made--(i) In general. Except as provided in 
paragraph (d)(6)(ii) of this section, for purposes of section 6049, 
interest is deemed to have been paid when it is credited or set apart to 
a person without any substantial limitation or restriction as to the 
time or manner of payment or condition upon which payment is to be made, 
and is made available to him so that it may be drawn at any time, and 
its receipt brought within his own control and disposition.
    (ii) Instruments paid on presentment or demand. In the case of a 
payment made on an obligation described in paragraph (e)(2) of this 
section (relating to transactional reporting), interest is deemed to 
have been paid at the time the obligation is presented for payment. For 
example, interest represented by a coupon detached from a bond is 
considered paid for purposes of section 6049 when the coupon is 
presented for payment.
    (7) Magnetic media requirement. For rules relating to permission to 
submit the information required by Form 1099 on magnetic tape or other 
media, see Sec. 1.9101-1. For the requirement to submit the information 
required by Form 1099 on magnetic media for payments after December 31, 
1983, see section

[[Page 381]]

6011(e) and Sec. 301.6011-2 of this chapter (Regulations on Procedure 
and Administration).
    (8) Obligations that are not exempt from taxation. When an issuer of 
an obligation that is not exempt from taxation receives an envelope or 
``shell'', signed by the payee, stating that interest on the obligation 
is exempt from taxation under section 103(a) (as described in Sec. 
1.6049-5(b)(2), the issuer shall make an information return under 
section 6049. The information return shall show the name, address, and 
taxpayer identification number of the person who signed the statement 
claiming that interest on the obligation is exempt from taxation, the 
amount of interest paid, and such other information as is required by 
the form. An information return is required regardless of the amount of 
interest. The issuer shall also furnish a written statement to such 
person showing the information required by Sec. 1.6049-6(b).
    (9) Savings bonds--(i) In general. A person who makes payment on a 
United States savings bond when the bond is presented for payment shall 
report the difference between the amount to be paid and the amount paid 
for the bond. The amount subject to reporting shall not be reduced to 
take into account:
    (A) Amounts previously included in the income of a holder as a 
result of an election under section 454 to include annually the increase 
in the redemption price of the bond; or
    (B) Amounts accrued prior to transfer of the bond where the bond has 
been reissued in the name of the person presenting the bond for payment.


With respect to a savings bond that is reissued in another person's 
name, the amount subject to reporting when the bond is reissued is the 
amount of interest that has accrued. With respect to a savings bond that 
is exchanged in a tax-deferred transaction (as described in section 
1037), the amount subject to reporting is the amount of cash paid to the 
holder at the time of the transaction.
    (ii) Examples. The application of the provisions of paragraph 
(d)(9)(i) of this section may be illustrated by the following examples:

    Example 1. On June 10, 1943, A purchases a $50 Series E savings 
bond. The amount paid for the savings bond is $37.50. A elects under 
section 454 to include the increase in the redemption price of the bond 
annually in income. A presents the bond to Bank M to be cashed on July 
1, 1983. The amount to be paid on the bond on that date is $204.96. Bank 
M is required to make an information return under section 6049 showing 
that it paid $167.46 (the difference between $204.96 and $37.50) of 
interest, without regard to A's election to include annually the 
increase in the redemption price of the bond.
    Example 2. On December 1, 1970, B purchases a $500 Series E savings 
bond. The amount paid for the bond is $375. On August 1, 1984, the bond 
is reissued by the Bureau of Public Debt by deleting B's name and 
inserting the name of B's child. At the time of reissue, the redemption 
value of the bond is $1,015.80. The accrued interest is $640.80 (the 
difference between $1,015.80 and $375). The reissue is a taxable 
transaction, and B must include in income the accrued interest at the 
time of reissue. The Bureau of Public Debt is required to make an 
information return under section 6049 showing that it paid $640.80 of 
interest to B.
    Example 3. Assume the same facts as in example (2) except that B 
exchanges the bond for a Series HH savings bond in the amount of $1,000 
issued in B's name. The exchange is tax-deferred under section 1037. The 
Bureau of Public Debt stamps a legend on the bond stating that interest 
of $625 has been deferred. The amount of $15.80 is paid to B. The Bureau 
of the Public Debt must make an informatiion return showing that it paid 
$15.80 of interest to B.
    Example 4. Assume the same facts as in example (3) except that the 
exchange is not a tax-deferred exchange. The Bureau of the Public Debt 
must make an information return showing that it paid $640.80 of interest 
to B.

    (e) Transactional reporting--(1) In general. An information return 
required to be made under paragraph (b) of this section may be made on a 
transaction-by-transaction basis, rather than on an annual aggregation 
basis, if payment described in paragraph (e)(2) of this section is made 
by a person described in paragraph (e)(3) of this section.
    (2) Payments subject to transactional reporting. An information 
return may be made on a transactional basis if payment is made on:
    (i) A United States savings bond,
    (ii) An interest coupon (but see Sec. 1.6049-5(b) which provides 
that no information return is required to be

[[Page 382]]

made with respect to an interest coupon that is exempt from taxation),
    (iii) A discount obligation having a maturity at issue of 1 year or 
less, including commercial paper and short-term government obligations 
defined in section 1232(a)(3), and
    (iv) Any obligation similar to those described in subdivisions (i) 
through (iii).


The information return with respect to payments on the types of 
obligations described in this paragraph shall be made on Form 1099-INT. 
A payor may include all interest paid in one transaction on one 
information return, irrespective of whether obligations of different 
issuers are paid as part of the transaction.
    (3) Persons subject to transactional reporting. A person may make a 
return on a transactional basis if the person is:
    (i) A middleman (as defined in paragraph (f)(4) of this section) who 
is required to make an information return under paragraph (b)(3) of this 
section with respect to any payment described in paragraph (e)(2) of 
this section, or
    (ii) A Federal agency making payments on a United States savings 
bond.
    (4) Transaction defined. For purposes of this paragraph (e), a 
transaction means a payment at one time on one or more obligations. For 
example, if an individual who is exempt from withholding under section 
3406 presents at one time five Series EE bonds on each of which $3 of 
interest has accrued, $15 of interest will be paid as part of the 
transaction. Accordingly, an information return is required under Sec. 
1.6049-4 (a)(2)(iii) because the interest paid in the transaction 
exceeds $10. If only three of the savings bonds were presented, however, 
no return would be required even if the remaining two bonds were 
redeemed the following day. See paragraph (a)(2)(i) of this section for 
the requirement that an information return be made if any amount of tax 
is withheld under section 3406.
    (5) Information required. The information return for any transaction 
under paragraph (e) of this section shall show the following:
    (i) The name, address, and taxpayer identification number of the 
person to whom the interest is paid;
    (ii) The name and address of the person filing the form;
    (iii) The amount of interest paid;
    (iv) The amount of tax withheld under section 3406, if any; and
    (v) Such other information as is required by the form.
    (f) Definitions. For purposes of section 6049, this section, and 
Sec. Sec. 1.6049-5 and 1.6049-6:
    (1) Person. The term person includes any governmental unit, 
international organization, and any agency or instrumentality thereof. 
Therefore, interest paid by one of these entities must be reported 
unless one of the exceptions under section 6049 applies.
    (2) Natural person. The term natural person means any individual, 
but shall not include a partnership (whether of not composed entirely of 
individuals), a trust, or an estate.
    (3) Obligation. The term obligation includes bonds, debentures, 
notes, certificates, and other evidences of indebtedness regardless of 
how denominated. For the definition of the term offshore obligation, see 
paragraph (f)(9) of this section.
    (4) Middleman--(i) In general. The term middleman means any person. 
including a financial institution as described in paragraph 
(c)(1)(ii)(M) of this section, a broker as defined in section 6045(c), 
or a nominee, who makes payment of interest for, or collects interest on 
behalf of, another person, or otherwise acts in a capacity as 
intermediary between a payor and a payee. For example, a person (other 
than an issuer of an obligation) who makes payment on an interest coupon 
of the obligation to another person is a middleman, irrespective of 
whether such person purchases the coupon for his own account, accepts 
the coupon as agent for the payee, or otherwise deals with the coupon. 
The term ``middleman'' also includes a trustee, including a corporate 
trustee of a trust where the trust is the payee. See Sec. 1.6049-
4(c)(2) providing that the trustee does not have to make an information 
return on Form 1099 to a beneficiary if the trustee is required to file 
Form 1041 and furnishes Form K-1 to the beneficiary showing the 
information required to be shown on the form, including amounts withheld 
under section 3406. A person

[[Page 383]]

shall be considered to be a middleman as to any portion of an interest 
payment made to such person which portion is actually owned by another 
person, whether or not the other person's name is also shown on the 
information return filed with respect to such interest payment, except 
that a husband or wife will not be considered as acting in the capacity 
of a middleman with respect to his or her spouse. A person who, from 
within the United States, forwards an interest coupon or discount 
obligation on behalf of a payee for presentation, collection or payment 
outside the United States is also a middleman for purposes of this 
section (but the transfer, although subject to information reporting 
under this section, does not make the payment subject to backup 
withholding under section 3406).
    (ii) Example. The application of the provisions of paragraph (f)(4) 
of this section may be illustrated by the following example:

    Example. In January 1984, Broker B, a U.S. payor, purchases on 
behalf of its customer, Individual A, an obligation issued by 
partnership in a public offering on that date. Broker B holds the 
obligation for A throughout 1984. Broker B is required to make an 
information return showing the amount of original issue discount treated 
as paid to A under Sec. 1.6049-5(f).

    (5) Chapter 4 withholding rate pool. The term chapter 4 withholding 
rate pool has the meaning set forth in Sec. 1.1471-1(b)(20). However, 
for determining the U.S. payees included in a chapter 4 withholding rate 
pool for purposes of section 6049, see paragraph (c)(4)(iii) of this 
section.
    (6) Foreign financial institution (or FFI). The term foreign 
financial institution or FFI means an entity described in Sec. 1.1471-
1(b)(47),
    (7) Intergovernmental agreement (or IGA). The term intergovernmental 
agreement or IGA has the meaning set forth in Sec. 1.1471-1(b)(67) 
(i.e., either a Model 1 IGA described in Sec. 1.1471-1(b)(78) or a 
Model 2 IGA described in Sec. 1.1471-1(b)(79)).
    (8) Non-consenting U.S. accounts. The term non-consenting U.S. 
accounts has the meaning set forth in an applicable Model 2 IGA.
    (9) Offshore obligation. The term offshore obligation means an 
offshore obligation defined in Sec. 1.6049-5(c)(1). For the definition 
of the term obligation, see paragraph (f)(3) of this section.
    (10) Participating FFI. The term participating FFI means an FFI that 
is described in Sec. 1.1471-1(b)(91).
    (11) Recalcitrant account holder. The term recalcitrant account 
holder has the same meaning set forth in Sec. 1.1471-1(b)(110).
    (12) Registered deemed-compliant FFI. The term registered deemed-
compliant FFI means an FFI that is described in Sec. 1.1471-1(b)(111).
    (13) Reporting Model 1 FFI. The term reporting Model 1 FFI means an 
FFI that is described in Sec. 1.1471-1(b)(114).
    (14) Reporting Model 2 FFI. The term reporting Model 2 FFI means a 
participating FFI that is described in Sec. 1.1471-1(b)(91).
    (15) Withholdable payment. The term withholdable payment means a 
payment described in Sec. 1.1471-1(b)(145).
    (16) Paid and received outside the United States--(i) In general. 
Except as otherwise provided in paragraphs (f)(16)(ii) and (iii) of this 
section, the term paid and received outside the United States means an 
amount that is paid by a payor or middleman outside the United States as 
described in Sec. 1.6049-5(e).
    (ii) Transfers to the United States. Without regard to the location 
of the account from which the amount is drawn, an amount that is 
described in paragraph (f)(16)(ii)(A) or (B) of this section and paid by 
transfer to an account maintained by the payee in the United States or 
by mail to a United States address (including an amount paid with 
respect to a bond or a discount obligation described in Sec. 1.6049-
5(e)(4)) is not considered to be paid and received outside the United 
States.
    (A) An amount is described in this paragraph (f)(16)(ii)(A) if it is 
paid by an issuer or the paying agent of the issuer with respect to an 
obligation that is--
    (1) Issued by a U.S. payor, as defined in Sec. 1.6049-5(c)(5);
    (2) Registered under the Securities Act of 1933 (15 U.S.C. 77a); or

[[Page 384]]

    (3) Listed on an exchange that is registered as a national 
securities exchange in the United States or included in an interdealer 
quotation system in the United States.
    (B) An amount is described in this paragraph (f)(16)(ii)(B) if it is 
paid by a U.S. middleman (as defined in Sec. 1.6049-5(c)(5)) that, as a 
custodian, nominee, or other agent of a payee, collects the amount for 
or on behalf of the payee.
    (iii) Deposits or accounts with banks and other financial 
institutions. In the case of an amount paid by a bank or other financial 
institution with respect to a deposit or an account that is considered 
paid at a branch or office outside the United States as described in 
Sec. 1.6049-5(e)(2), the amount is not considered paid and received 
outside the United States if the institution has knowledge that the 
customer has transmitted instructions to an agent, branch, or office of 
the institution from inside the United States by mail, telephone, 
electronic transmission, or otherwise concerning the deposit or account 
(unless the transmission from the United States has taken place in 
isolated and infrequent circumstances).
    (iv) Examples. The application of the provisions of paragraph 
(f)(16) of this section may be illustrated by the following examples:

    Example 1. FC is a foreign corporation that is not a U.S. payor or 
U.S. middleman, as defined in Sec. 1.6049-5(c)(5). A holds FC coupon 
bonds that are not in registered form under section 163(f) and the 
regulations . FB, a foreign branch of DC, a domestic corporation, is the 
designated paying agent with respect to the bonds issued by FC. A does 
not have an account with FB. A presents a coupon to FB at its office 
outside the United States with instructions to transfer funds to a bank 
account maintained by A in the United States. FB transfers the funds in 
accordance with A's instructions. Even though the amount is credited to 
an account in the United States, the interest on the FC bonds is paid 
and received outside the United States under paragraph (f)(16)(ii) of 
this section and Sec. 1.6049-5(e)(3) because the coupon is presented 
for payment outside the United States; because FC is a foreign person 
that is not a U.S. payor or U.S. middleman, as defined in Sec. 1.6049-
5(d)(1); because FB is not acting as A's agent; and because the 
obligation is not registered under the Securities Act of 1933 (15 U.S.C. 
77a), listed on a securities exchange that is registered as a national 
securities exchange in the United States, or included in an interdealer 
quotation system.
    Example 2. FC is a foreign corporation that is not a U.S. payor or 
U.S. middleman, as defined in Sec. 1.6049-5(d)(1). B, a United States 
citizen, holds a bond issued by FC in registered form under section 
163(f) and the regulations thereunder and registered under the 
Securities Act of 1933 (15 U.S.C. 77a). The bond is not a foreign-
targeted registered obligation as defined in Sec. 1.871-14(e)(2). DB, a 
United States branch of a foreign corporation engaged in the commercial 
banking business, is the registrar of the bonds issued by FC. DB 
supplies FC with a list of the holders of the FC bonds. Interest on the 
FC bonds is paid to B and other bondholders by checks prepared by FC at 
its principal office outside the United States, and B's check is mailed 
from there to his designated address in the United States. The bond is 
described in paragraph (f)(16)(ii)(A)(2) of this section. The interest 
on the FC bonds paid to B by FC is not paid and received outside the 
United States under paragraph (f)(16) of this section.
    Example 3. The facts are the same as in Example 2 except that the 
checks are prepared and mailed in the United States by DC, a U.S. 
corporation engaged in the commercial banking business that is the 
designated paying agent with respect to the bonds issued by FC, and B's 
check is mailed to his designated address outside the United States. For 
purposes of section 6049, the interest on the FC bonds paid by DC is not 
paid and received outside the United States under paragraph (f)(16)(i) 
of this section.

    (g) Time and place for filling a return for the payment of 
interest--(1) Annual return. Except as provided in paragraph (g)(2) of 
this section, the returns required under this section for any calendar 
year for the payment of interest shall be filed after September 30 of 
such year, but not before the payor's final payment to the payee for the 
year, and on or before February 28 (March 31 if filed electronically) of 
the following year. Such returns shall be filed with the appropriate 
Internal Revenue Service Center, the address of which is listed in the 
instructions for Form 1096. For extensions of time for filing returns 
under this section, see Sec. 1.6081-1.
    (2) Transactional return. In the case of a return under paragraph 
(e) of this section, relating to returns on a transactional basis, such 
return shall be filed at any time but in no event later than February 28 
(March 31 if filed electronically) of the year following the calendar 
year in which the interest

[[Page 385]]

was paid. The return shall be filed with the appropriate Internal 
Revenue Service Center, the address of which is listed in the 
instructions for Form 1096. For extensions of time for filing returns 
under this section, see Sec. 1.6081-1.
    (3) Cross-reference to penalty. For provisions relating to the 
penalty provided for failure to file timely a correct information return 
required under section 6049(a) and Sec. 1.6049-4(a)(1), see Sec. 
301.6721-1 of this chapter (Procedure and Administration Regulations). 
See Sec. 301.6724-1 of this chapter for the waiver of a penalty if the 
failure is due to reasonable cause and is not due to willful neglect.
    (h) Effective/applicability dates. Except as otherwise provided in 
paragraphs (b)(5)(ii) and (d)(3)(ii)(B) of this section, this section 
applies to payments made on or after January 6, 2017. (For payments made 
after June 30, 2014, and before January 6, 2017, see this section as in 
effect and contained in 26 CFR part 1, as revised April 1, 2016.)

[T.D. 7881, 48 FR 12968, Mar. 28, 1983]

    Editorial Note: For Federal Register citations affecting Sec. 
1.6049-4, see the List of CFR Sections Affected, which appears in the 
Finding Aids section of the printed volume and at www.govinfo.gov.



Sec. 1.6049-5  Interest and original issue discount subject to
reporting after December 31, 1982.

    (a) Interest subject to reporting requirement. For purposes of 
Sec. Sec. 1.6049-4, 1.6049-6 and this section, except as provided in 
paragraph (b) of this section, the term ``interest'' means:
    (1) Interest on an obligation:
    (i) In registered form (as defined in Sec. 5f.103-1(c)), or
    (ii) Of a type offered to the public. Principles consistent with 
Sec. 5f.163-1 shall be applied to determine whether an obligation is of 
a type offered to the public.
    (2) Interest on deposits with persons carrying on the banking 
business. Such term shall include deposits evidenced by time 
certificates of deposit issued in any amount whether negotiable or non-
negotiable. The term ``interest'' includes payments to a mortgage escrow 
account and amounts paid with respect to repurchase agreements and 
banker's acceptances. Property which the payee receives from the payor 
as interest (or in lieu of a cash payment of interest) shall be interest 
for purposes of section 6049. The amount subject to reporting is the 
fair market value of such property.
    (3) Amounts, whether or not designated as interest, paid or credited 
by mutual savings banks, savings and loan associations, building and 
loan associations, cooperative banks, homestead associations, credit 
unions, industrial loan associations or banks, or similar organizations, 
in respect of deposits, face amount certificates, investment 
certificates, or withdrawable or repurchasable shares. Thus, even though 
amounts paid or credited by such organizations with respect to deposits 
are designated as ``dividends'', such amounts are included in the 
definition of interest for purposes of section 6049. The term 
``interest'' includes payments to a mortgage escrow account and amounts 
paid with respect to repurchase agreements. Property which the payee 
receives from the payor as interest (or in lieu of a cash payment of 
interest) is ``interest'' for purposes of section 6049. The fair market 
value of such property is the amount subject ot reporting.
    (4) Interest on amounts held by insurance companies under an 
agreement to pay interest thereon. Any increment in value of ``advance 
premiums'', ``prepaid premiums'', or ``premium deposit funds'' which is 
applied to the payment of premiums due on insurance policies, or made 
available for withdrawal by the policyholder, shall be considered 
interest subject to reporting. Interest that an insurance company pays 
pursuant to an agreement with the policyholder to a beneficiary because 
he payment due has been delayed is interest subject to reporting. 
Interest subject to reporting also includes interest paid by insurance 
companies with respect to policy ``dividend'' accumulations (see 
sections 61 and 451 and the regulations thereunder for rules as to when 
such interest is considered paid), and interest paid with respect to the 
proceeds of insurance policies left with the insurer. The so-called 
``interest element'' in the

[[Page 386]]

case of annuity or installment payments under life insurance or 
endowment contracts does not constitute interest for purposes of section 
6049.
    (5) Interest on deposits with brokers as defined in section 6045(c) 
and the regulations thereunder. Any payment made in lieu of interest to 
a person whose obligation has been borrowed in connection with a short 
sale or other similar transaction is subject to reporting under section 
6049. See Sec. 1.6045-2T for reporting requirements with respect to 
payments in lieu of tax-exempt interest. See Sec. 1.6045-2 for 
reporting requirements with respect to payments in lieu of tax-exempt 
interest.
    (6) Interest paid on amounts held by investment companies as defined 
in section 3 of the Investment Company Act (15 U.S.C. section 80-a) and 
on amounts paid on pooled funds or trusts. The interest to be reported 
with respect to a widely held fixed investment trust, as defined in 
Sec. 1.671-5(b)(22), shall be the interest earned on the assets held by 
the trust. See Sec. 1.671-5 for the reporting rules for widely held 
fixed investment trusts (as defined under that section).
    (b) Interest excluded from reporting requirement. The term interest 
or original issue discount (OID) does not include--
    (1) Interest on any obligation issued by a natural person as defined 
in Sec. 1.6049-4(f)(2), irrespective of whether such interest is 
collected on behalf of the holder of the obligation by a middleman.
    (2) Interest on any obligation if such interest is exempt from 
taxation under section 103(a), relating to certain governmental 
obligations, or interest which is exempt from taxation under any other 
provision of law without regard to the identity of the holder. The 
holder of a tax exempt obligation that is not in registered form must 
provide written certification to the payor (other than the issuer of the 
obligation) that the obligation is exempt from taxation. A statement 
that interest coupons are tax exempt on the envelope or shell commonly 
used by financial institutions to process such coupons, signed by the 
payee, will be sufficient for this purpose if the envelope is properly 
completed (i.e., shows the name, address, and taxpayer identification 
number of the payee). A payor may rely on such written certification in 
treating such interest as tax exempt for purposes of section 6049. See 
Sec. 1.6049-4(d)(8) with respect to the requirement that the issuer of 
a taxable obligation shall make an information return if such issuer 
receives an envelope which improperly claims that the interest coupons 
contained therein are tax exempt.
    (3) Interest on amounts held in escrow to guarantee performance on a 
contract or to provide security. However, interest on amounts held in 
escrow with a person described in paragraph (a)(2) or (3) of this 
section is interest subject to reporting under section 6049.
    (4) Interest that a governmental unit pays with respect to tax 
refunds.
    (5) Interest on deposits for security, such as deposits posted with 
a public utility company. However, interest on deposits posted for 
security with a person described in paragraph (a)(2) or (3) of this 
section is interest subject to reporting under section 6049.
    (6) Amounts from sources outside the United States (determined under 
the provisions of part I, subchapter N, chapter 1 of the Internal 
Revenue Code (Code) and the regulations under those provisions) paid by 
a non-U.S. payor or a non-U.S. middleman (as defined in paragraph (c)(5) 
of this section) and paid and received outside the United States. See 
Sec. 1.6049-4(f)(16) for circumstances in which a payment is considered 
to be paid and received outside the United States.
    (7) Portfolio interest, as defined in Sec. 1.871-14(b)(1), paid 
with respect to obligations in bearer form described in section 
871(h)(2)(A), as in effect prior to the amendment by section 502 of the 
Hiring Incentives to Restore Employment Act of 2010 (HIRE Act), Public 
Law 111-147, or section 881(c)(2)(A), as in effect prior to the 
amendment by section 502 of the HIRE Act, that were issued prior to 
March 19, 2012, or with respect to a foreign-targeted registered 
obligation described in Sec. 1.871-14(e)(2) that was issued prior to 
January 1, 2016, and for which the documentation requirements described 
in Sec. 1.871-14(e)(3) and (4) have been satisfied (other than by a 
U.S. middleman (as

[[Page 387]]

defined in paragraph (c)(5) of this section) that, as a custodian or 
nominee of the payee, collects the amount for, or on behalf of, the 
payee, regardless of whether the middleman is also acting as agent of 
the payor).
    (8) Portfolio interest described in Sec. 1.871-14(c)(1)(ii), paid 
with respect to obligations in registered form described in section 
871(h)(2) or 881(c)(2) that is not described in paragraph (b)(7) of this 
section.
    (9) Any amount paid by an international organization described in 
Sec. 1.6049-4(c)(1)(ii)(G) (or its paying, transfer, or other agent 
that is not also a payee's agent) with respect to an obligation of which 
the international organization is the issuer.
    (10)(i) Amounts paid and received outside the United States under 
Sec. 1.6049-4(f)(16) (other than by a U.S. middleman (as defined in 
paragraph (c)(5) of this section) that are paid by a custodian or 
nominee or other agent of the payee, of amounts that that it receives 
for, or on behalf of, the payee, regardless of whether the middleman is 
also acting as agent of the payor) with respect to an obligation that: 
Has a face amount or principal amount of not less than $500,000 (as 
determined based on the spot rate on the date of issuance if in foreign 
currency); has a maturity (at issue) of 183 days or less; satisfies the 
requirements of sections 163(f)(2)(B)(i) and (ii)(I), as in effect prior 
to the amendment by section 502 of the HIRE Act, and the regulations 
thereunder (as if the obligation would otherwise be a registration-
required obligation within the meaning of section 163(f)(2)(A)) 
(however, an original issue discount obligation with a maturity of 183 
days or less from the date of issuance is not required to satisfy the 
certification requirement of Sec. 1.163-5(c)(2)(i)(D)(3)) and is issued 
in accordance with the procedures of Sec. 1.163-5(c)(2)(i)(D); and has 
on its face the following statement (or a similar statement having the 
same effect):

    By accepting this obligation, the holder represents and warrants 
that it is not a United States person (other than an exempt recipient 
described in section 6049(b)(4) of the Internal Revenue Code and 
regulations thereunder) and that it is not acting for or on behalf of a 
United States person (other than an exempt recipient described in 
section 6049(b)(4) of the Internal Revenue Code and the regulations 
thereunder).

    (ii) If the obligation is in registered form, it must be registered 
in the name of an exempt recipient described in Sec. 1.6049-
4(c)(1)(ii). For purposes of this paragraph (b)(10), a middleman may 
treat an obligation as described in section 163(f)(2)(B)(i) and 
(f)(2)(B)(ii)(I), as in effect prior to the amendment by section 502 of 
the HIRE Act, and the regulations under that section if the obligation, 
or coupons detached therefrom, whichever is presented for payment, 
contains the statement described in this paragraph (b)(10). The 
exemption from reporting described in this paragraph (b)(10) shall not 
apply if the payor has actual knowledge that the payee is a U.S. person 
who is not an exempt recipient.
    (11) Amounts paid with respect to an account or deposit with a U.S. 
or foreign branch of a domestic or foreign corporation or partnership 
that is paid with respect to an obligation described in either paragraph 
(b)(11)(i) or (ii) of this section, if the branch is engaged in the 
commercial banking business; and the interest or OID is paid and 
received outside the United States as defined in Sec. 1.6049-4(f)(16) 
(other than by a U.S. middleman (as defined in paragraph (c)(5) of this 
section) that acts as a custodian, nominee, or other agent of the payee, 
and collects the amount for, or on behalf of, the payee, regardless of 
whether the middleman is also acting as agent of the payor). The 
exemption from reporting described in this paragraph (b)(11) shall not 
apply if the payor has actual knowledge that the payee is a U.S. person 
who is not an exempt recipient.
    (i) An obligation is described in this paragraph (b)(11)(i) if it is 
not in registered form (within the meaning of section 163(f) and the 
regulations under that section), is described in section 163(f)(2)(B), 
as in effect prior to the amendment by section 502 of the HIRE Act, and 
issued in accordance with the procedures of Sec. 1.163-5(c)(2)(i)(C) or 
(D), and, in the case of a U.S. branch, is part of a larger single 
public offering of securities. For purposes of this paragraph 
(b)(11)(i), a middleman may treat an obligation as described in section 
163(f)(2)(B), as in effect prior to the

[[Page 388]]

amendment by section 502 of the HIRE Act, if the obligation, and any 
detachable coupons, contains the statement described in section 
163(f)(2)(B)(ii)(II), as in effect prior to the amendment by section 502 
of the HIRE Act, and the regulations under that section.
    (ii)(A) An obligation is described in this paragraph (b)(11)(ii) if 
it produces income described in section 871(i)(2)(A); has a face amount 
or principal amount of not less than $500,000 (as determined based on 
the spot rate on the date of issuance if in foreign currency); satisfies 
the requirements of sections 163(f)(2)(B)(i) and (ii)(I), as in effect 
prior to the amendment by section 502 of the HIRE Act, and the 
regulations thereunder (as if the obligation would otherwise be a 
registration-required obligation within the meaning of section 
163(f)(2)(A)) and is issued in accordance with the procedures of Sec. 
1.163-5(c)(2)(i)(C) or (D) (however, an original issue discount 
obligation with a maturity of 183 days or less from the date of issuance 
is not required to satisfy the certification requirement of Sec. 1.163-
5(c)(2)(i)(D)(3)). For purposes of this paragraph (b)(11)(ii), a 
middleman may treat an obligation as described in sections 
163(f)(2)(B)(i) and (ii), as in effect prior to the amendment by section 
502 of the HIRE Act, and the regulations under that section if the 
obligation, or any detachable coupon, contains the statement described 
in paragraph (b)(11)(ii)(B) of this section.
    (B) The obligation must have on its face, and on any detachable 
coupons, the following statement (or a similar statement having the same 
effect):

    By accepting this obligation, the holder represents and warrants 
that it is not a United States person (other than an exempt recipient 
described in section 6049(b)(4) and regulations under that section) and 
that it is not acting for or on behalf of a United States person (other 
than an exempt recipient described in section 6049(b)(4) and the 
regulations under that section).

    (C) If the obligation is in registered form, it must be registered 
in the name of an exempt recipient described in Sec. 1.6049-
4(c)(1)(ii).
    (12) Payments that a payor can, prior to payment, reliably associate 
with documentation upon which it may rely to treat the payment as made 
to a foreign beneficial owner in accordance with Sec. 1.1441-
1(e)(1)(ii) or as made to a foreign payee in accordance with paragraph 
(d)(1) of this section or presumed to be made to a foreign payee under 
paragraph (d)(2) or (3) of this section. However, such payments may be 
reportable under Sec. 1.1461-1(b) and (c) or under Sec. 1.1474-1(d)(2) 
(for a chapter 4 reportable amount (as described in Sec. 1.1471-
1(b)(18)). The provisions of Sec. 1.1441-1 shall apply by substituting 
the term ``payor'' for the term ``withholding agent'' and without regard 
to the fact that the provisions apply only to amounts subject to 
withholding under chapter 3 of the Code. In the event of a conflict 
between the provisions of Sec. 1.1441-1 and paragraph (d) of this 
section in determining the foreign status of the payee, the provisions 
of Sec. 1.1441-1 shall govern for payments of amounts subject to 
withholding under chapter 3 of the Code and the provisions of paragraph 
(d) of this section shall govern in other cases. This paragraph (b)(12) 
does not apply to interest paid on or after January 1, 2013, to a 
nonresident alien individual to the extent provided in Sec. 1.6049-8.
    (13) Amounts for the period that the debt obligation with respect to 
which the interest arises represents an asset blocked as described in 
Sec. 1.1441-2(e)(3). Payment of such amounts, including interest that 
is past due and OID on obligations that mature on or before the date 
that the assets are no longer blocked, is deemed to occur in accordance 
with the rules of Sec. 1.1441-2(e)(3).
    (14) Payments that a payor or middleman can, prior to payment, 
reliably associate with documentation upon which it may rely to treat as 
made to a foreign intermediary or flow-through entity in accordance with 
Sec. 1.1441-1(b) if it obtains from the foreign intermediary or flow-
through entity a withholding statement under Sec. 1.1471-
3(c)(3)(iii)(B)(2) (describing an FFI withholding statement), Sec. 
1.1471-3(c)(3)(iii)(B)(3) (describing a chapter 4 withholding 
statement), Sec. 1.1441-1(e)(3)(iv) (describing a withholding statement 
provided by a non-qualified intermediary), Sec. 1.1441-1(e)(5)(v) 
(describing a withholding statement provided by a qualified 
intermediary), or

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under Sec. 1.1441-5 (describing a withholding statement provided by a 
foreign partnership, foreign simple trust, or foreign grantor trust), 
that allocates the payment (or portion of a payment) to a chapter 4 
withholding rate pool or specific payees to which withholding applies 
under chapter 4. The provisions of each of the foregoing sections shall 
apply by substituting the term ``payor'' for the term ``withholding 
agent.'' A payor or middleman may rely on a withholding statement 
provided by a foreign intermediary or flow-through entity that 
identifies a chapter 4 withholding rate pool of U.S. payees (as 
described in Sec. 1.6049-4(c)(4)) or, with respect to a withholdable 
payment, a chapter 4 withholding rate pool of recalcitrant account 
holders (as described in Sec. 1.1471-4(d)(6)) provided that the payor 
or middleman identifies the foreign intermediary or flow-through entity 
that maintains the accounts (as described in Sec. 1.1471-5(b)(5)) 
included in the chapter 4 withholding rate pool as a participating FFI 
(including a reporting Model 2 FFI) or registered deemed-compliant FFI 
(including a reporting Model 1 FFI) by applying the rules in Sec. 
1.1471-3(d)(4) or in Sec. 1.1471-3(e)(4)(vi)(B), as applicable, for 
identifying the payee of a payment (by substituting the term ``payor'' 
for the term ``withholding agent''). See, however, Sec. 1.1441-
1(e)(5)(v)(C)(2)(i) for when a qualified intermediary may provide a 
single pool of recalcitrant account holders (without the need to 
subdivide into the pools described in Sec. 1.1471-4(d)(6)). 
Additionally, when a foreign intermediary or flow-through entity 
provides to a payor or middleman a withholding statement that allocates 
the payment (or portion of a payment) to a chapter 4 withholding rate 
pool of U.S. payees, the payor or middleman may also rely on the 
withholding statement if the payor or middleman identifies the 
intermediary or flow-through entity as a qualified intermediary (as 
defined in Sec. 1.1441-1(c)(15) by applying the rules described in 
Sec. 1.1441-1(b)(2)(vii)) that provides the certification described in 
Sec. 1.1441-1(e)(3)(ii)(D) with respect to U.S. payees that hold 
accounts with a foreign intermediary or flow-through entity other than 
the qualified intermediary providing the certification.
    (15) If a foreign intermediary, as described in Sec. 1.1441-
1(c)(13), or a U.S. branch that is not treated as a U.S. person receives 
a payment from a payor, which payment the payor can reliably associate 
with a valid withholding certificate described in Sec. 1.1441-
1(e)(3)(ii) or (iii), or Sec. 1.1441-1(e)(3)(v), respectively, 
furnished by such intermediary or branch, then the intermediary or 
branch is not required to report such payment when it, in turn, pays the 
amount, unless, and to the extent, the intermediary or branch knows that 
the payment is required to be reported under this section and was not so 
reported. For example, if a U.S. branch described in Sec. 1.1441-
1(b)(2)(iv) fails to provide information regarding U.S. persons that are 
not exempt from reporting under Sec. 1.6049-4(c)(1)(ii) to the person 
from whom the U.S. branch receives the payment, the amount paid by the 
U.S. branch to such person is interest or original issue discount. See, 
however, Sec. 1.6049-4(c)(4) for when reporting under section 6049 is 
coordinated with reporting under chapter 4 or an applicable IGA (as 
defined in Sec. 1.6049-4(f)(7)). The exception for payments described 
in this paragraph (b)(15) shall not apply to a qualified intermediary 
that assumes reporting responsibility under chapter 61 of the Code for 
the payment under the agreement described in Sec. 1.1441-1(e)(5)(iii).
    (16) Amounts of interest as determined under the provisions of Sec. 
1.446-3(g)(4) (dealing with interest in the case of a significant non-
periodic payment with respect to a notional principal contract). Such 
amounts are governed by the provisions of section 6041. See Sec. 
1.6041-1(d)(5).
    (c) Applicable rules--(1) Documentary evidence for offshore 
obligations and certain other obligations--(i) A payor may rely on 
documentary evidence described in Sec. 1.1471-3(c)(5)(i) instead of a 
beneficial owner withholding certificate described in Sec. 1.1441-
1(e)(2)(i) in the case of an amount paid outside the United States (as 
described in paragraph (e) of this section) with respect to an offshore 
obligation, or, in the case of broker proceeds described in Sec. 
1.6045-1(c)(2), to the extent provided in

[[Page 390]]

Sec. 1.6045-1(g)(1)(i). For purposes of this section, the term offshore 
obligation means--
    (A) An account maintained at an office or branch of a bank or other 
financial institution located outside the United States; or
    (B) An obligation as defined in Sec. 1.6049-4(f)(3) (other than an 
account described in paragraph (c)(1)(i)(A) of this section), contract, 
or other instrument with respect to which the payor is either engaged in 
business as a broker or dealer in securities or a financial institution 
(as defined in Sec. 1.1471-5(e)) that engages in significant activities 
at an office or branch located outside the United States. For purposes 
of the preceding sentence, an office or branch of such payor shall be 
considered to engage in significant activities with respect to an 
obligation when it participates materially and actively in negotiating 
the obligation under the principles described in Sec. 1.864-
4(c)(5)(iii) (substituting the term ``obligation'' for the term ``stock 
or security'').
    (ii) A payor may rely on documentary evidence if the payor has 
established procedures to obtain, review, and maintain documentary 
evidence sufficient to establish the identity of the payee and the 
status of that person as a foreign person; and the payor obtains, 
reviews, and maintains such documentary evidence in accordance with 
those procedures. A payor maintains the documents reviewed for purposes 
of this paragraph (c)(1) by retaining an original, certified copy, or 
photocopy (including a microfiche, electronic scan, or similar means of 
electronic storage) of the documents reviewed for as long as it may be 
relevant to the determination of the payor's obligation to report under 
Sec. 1.6049-4 and this section and noting in its records the date on 
which the document was received and reviewed. Documentary evidence 
furnished for a payment of an amount subject to withholding under 
chapter 3 of the Code or that is a chapter 4 reportable amount under 
Sec. 1.1474-1(d)(2) must contain all of the information that is 
necessary to complete a Form 1042-S for that payment. See Sec. Sec. 
1.1471-3(c) and 1.1471-4(c) for additional documentation requirements to 
identify a payee or account holder for chapter 4 purposes that may apply 
in addition to the requirements under paragraph (c) of this section.
    (iii) Even if an account or obligation (as defined in Sec. 1.6049-
4(f)(3)) is not maintained outside the United States (maintained in the 
United States), a payor may rely on documentary evidence associated with 
a withholding certificate described in Sec. 1.1441-1(e)(3)(iii) with 
respect to the persons for whom an entity acting as an intermediary 
collects the payment. A payor may also rely on documentary evidence 
associated with a flow-through withholding certificate for payments 
treated as made to foreign partners of a nonwithholding foreign 
partnership, as defined in Sec. 1.1441-1(c)(28), the foreign 
beneficiaries of a foreign simple trust, as defined in Sec. 1.1441-
1(c)(24), or foreign owners of a foreign grantor trust, as defined in 
Sec. 1.1441-1(c)(26), even though the partnership or trust account is 
an obligation maintained in the United States.
    (iv) For accounts opened on or after July 1, 2014, and before 
January 1, 2015, and for obligations entered into on or after July 1, 
2014, and before January 1, 2015, a payor may continue to apply the 
rules of Sec. 1.6049-5(c)(1) and (c)(4) as in effect and contained in 
26 CFR part 1 revised April 1, 2013, rather than this paragraph (c)(1) 
and paragraph (c)(4) of this section. A payor that applies the rules of 
Sec. 1.6049-5(c)(1) and (c)(4) as in effect and contained in 26 CFR 
part 1 revised April 1, 2013, to an account or obligation must also 
apply Sec. 1.1441-6(c)(2) (to the extent applicable) and Sec. 1.6049-
5(e) both as in effect and contained in 26 CFR part 1 revised April, 
2013, with respect to the account or obligation.
    (2) Other applicable rules. The provisions of Sec. 1.1441-
1(e)(4)(i) through (xii) (regarding who may sign a certificate, validity 
period of certificates and documentary evidence, retention of 
certificates, reliance rules, etc.) shall apply (by substituting the 
term ``payor'' for the term ``withholding agent'' and disregarding the 
fact that the provisions under Sec. 1.1441-1(e)(4) only apply to 
amounts subject to withholding under chapter 3 of the Code) to 
withholding certificates and documentary evidence

[[Page 391]]

furnished for purposes of this section. See Sec. 1.1441-1(b)(2)(vii) 
for provisions dealing with reliable association of a payment with 
documentation.
    (3) Standards of knowledge. A payor may not rely on a withholding 
certificate or documentary evidence described in paragraph (c)(1) or (4) 
of this section if it has actual knowledge or reason to know that any 
information or certification stated in the certificate or documentary 
evidence is unreliable. A payor has reason to know that information or 
certifications are unreliable only if the payor would have reason to 
know under the provisions of Sec. 1.1441-7(b)(2) and (3) that the 
information and certifications provided on the certificate or in the 
documentary evidence are unreliable or, in the case of a Form W-9 (or an 
acceptable substitute), it cannot reasonably rely on the documentation 
as set forth in Sec. 31.3406(h)-3(e) of this chapter (see the 
information and certification described in Sec. 31.3406(h)-3(e)(2)(i) 
through (iv) of this chapter that are required in order for a payor 
reasonably to rely on a Form W-9). The provisions of Sec. 1.1441-
7(b)(2) and (3) shall apply for purposes of this paragraph (c)(3) 
irrespective of the type of income to which Sec. 1.1441-7(b)(2) is 
otherwise limited. The exemptions from reporting described in paragraphs 
(b)(10) and (11) of this section shall not apply if the payor has actual 
knowledge that the payee is a U.S. person who is not an exempt 
recipient.
    (4) Special documentation rules for certain payments. This paragraph 
(c)(4) modifies the provisions of paragraph (c)(1) of this section for 
payments of amounts that are not subject to withholding under chapter 3 
of the Code, other than amounts described in paragraph (d)(3)(iii) of 
this section (dealing with U.S. short-term OID and U.S. source deposit 
interest described in section 871(i)(2)(A) or 881(d)(3)). Amounts are 
not subject to withholding under chapter 3 of the Code if they are not 
included in the definition of amounts subject to withholding under Sec. 
1.1441-2(a) (e.g., deposit interest with foreign branches of U.S. banks, 
foreign source income, or broker proceeds). A payor may rely upon 
documentation in lieu of documentary evidence (as described in paragraph 
(c)(1) of this section) or a written statement (as defined in Sec. 
1.1471-1(b)(150)) or another statement to the extent permitted in 
paragraphs (c)(4)(i) through (iii) of this section, until the payor 
knows or has reason to know of a change in circumstance that makes the 
documentation unreliable or incorrect (as defined in Sec. 1.1441-1(e)) 
when the payor does not have customer information for the payee that 
includes any of the U.S. indicia described in Sec. 1.1471-
3(c)(6)(ii)(C)(1). Further, a payor may maintain such documentation or 
documentary evidence as required in paragraph (c)(4)(iv) of this 
section.
    (i) Statement in lieu of documentary evidence with respect to 
accounts. If under the local laws, regulations, or practices of a 
country in which an account is maintained, it is not customary to obtain 
documentary evidence described in paragraph (c)(1) of this section with 
respect to the type of account, the payor may, instead of obtaining a 
beneficial owner withholding certificate described in Sec. 1.1441-
1(e)(2)(i) or documentary evidence described in paragraph (c)(1) of this 
section, establish a payee's foreign status based on the statement 
described in this paragraph (c)(4)(i) (or such substitute statement as 
the Internal Revenue Service may prescribe) made on an account opening 
form. However, see, also Sec. 1.1471-4(c) or an applicable IGA for 
additional documentation requirements that may apply to a participating 
FFI (including a reporting Model 2 FFI) for determining the status of 
its account holders for chapter 4 purposes. The statement referred to in 
this paragraph (c)(4)(i) must appear near the signature line and must 
state, ``By opening this account and signing below, the account owner 
represents and warrants that he/she/it is not a U.S. person for purposes 
of U.S. Federal income tax and that he/she/it is not acting for, or on 
behalf of, a U.S. person. A false statement or misrepresentation of tax 
status by a U.S. person could lead to penalties under U.S. law. If your 
tax status changes and you become a U.S. citizen or a resident, you must 
notify us within 30 days.'' Additionally, a payor may, instead of 
obtaining a beneficial owner withholding certificate described in Sec. 
1.1441-1(e)(2)(i) or Sec. 1.1471-3(c)(3)(ii) or

[[Page 392]]

documentary evidence described in paragraph (c)(1) of this section, 
establish a payee's foreign status based on a written statement 
described in paragraph Sec. 1.1471-1(b)(150) to the extent a payor uses 
such written statement to establish a payee's chapter 4 status and is 
permitted to use the written statement under Sec. 1.1471-3(d) (by 
substituting the term ``payor'' for the term ``withholding agent'') 
without any other documentary evidence.
    (ii) Documentation under IGA. A payor that is a reporting Model 1 
FFI or reporting Model 2 FFI may rely upon documentation or information 
establishing a payee's status that is permitted under an applicable IGA 
for determining whether the account of the payee is other than a U.S. 
account and regardless of whether such documentation or certification is 
described in paragraph (c)(1) of this section or Sec. 1.1441-1(e)(2).
    (iii) Maintenance of documentation and written statement. A payor 
maintains documentation if it either maintains the documentary evidence 
as described in paragraph (c)(1) of this section or retains a record of 
the documentary evidence reviewed if the payor is not required to retain 
copies of the documentation pursuant to the payor's AML due diligence 
(as defined in Sec. 1.1471-1(b)(4)). A payor retains a record of 
documentary evidence reviewed by noting in its records the type of 
documentation reviewed, the date the document was reviewed, the 
document's identification number (if any), and whether such 
documentation contained any U.S. indicia described in Sec. 1.1441-
7(b)(8). Any statement described in paragraph (c)(4)(i) of this section, 
must be retained in accordance with Sec. 1.1471-3(c)(6)(iii).
    (5) U.S. payor, U.S. middleman, non-U.S. payor, and non-U.S. 
middleman. The terms payor and middleman have the meanings ascribed to 
them under Sec. 1.6049-4(a). A non-U.S. payor or non-U.S. middleman 
means a payor or middleman other than a U.S. payor or U.S. middleman. 
The term U.S. payor or U.S. middleman means--
    (i) Definition. (A) A person described in section 7701(a)(30) 
(including a foreign branch or office of such person);
    (B) The government of the United States or the government of any 
State or political subdivision thereof (or any agency or instrumentality 
of any of the foregoing);
    (C) A controlled foreign corporation within the meaning of section 
957(a);
    (D) A foreign partnership, if at any time during its tax year, one 
or more of its partners are U.S. persons (as defined in Sec. 1.1441-
1(c)(2)) who, in the aggregate hold more than 50 percent of the income 
or capital interest in the partnership or if, at any time during its tax 
year, it is engaged in the conduct of a trade or business in the United 
States;
    (E) A foreign person 50 percent or more of the gross income of 
which, from all sources for the three-year period ending with the close 
of its taxable year preceding the collection or payment (or such part of 
such period as the person has been in existence), was effectively 
connected with the conduct of trade or business within the United 
States; or
    (F) A U.S. branch or territory financial institution described in 
Sec. 1.1441-1(b)(2)(iv) that is treated as a U.S. person.
    (ii) Reporting by U.S. payors in U.S. possessions. U.S. payors are 
not required to report on Form 1099 income that is from sources within a 
possession of the United States and that is exempt from taxation under 
section 931, 932, or 933, each of which sections exempts certain income 
from sources within a possession of the United States paid to a bona 
fide resident of that possession. For purposes of this paragraph 
(c)(5)(ii), a U.S. payor may treat the beneficial owner as a bona fide 
resident of the possession of the United States from which the income is 
sourced if, prior to payment of the income, the U.S. payor can reliably 
associate the payment with valid documentation that supports the claim 
of residence in the possession of the United States from which the 
income is sourced. This paragraph (c)(5)(ii) shall not apply if the U.S. 
payor has actual knowledge or reason to know that the documentation is 
unreliable or incorrect or that the income does not satisfy the 
requirements for exemption under section 931, 932, or 933.

[[Page 393]]

For the rules determining whether income is from sources within a 
possession of the United States, see section 937(b) and the regulations 
thereunder.
    (6) Examples. The following examples illustrate the provisions of 
paragraphs (b) and (c) of this section:

    Example 1. FC is a foreign corporation that is not engaged in a 
trade or business in the United States during the current calendar year. 
D, an individual who is a resident and citizen of the United States, 
holds a registered obligation issued by FC in a public offering. 
Interest is paid on the obligation within the United States by DC, a 
U.S. corporation that is the designated paying agent of FC. D does not 
have an account with DC. Although interest paid on the obligation issued 
by FC is foreign source, the interest paid by DC to D is considered to 
be interest under paragraph (b)(6) of this section for purposes of 
information reporting under section 6049 because it is not paid and 
received outside the United States within the meaning of Sec. 1.6049-
4(f)(16).
    Example 2. The facts are the same as in Example 1 except that D is a 
nonresident alien individual who has furnished DC with a Form W-8 in 
accordance with the provisions of Sec. 1.1441-1(e)(1)(ii). By reason of 
paragraph (b)(12) of this section, the payment of interest by DC to D is 
not considered to be a payment of interest for purposes of information 
reporting under section 6049. Therefore, DC is not required to make an 
information return under section 6049.
    Example 3. The facts are the same as in Example 2 except that the 
obligation of FC is held in a custodial account for D by FB, a foreign 
branch of a U.S. financial institution. By reason of paragraph (c)(5) of 
this section, FB is considered to be a U.S. middleman. Therefore, FB is 
required to make an information return unless FB may treat D as a 
beneficial owner that is a foreign person in accordance with the 
provisions of Sec. 1.1441-1(e)(1)(ii).
    Example 4. The facts are the same as in Example 3 except that the FC 
obligation is held for D by NC, in a custodial account at NC's foreign 
branch. NC is a foreign corporation that is a non-U.S. middleman 
described in paragraph (c)(5) of this section. The payment by NC to D is 
paid and received outside of the United States under Sec. 1.6049-
4(f)(16) and therefore is not considered to be a payment of interest for 
purposes of section 6049 pursuant to paragraph (b)(6) of this section. 
Therefore, NC is not required to make an information return under 
section 6049 with respect to the payment.

    (d) Determination of status as U.S. or foreign payee and applicable 
presumptions in the absence of documentation--(1) Identifying the payee. 
The provisions of Sec. Sec. 1.1441-1(b)(2), 1.1441-5(c)(1) and (e)(2) 
and (3) shall apply (by substituting the term ``payor'' for the term 
``withholding agent'') to identify the payee (other than a payee 
included in a chapter 4 withholding rate pool described in paragraph 
(b)(14) of this section) for purposes of this section (and other 
sections of the regulations under this chapter to which this paragraph 
(d)(1) applies), except to the extent provided in this paragraph (d)(1) 
in the case of a payment of an amount that is not subject to withholding 
under chapter 3 of the Code and that is not a withholdable payment (as 
defined in Sec. 1.6049-4(f)(15)). Amounts are not subject to 
withholding under chapter 3 of the Code if they are not included in the 
definition of amounts subject to withholding under Sec. 1.1441-2(a) 
(e.g., deposit interest with foreign branches of U.S. banks, foreign 
source income, or broker proceeds). The exceptions to the application of 
Sec. 1.1441-1(b)(2) to amounts that are not subject to withholding 
under chapter 3 of the Code and that are not withholdable payments are 
as follows:
    (i) The provisions of Sec. 1.1441-1(b)(2)(ii), dealing with 
payments to a U.S. agent or intermediary of a foreign person, shall not 
apply. Thus, a payment to a U.S. agent or intermediary of a foreign 
person is treated as a payment to a U.S. payee.
    (ii) Payments to U.S. branches or territory financial institution 
described in Sec. 1.1441-1(b)(2)(iv) shall be treated as payments to a 
foreign payee, irrespective of the fact that the U.S. branch or 
territory financial institution is otherwise treated as a U.S. person 
for payments of amounts subject to withholding under chapter 3 and 
withholdable payments, and irrespective of the fact that the branch or 
territory financial institution is treated as a U.S. payor for purposes 
of paragraph (c)(5) of this section.
    (2) Presumptions of U.S. or foreign status in the absence of 
documentation--(i) In general. Except as otherwise provided in this 
paragraph (d)(2)(i), for purposes of this section (and other sections of 
regulations under this chapter 61 to which this paragraph (d)(2) 
applies), the provisions of Sec. 1.1441-1(b)(3)(i) through (ix) and 
Sec. 1.1441-5(d)

[[Page 394]]

and (e)(6) shall apply (by substituting the term ``payor'' for the term 
``withholding agent'') to determine the classification (e.g., 
individual, corporation, partnership, trust), status (i.e., a U.S. or a 
foreign person), and other relevant characteristics (e.g., beneficial 
owner or intermediary) of a payee if a payment cannot be reliably 
associated with valid documentation under Sec. 1.1441-1(b)(2)(vii) 
irrespective of whether the payments are subject to withholding under 
chapter 3 of the Code or are withholdable payments. The provisions of 
Sec. 1.1441-1(b)(3)(iii)(D) and (vii)(B) (referencing presumption rules 
for payments with respect to offshore obligations) shall not apply to a 
payment of an amount not subject to withholding under chapter 3, unless 
it is an amount that is a withholdable payment made to a payee that is 
an entity. Thus, in the case of a withholdable payment made to an 
entity, the presumption rules of Sec. 1.1441-1(b)(3)(iii)(D) and 
(vii)(B) shall apply regardless of whether the payment is an amount 
subject to withholding under chapter 3. Additionally, in the case of an 
amount paid outside the United States with respect to an offshore 
obligation described in Sec. 1.1441-1(b)(3)(iii)(D) or (vii)(B) of an 
amount not subject to withholding under chapter 3 and that is treated as 
made to a payee that is an individual, the presumption rules of Sec. 
1.1441-1(b)(3)(iii) shall not apply, and the payee shall be presumed a 
U.S. person only when the payee has any of the indicia of U.S. status 
that are described in Sec. 1.1441-7(b)(5) or (8). In a case in which a 
withholding agent makes a withholdable payment that cannot reliably be 
associated with documentation, see Sec. 1.1471-3(f)(4) and (5) for 
determining the status of the payee for chapter 4 purposes when the 
payment is treated as made to a foreign entity (by substituting the term 
``payor'' for the term ``withholding agent''). The rules of Sec. 
1.1441-1(b)(2)(vii) shall apply for purposes of determining when a 
payment can reliably be associated with documentation, by substituting 
the term ``payor'' for the term ``withholding agent.'' For this purpose, 
the information, documentary evidence, statement, or other documentation 
described in paragraph (c)(4) of this section can be treated as 
documentation with which a payment can be associated.
    (ii) Grace period in the case of indicia of a foreign payee. When 
the conditions of this paragraph (d)(2)(ii) are satisfied, the 30-day 
grace period provisions under section 3406(e) shall not apply and the 
provisions of this paragraph (d)(2)(ii) shall apply instead. A payor 
that, at any time during the grace period described in this paragraph 
(d)(2)(ii), credits an account with payments described in Sec. 1.1441-
6(c)(2) (or credits an account with broker proceeds from securities 
described in Sec. 1.1441-6(c)(2)), that are reportable under section 
6042, 6045, 6049, or 6050N may, instead of treating the account as owned 
by a U.S. person and applying backup withholding under section 3406, if 
applicable, choose to treat the account as owned by a foreign person 
(and apply the grace period described in Sec. 1.1441-1(b)(3)(iv)) if, 
at the beginning of the grace period, the address that the payor has in 
its records for the account holder is in a foreign country, the payor 
has been furnished the information contained in a withholding 
certificate described in Sec. 1.1441-1(e)(2), or the payor holds a 
withholding certificate that is no longer reliable other than because 
the validity period as described in Sec. 1.1441-1(e)(4)(ii)(A) has 
expired. In the case of a newly opened account, the grace period begins 
on the date that the payor first credits the account. In the case of an 
existing account for which the payor holds a Form W-8 or documentary 
evidence of foreign status, the payor may apply the provisions of the 
grace period described in Sec. 1.1441-1(b)(3)(iv), beginning on the 
date that the payor first credits the account after the existing 
documentation held with regard to the account can no longer be relied 
upon (other than because the validity period described in Sec. 1.1441-
1(e)(4)(ii)(A) has expired). A new account shall be treated as an 
existing account for purposes of this paragraph (d)(2)(ii) if the 
account holder already holds an account at the branch location at which 
the new account is opened, or if the account is treated as a 
consolidated obligation as defined in Sec. 1.1471-(1)(b)(23) for 
purpose of chapter 4 to the extent the account

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does not receive any amounts subject to withholding under chapter 3. A 
new account shall also be treated as an existing account for purposes of 
this paragraph (d)(2)(ii) if an account is held at another branch 
location if the institution maintains an account information system 
described in Sec. 1.1441-1(e)(4)(ix). The grace period terminates on 
the earlier of the close of the 90th day from the date on which the 
grace period begins or the date that valid documentation is provided. 
The grace period also terminates when the remaining balance in the 
account (due to withdrawals or otherwise) is equal to or less than 28 
percent (or other statutory tax rate that is applicable to backup 
withholding) of the total amounts credited since the beginning of the 
grace period that would be subject to backup withholding if the 
provisions of this paragraph (d)(2)(ii) did not apply. At the end of the 
grace period, the payor shall treat the amounts credited to the account, 
or paid with respect to an account, during the grace period as paid to a 
U.S. or foreign payee depending upon whether documentation has been 
furnished and the nature of any such documentation furnished upon which 
the payor may rely to treat the account as owned by a U.S. or foreign 
payee. If the documentation has not been received on or before the date 
of expiration of the grace period, the payor may also apply the 
presumptions described in this paragraph (d) to amounts credited to the 
account after the date on which the grace period expires (until such 
time as the payor can reliably associate the documentation with amounts 
credited). See Sec. 31.6413(a)-3(a)(1)(iv) of this chapter for treating 
backup withheld amounts under section 3406 as erroneously withheld when 
the documentation establishing foreign status is furnished prior to the 
end of the calendar year in which backup withholding occurs. If the 
provisions of this paragraph (d)(2)(ii) apply, the provisions of Sec. 
31.3406(d)-3 of this chapter shall not apply. For purposes of this 
paragraph (d)(2)(ii), an account holder's reinvestment of gross proceeds 
of a sale into other instruments constitutes a withdrawal and a non-
qualified electronic transmission of information on a withholding 
certificate is a transmission that is not in accordance with the 
provisions of Sec. 1.1441-1(e)(4)(iv). See Sec. 1.1092(d)-1 for a 
definition of the term actively traded for purposes of this paragraph 
(d)(2)(ii).
    (iii) Joint owners. Amounts paid to accounts held jointly for which 
a certificate or documentation is required as a condition for being 
exempt from reporting under paragraph (b) of this section are presumed 
made to U.S. payees who are not exempt recipients if, prior to payment, 
the payor cannot reliably associate the payment either with a Form W-9 
furnished by one of the joint owners in the manner required in 
Sec. Sec. 31.3406(d)-1 through 31.3406(d)-5 of this chapter, or with 
documentation described in paragraph (b)(12) of this section furnished 
by each joint owner upon which it can rely to treat each joint owner as 
a foreign payee or foreign beneficial owner. In the case of an amount 
that is a withholdable payment made to a joint account, however, see 
Sec. 1.1471-3(f)(7) for when the payment is treated as made to a 
foreign payee that is a nonparticipating FFI (as defined in Sec. 
1.1471-1(b)(82)). For purposes of applying this paragraph (d)(2)(iii), 
the grace period described in paragraph (d)(2)(ii) of this section shall 
apply only if each payee qualifies for such grace period.
    (3) Payments to foreign intermediaries or flow-through entities--(i) 
Payments of amounts subject to withholding under chapter 3 of the Code 
or withholdable payments. In the case of payments of amounts that the 
payor may treat as made to a foreign intermediary or flow-through entity 
in accordance with Sec. Sec. 1.1441-1(b)(3)(ii)(C) and (b)(3)(v)(A) and 
1.1441-5(c) or (e) and that are subject to withholding under Sec. 
1.1441-2(a), the provisions of Sec. Sec. 1.1441-1(b)(2)(v) and 1.1441-
5(c)(1), (e)(2), and (3) shall apply (by substituting the term ``payor'' 
for the term ``withholding agent'') to identify the payee. If a payment 
of an amount subject to withholding cannot be reliably associated with 
valid documentation from a payee in accordance with Sec. 1.1441-
1(b)(2)(vii), the presumption rules of Sec. Sec. 1.1441-1(b)(3)(v) and 
1.1441-5(d) and (e)(6) shall apply to determine the payee's status for 
purposes of this section (and other sections of

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regulations under this chapter to which this paragraph (d)(3) applies). 
In the case of an amount that is a withholdable payment, see Sec. 
1.1471-3(c)(3) for rules to identify the payee and see Sec. 1.1471-
3(f)(5) for the presumption rule that shall apply to amounts treated as 
made to a foreign intermediary or flow-through entity (by substituting 
the term ``payor'' for the term ``withholding agent''). For example, 
where a withholdable payment is made to an intermediary under Sec. 
1.1471-3 that is treated as a nonparticipating FFI under Sec. 1.1471-
3(f)(5), the nonparticipating FFI shall be treated as the payee under 
Sec. 1.1471-3(c)(3) and for purposes of this paragraph (d)(3)(i), 
therefore, no information return shall be required under this section.
    (ii) Payments of amounts not subject to withholding under chapter 3 
of the Code and that are not withholdable payments. Except as provided 
in paragraph (d)(3)(iii) of this section, amounts that are not subject 
to withholding under chapter 3 of the Code and that are not withholdable 
payments that the payor may treat as paid to a foreign intermediary or 
flow-through entity shall be treated as made to an exempt recipient 
described in Sec. 1.6049-4(c) except to the extent that the payor has 
actual knowledge that any person for whom the intermediary or flow-
through entity is collecting the payment is a U.S. person who is not an 
exempt recipient. In the case of such actual knowledge, the payor shall 
treat the payment that it knows is allocable to such U.S. person as a 
payment to a U.S. payee who is not an exempt recipient and has actual 
knowledge of the amount allocable to such a person.
    (iii) Special rule for payments of certain short-term original issue 
discount--(A) General rule. A payment of U.S. source bank deposit 
interest not subject to chapter 4 withholding or U.S. source interest or 
original issue discount on the redemption of an obligation with a 
maturity from the date of issue of 183 days or less (short-term OID) 
described in section 871(g)(1)(B) or 881(e) that the payor may treat as 
paid to a foreign intermediary or flow-through entity in accordance with 
the provisions of Sec. 1.1441-1(b)(3)(ii)(C), (b)(3)(v)(A), Sec. 
1.1441-5(d) or (e) (by substituting the term ``payor'' for the term 
``withholding agent''), shall be treated as paid to an undocumented U.S. 
payee that is not an exempt recipient under paragraph Sec. 1.6049-4(c) 
unless the payor has documentation from the payees of the payment and 
the payment is allocated to foreign payees, as a group, and to each U.S. 
non-exempt recipient payee. See Sec. 1.1441-1(e)(3)(iv)(C)(2). However, 
a payor may rely on a withholding statement provided by an intermediary 
described in Sec. 1.1441-1(e)(3)(iv) (or similar withholding statement 
for a flow-through entity) that identifies a chapter 4 withholding rate 
pool of U.S. payees (as described in Sec. 1.6049-4(c)(4)(iii)) only if 
it identifies the foreign intermediary or flow-through entity as a 
participating FFI (including a reporting Model 2 FFI) or registered 
deemed-compliant FFI (including a reporting Model 1 FFI) under Sec. 
1.1471-3(d)(4) (by substituting the term ``payor'' for the term 
``withholding agent''). See also Sec. 1.6049-4(c)(4)(iii) for when an 
FFI may provide a chapter 4 withholding rate pool of U.S. payees on a 
withholding statement.
    (B) Payee may be an intermediary. If a payment is made to a person 
described in Sec. 1.6049-4(c)(1)(ii) that has not provided an 
intermediary withholding certificate under Sec. 1.1441-1(e)(3)(i) but 
the payor knows or has reason to know that the payee may be an 
intermediary, the payor must apply the rules of paragraph (d)(3)(iii)(A) 
of this section. A payor has reason to know that such a person may be an 
intermediary if that person has provided documentation as an 
intermediary for another account with the same payor.
    (iv) Short-term deposits and repurchase transactions. The provisions 
of paragraph (d)(3)(ii) of this section and not paragraph (d)(3)(iii) of 
this section shall apply to deposits with banks and other financial 
institutions that remain on deposit for a period of two weeks or less, 
to amounts of original issue discount arising from a sale and repurchase 
transaction that is completed within a period of two weeks or less, or 
to amounts described in paragraphs (b)(7), (10) and (11) of this section 
(relating to certain obligations issued in bearer form).

[[Page 397]]

    (4) Examples. The rules of paragraphs (d)(1) through (3) of this 
section are illustrated by the examples in this paragraph (d)(4). Unless 
otherwise specified in an example, the following facts apply: all FFIs, 
such as a nonqualified intermediary that is an FFI, are treated as 
participating FFIs; all payees have been identified with chapter 4 
statuses that do not require withholding under chapter 4; and none of 
the payments are withholdable payments.

    Example 1. (i) Facts. USP is a U.S. payor as defined in paragraph 
(c)(5) of this section. USP pays interest from sources within the United 
States that is a withholdable payment to an account maintained in the 
United States by X. The interest is not deposit interest described in 
sections 871(i)(2)(A) or 881(d). USP does not have a Form W-9, or 
withholding certificate from X as defined in Sec. 1.1441-1(c)(16). 
Moreover, USP cannot treat X as an exempt recipient, as defined in Sec. 
1.6049-4(c)(1)(ii), without documentation and there is no indication 
that X is an individual, trust, or estate.
    (ii) Analysis. The U.S. source interest is an amount subject to 
withholding as defined in Sec. 1.1441-2(a). Under paragraph (d)(1) of 
this section, USP must apply the provisions of Sec. Sec. 1.1441-1(b)(2) 
and 1.1441-5(c) and (e) to determine the payee of the interest. Under 
Sec. 1.1441-1(b)(2)(i), X, the person to whom the payment is made, is 
considered to be the payee, unless X is determined to be a flow-through 
entity, in which case the rules of Sec. 1.1441-5 apply to determine the 
payee. Under paragraph (d)(2)(i) of this section, the rules of Sec. 
1.1441-1(b)(3)(ii) apply to determine the classification of a payee as 
an individual, trust, estate, corporation, or partnership. Under Sec. 
1.1441-1(b)(3)(ii)(B), X is presumed to be a partnership, since X does 
not appear to be an individual, trust or estate, and X cannot be 
presumed to be an exempt recipient in the absence of documentation. 
Paragraph (d)(2)(i) of this section requires USP to apply the provisions 
of Sec. Sec. 1.1441-1(b)(3)(iii) and 1.1441-5(d) to determine whether X 
is presumed to be a U.S. or foreign partnership. Under Sec. Sec. 
1.1441-1(b)(3)(iii) and 1.1441-5(d)(2), X is presumed to be a U.S. 
partnership in absence of any indicia of foreign partnership status. The 
presumption of U.S. status applies even though the payment is a 
withholdable payment (see paragraph (d)(2) of this section and Sec. 
1.1471-3(f)(2) cross referencing the presumption rules of Sec. 1.1441-
1(b)(3)). The U.S. source interest paid to X is reportable under section 
6049 on Form 1099 and the interest is subject to backup withholding 
under section 3406 because X has not provided its TIN on a valid Form W-
9. No withholding or reporting applies to the payment under chapter 3 or 
4 of the Code.
    Example 2. (i) Facts. The facts are the same as in Example 1, except 
that the interest paid by USP is from sources outside the United States.
    (ii) Analysis. Interest from sources outside the United States is 
not an amount subject to withholding, as defined in Sec. 1.1441-2(a) or 
a withholdable payment. Under paragraph (d)(1) of this section, USP must 
apply the provisions of Sec. Sec. 1.1441-1(b)(2) and 1.1441-5(c) and 
(e) to determine the payee. Under Sec. 1.1441-1(b)(2)(i), X, the person 
to whom the payment is made, is considered to be the payee, unless X is 
determined to be a flow-through entity, in which case the rules of Sec. 
1.1441-5(c) or (e) apply to determine the payee. Under paragraph 
(d)(2)(i) of this section, the rules of Sec. 1.1441-1(b)(3)(ii) apply 
to determine the classification of a payee as an individual, trust, 
estate, corporation, or partnership. These rules apply irrespective of 
whether the payment is an amount subject to withholding. Under Sec. 
1.1441-1(b)(3)(ii)(B), X is presumed to be a partnership, since X does 
not appear to be an individual, trust or estate, and X cannot be 
presumed to be an exempt recipient in the absence of documentation. 
Paragraph (d)(2)(i) of this section requires USP to apply the provisions 
of Sec. Sec. 1.1441-1(b)(3)(iii) and 1.1441-5(d) to determine whether, 
X is presumed to be a U.S. or foreign partnership. Under Sec. Sec. 
1.1441-1(b)(3)(iii) and 1.1441-5(d)(2), X is presumed to be a U.S. 
partnership in absence of any indicia of foreign partnership status. The 
foreign source interest is a payment subject to reporting on Form 1099 
under Sec. 1.6049-5(a). Further, because X is a non-exempt recipient 
that has failed to provide its TIN on a valid Form W-9, the foreign 
source interest is subject to backup withholding under section 3406.
    Example 3. (i) Facts. USP is a U.S. payor as defined in paragraph 
(c)(5) of this section. USP makes a payment of U.S. source interest 
outside the United States to an offshore account of X. See paragraphs 
(c)(1) for a definition of offshore account and (e) for a payment 
outside the United States. USP does not have a withholding certificate 
from X as defined in Sec. 1.1441-1(c)(16) nor does it have documentary 
evidence as described in Sec. 1.1441-1(e)(1)(ii)(A)(2) and Sec. 
1.6049-5(c)(1).
    (ii) Analysis. The interest is an amount subject to withholding as 
defined in Sec. 1.1441-2(a). Under paragraph (d)(1) of this section, 
USP must apply the provisions of Sec. 1.1441-1(b)(2) and Sec. 1.1441-
5(c) and (e) to determine the payee. Under Sec. 1.1441-1(b)(2)(i), X, 
the person to whom the payment is made, is considered to be the payee, 
unless X is determined to be a flow-through entity, in which case the 
rules of Sec. 1.1441-5(c) or (e) apply to determine the payee. Under 
paragraph (d)(2)(i) of this section, the rules of Sec. 1.1441-
1(b)(3)(ii) apply to determine the classification of a

[[Page 398]]

payee as an individual, trust, estate, corporation, or partnership. 
Under Sec. 1.1441-1(b)(3)(ii)(B), X is presumed to be a partnership, 
since X does not appear to be an individual, trust or estate, and X 
cannot be presumed to be an exempt recipient in the absence of 
documentation. Paragraph (d)(2)(i) of this section requires USP to apply 
the provisions of Sec. Sec. 1.1441-1(b)(3)(iii) and 1.1441-5(d) to 
determine whether, X is presumed to be a U.S. or foreign partnership. 
Under Sec. Sec. 1.1441-1(b)(3)(iii)(D) and 1.1441-5(d)(2), X is 
presumed to be a foreign partnership. Therefore, under paragraph (d)(1) 
of this section and Sec. 1.1441-5(c)(1)(i)(E), the payees of the 
interest are presumed to be the partners of X. Under Sec. 1.1441-
5(d)(3), the partners are presumed to be undocumented foreign persons. 
Therefore, USP must withhold 30% of the interest payment under Sec. 
1.1441-1(b)(1) and report the payment on Form 1042-S in accordance with 
Sec. 1.1461-1(c).
    Example 4. (i) Facts. The facts are the same as in Example 3, except 
that the interest is paid by F, a non-U.S. payor.
    (ii) Analysis. The analysis and result are the same as in Example 3. 
F is a withholding agent under Sec. 1.1441-7 and its status as a non-
U.S. payor under paragraph (c)(5) of this section is irrelevant.
    Example 5. (i) Facts. USP is a U.S. payor as defined in paragraph 
(c)(5) of this section that is not an FFI. USP makes a payment outside 
the United States of interest from sources outside the United States 
with respect to an offshore obligation held by X. USP does not have a 
withholding certificate from X as defined in Sec. 1.1441-1(c)(16) nor 
does it have documentary evidence as described in Sec. Sec. 1.1471-
3(c)(5)(i) and 1.6049-5(c)(1). USP does not have actual knowledge of an 
employer identification number for X. X does not appear to be an 
individual, trust, or estate and cannot be treated as an exempt 
recipient, as defined in Sec. 1.6049-4(c)(1)(ii) in the absence of 
documentation.
    (ii) Analysis. The interest is not an amount subject to withholding 
as defined in Sec. 1.1441-2(a) and is not a withholdable payment. Under 
paragraph (d)(1) of this section, USP must apply the rules of Sec. Sec. 
1.1441-1(b)(2) and 1.1441-5(c) and (e) to determine the payee of the 
interest. Under Sec. 1.1441-1(b)(2)(i), X, the person to whom the 
payment is made, is considered to be the payee, unless X is determined 
to be a flow-through entity, in which case the rules of Sec. 1.1441-
5(c) or (e) apply to determine the payee. Under paragraph (d)(2)(i) of 
this section, Sec. 1.1441-1(b)(3)(ii) applies to determine X's 
classification as an individual, trust, estate, corporation or 
partnership. Under Sec. 1.1441-1(b)(3)(ii)(B), X is treated as a 
partnership, since it does not appear to be an individual, trust, or 
estate and cannot be treated as an exempt recipient without 
documentation. Paragraph (d)(2)(i) of this section requires USP to apply 
the provisions of Sec. Sec. 1.1441-1(b)(3)(iii) and 1.1441-5(d) to 
determine whether, X is presumed to be a U.S. or foreign partnership. 
Paragraph (d)(2)(i) of this section also states that the presumptions of 
foreign status for payments made with respect to offshore obligations 
contained in Sec. Sec. 1.1441-1(b)(3)(iii)(D) and 1.1441-5(d)(2) do not 
apply to amounts that are not subject to withholding and that are not 
withholdable payments described in paragraph (d)(2)(i). Therefore, under 
Sec. Sec. 1.1441-1(b)(3)(iii) and 1.1441-5(d)(2), X is presumed to be a 
U.S. partnership because it does not have actual knowledge that X's 
employer identification number begins with the digits ``98.'' Therefore, 
USP must treat X as a U.S. person that is not an exempt recipient and 
report the payment on Form 1099 under section 6049. Under Sec. 
31.3406(g)-1(e) of this chapter, however, USP is not required to backup 
withhold on the payment unless it has actual knowledge that X is a U.S. 
person that is not an exempt recipient.
    Example 6. (i) Facts. The facts are the same as in Example 5, except 
that the interest is paid by F, a non-U.S. payor, as defined under 
paragraph (c)(5) of this section.
    (ii) Analysis. The analysis is the same as under Example 5. However, 
F is a non-U.S. payor paying foreign source interest outside the United 
States, and there is no indication that the amount is received in the 
United States under Sec. 1.6049-4(f)(16). Thus, paragraph (b)(6) of 
this section exempts the payment from reporting under section 6049.
    Example 7. (i) Facts. USP, a U.S. payor as defined in paragraph 
(c)(5) of this section that is not an FFI, makes a payment of U.S. 
source interest that is a withholdable payment to NQI, a nonqualified 
intermediary as defined in Sec. 1.1441-1(c)(14), that is a certified 
deemed-compliant FFI under Sec. 1.1471-5(f)(2). The interest is paid 
inside the United States to an account of a bank or other financial 
institution maintained in the United States. NQI has provided USP with a 
nonqualified intermediary withholding certificate, as described in Sec. 
1.1441-1(e)(3)(iii) that includes its chapter 4 status, but has not 
attached any documentation from the persons on whose behalf it acts or a 
withholding statement as described in Sec. 1.1441-1(e)(3)(iv).
    (ii) Analysis. U.S. source interest is an amount subject to 
withholding under Sec. 1.1441-2(a). USP may treat the payment as made 
to a foreign intermediary under Sec. 1.1441-1(b)(3)(v)(A) because USP 
has received a nonqualified intermediary withholding certificate from 
NQI and may except NQI from withholding under chapter 4 of the Code 
given NQI's status for chapter 4 purposes as a deemed-compliant FFI. 
Under paragraph (d)(3)(i) of this section, USP must then apply Sec. 
1.1471-3(c)(3) to treat the persons on whose behalf NQI is acting as the 
payees. Paragraph (d)(3)(i) of this section also requires USP to apply 
the presumption rules of

[[Page 399]]

Sec. 1.1441-1(b)(3)(v) if it cannot reliably associate the payment with 
valid documentation from a payee. See Sec. 1.1441-1(b)(2)(vii). As the 
payment is a withholdable payment, the interest is treated as paid to a 
nonparticipating FFI under Sec. 1.1471-3(f)(4). Therefore, the payment 
is not subject to reporting on Form 1099 under paragraph (b)(12) of this 
section. See Sec. 1.1471-2(a) for the withholding requirement with 
respect to the payment and Sec. 1.1474-1(d)(2) for the requirement to 
report the payment on Form 1042-S.
    Example 8. (i) Facts. The facts are the same as in Example 7, except 
that the interest is paid outside the United States, as defined in 
paragraph (e) of this section to an offshore account, as defined in 
paragraph (c)(1) of this section and is not a withholdable payment.
    (ii) Analysis. Under Sec. 1.1441-1(b)(3)(v)(B), the interest is 
treated as paid to an unknown foreign payee because it cannot be 
reliably associated with documentation under Sec. 1.1441-1(b)(2)(vii). 
Therefore, the payment is not subject to reporting on Form 1099 under 
paragraph (b)(12) of this section because the payment is presumed made 
to a foreign person. The payment is subject to withholding, however, 
under Sec. 1.1441-1(b) at a rate of 30% and is subject to reporting on 
Form 1042-S under Sec. 1.1461-1(c).
    Example 9. (i) Facts. The facts are the same as in Example 8, except 
that the interest is paid by F, a non-U.S. payor, as defined in 
paragraph (c)(5) of this section.
    (ii) Analysis. The analysis and results are the same as in Example 
8.
    Example 10. (i) Facts. USP, a U.S. payor as defined in paragraph 
(c)(5) of this section, makes a payment of foreign source interest 
(other than deposit interest) to NQI, a foreign corporation and a 
nonqualified intermediary as defined in Sec. 1.1441-1(c)(14). NQI has 
provided USP with a nonqualified intermediary withholding certificate, 
as described in Sec. 1.1441-1(e)(3)(iii), but has not attached any 
documentation from the persons on whose behalf it acts or a withholding 
statement as described in Sec. 1.1441-1(e)(3)(iv).
    (ii) Analysis. Foreign source interest is not an amount subject to 
withholding under chapter 3 of the Code and is not a withholdable 
payment. See Sec. Sec. 1.1441-2(a) and 1.1473-1(a). Under paragraph 
(d)(3)(ii) of this section, amounts that are not subject to withholding 
under chapter 3 of the Code and that are not withholdable payments 
described in paragraph (d)(2)(i) of this section that a payor may treat 
as paid to a foreign intermediary are treated as made to an exempt 
recipient described in Sec. 1.6049-4(c) absent actual knowledge that 
the payee is a U.S. person who is not an exempt recipient. Therefore, 
the foreign source interest is not subject to reporting on Form 1099.
    Example 11. (i) Facts. USP is a U.S. payor as defined in paragraph 
(c)(5) of this section that is a bank. USP pays U.S. source original 
issue discount from the redemption of an obligation described in section 
871(g)(1)(B) to NQI, a foreign corporation that is a nonqualified 
intermediary as defined in Sec. 1.1441-1(c)(14). The redemption 
proceeds are not paid outside of the United States as they are paid with 
respect to an account NQI has with a branch of a bank in the United 
States. See Sec. 1.6049-5(e)(2). NQI provides a nonqualified 
intermediary withholding certificate as described in Sec. 1.1441-
1(e)(3)(iii) that includes a certification of its status as a registered 
deemed-compliant FFI but does not attach any payee documentation or a 
withholding statement described in Sec. 1.1441-1(e)(3)(iv).
    (ii) Analysis. Under paragraph (d)(3)(ii)(A) of this section, USP 
must treat the payment as made to an undocumented U.S. payee that is not 
an exempt recipient and report the payment on Form 1099. Further, 
because the payment is made inside the United States, the exception to 
backup withholding with respect to offshore obligations contained in 
Sec. 31.3406(g)-1(e) of this chapter does not apply, and the payment is 
subject to backup withholding.
    Example 12. (i) Facts. P, a payor, makes a payment to NQI of U.S. 
source interest on debt obligations issued prior to July 18, 1984, that 
mature 30 years from their issuance dates. Therefore, the interest does 
not qualify as portfolio interest under section 871(h) or 881(d). 
Additionally, the interest is not a withholdable payment under Sec. 
1.1471-2(b) as the interest is a payment with respect to a grandfathered 
obligation for purposes of chapter 4 of the Code. NQI, a U.S. payor, is 
a nonqualified foreign intermediary, as defined in Sec. 1.1441-
1(c)(14), and has furnished P a valid nonqualified intermediary 
withholding certificate described in Sec. 1.1441-1(e)(3)(iii) to which 
it has attached a valid Form W-9 for A, and two valid beneficial owner 
Forms W-8, one for B and one for C. A is not an exempt recipient under 
Sec. 1.6049-4(c). NQI furnishes a withholding statement, described in 
Sec. 1.1441-1(e)(3)(iv), in which it allocates 20% of the U.S. source 
interest to A, but does not allocate the remaining 80% of the interest 
between B and C. B's withholding certificate indicates that B is a 
foreign pension fund, exempt from U.S. tax under the U.S. income tax 
treaty with Country T. C's withholding certificate indicates that C is a 
foreign corporation not entitled to a reduced rate of withholding.
    (ii) Analysis. As the interest is not a withholdable payment under 
paragraph (d)(3)(i) of this section, P applies the rules of Sec. 
1.1441-1(b)(2)(v) to determine the payees of the interest even though 
NQI has not certified its status for purposes of chapter 4 of the Code. 
Under that section, the payees are the persons on whose behalf NQI 
acts--A, B and C. Because P can reliably associate 20% of the payment 
with valid documentation

[[Page 400]]

provided by A, P must treat 20% of the interest as paid to A, a U.S. 
person not exempt from reporting, and report the payment on Form 1099. P 
cannot reliably associate the remaining 80% of the payment with valid 
documentation under Sec. 1.1441-1(b)(2)(vii) and, therefore, under 
paragraph (d)(3)(i) of this section must apply the presumption rules of 
Sec. 1.1441-1(b)(3)(v). Under that section, the interest is presumed 
paid to an unknown foreign payee. Under paragraph (b)(12) of this 
section, P is not required to report the interest presumed paid to a 
foreign person on Form 1099. Under Sec. 1.1441-1(b), 80% of the 
interest is subject to 30% withholding, however, and the interest is 
reportable on Form 1042-S under Sec. 1.1461-1(c).
    Example 13. (i) Facts. The facts are the same as in Example 12, 
except that P can reliably associate 30% of the payment of interest to 
B, but cannot reliably associate the remaining 70 percent with A or C.
    (ii) Analysis. Under paragraph (d)(3)(i) of this section, P applies 
the rules of Sec. 1.1441-1(b)(2)(v) to determine the payees of the 
interest. Under that section, the payees are the persons on whose behalf 
NQI acts--A, B and C. Because P can reliably associate 30% of the 
payment with B, a foreign pensions fund exempt from withholding under an 
income tax treaty, P may treat that payment as paid to B and not subject 
to reporting on Form 1099 under paragraph (b)(12) of this section. P 
cannot reliably associate the remaining 70% of the payment with valid 
documentation under Sec. 1.1441-1(b)(2)(vii) and, therefore, under 
paragraph (d)(3)(i) of this section must apply the presumption rules of 
Sec. 1.1441-1(b)(3)(v). Under that section, the interest is presumed 
paid to an unknown foreign payee. Under paragraph (b)(12) of this 
section, P is not required to report the interest presumed paid to a 
foreign person on Form 1099. Under Sec. 1.1441-1(b), 80% of the 
interest is subject to 30% withholding, however, and the interest is 
reportable on Form 1042-S under Sec. 1.1461-1(c).
    Example 14. (i) Facts. The facts are the same as in Example 12, 
except that P also makes a payment of foreign source interest to NQI.
    (ii) Analysis. Under paragraph (d)(3)(ii), P may treat the foreign 
source interest as paid to an exempt recipient as defined in Sec. 
1.6049-4(c) and not subject to reporting on Form 1099 even though some 
or all of the foreign source interest may in fact be owned by A, the 
U.S. person that is not exempt from reporting.
    Example 15. (i) Facts. The facts are the same as in Example 12, 
except that NQI is a non-U.S. payor.
    (ii) Analysis. The analysis is the same as under Example 12 with 
respect to B and C. However, because NQI is a non-U.S. payor, it may 
under Sec. 1.6049-4(c)(4)(iii) allocate the portion of the payment to A 
to a chapter 4 withholding rate pool of U.S. payees on a withholding 
statement provided to P in lieu of furnishing the Form W-9 to P when NQI 
reports the payments in accordance with Sec. 1.6049-4(c)(4)(i). In such 
a case, provided that P obtains a certification form confirming NQI's 
status as a participating FFI, P is excepted from reporting the payment 
under paragraph (b)(14) of this section because P can reliably associate 
the payment with the documentation provided by NQI.

    (e) Determination of whether amounts are considered paid outside the 
United States--(1) In general. For purposes of section 6049 and this 
section, an amount is considered to be paid by a payor or middleman 
outside the United States if the payor or middleman completes the acts 
necessary to effect payment outside the United States. See paragraphs 
(e)(2) through (5) of this section for further clarification of where 
amounts are considered paid. A payment shall not be considered to be 
made within the United States for purposes of section 6049 merely by 
reason of the fact that it is made on a draft drawn on a United States 
bank account or by a wire or other electronic transfer from a United 
States account.
    (2) Amounts paid with respect to deposits or accounts with banks and 
other financial institutions. Notwithstanding paragraph (e)(1) of this 
section, an amount paid by a bank or other financial institution with 
respect to a deposit or with respect to an account with the institution 
is considered paid at the branch or office at which the amount is 
credited unless the amount is collected by the financial institution as 
the agent of the payee. However, an amount will not be considered to be 
paid at the branch or office where the amount is considered to be 
credited unless the branch or office is a permanent place of business 
that is regularly maintained, occupied, and used to carry on a banking 
or similar financial business; the business is conducted by at least one 
employee of the branch or office who is regularly in attendance at such 
place of business during normal business hours; and the branch or office 
receives deposits and engages in one or more of the other activities 
described in Sec. 1.864-4(c)(5)(i).
    (3) Coupon bonds and discount obligations in bearer form. 
Notwithstanding paragraph (e)(1) of this section, an

[[Page 401]]

amount paid with respect to a bond with coupons attached (including a 
certificate of deposit with detachable interest coupons) or a discount 
obligation that is not in registered form (within the meaning of section 
163(f) and the regulations thereunder) is considered to be paid where 
the coupon or the discount obligation is presented to the payor or its 
paying agent for payment.
    (4) Foreign-targeted registered obligations. Notwithstanding 
paragraph (e)(1) of this section, where the payor is the issuer or the 
issuer's agent, an amount is considered paid outside the United States 
with respect to a foreign-targeted registered obligation issued before 
January 1, 2016, as described in Sec. 1.871-14(e)(2), if either the 
amount is paid by transfer to an account maintained by the registered 
owner outside the United States, or by mail to an address of the 
registered owner outside the United States, or by credit to an 
international account. For purposes of this paragraph (e)(4), the term 
international account means the book-entry account of a financial 
institution (within the meaning of section 871(h)(4)(B)) or of an 
international financial organization with the Federal Reserve Bank of 
New York for which the Federal Reserve Bank of New York maintains 
records that specifically identify an international financial 
organization or a financial institution (within the meaning of section 
871(h)(4)(B)) as either a non-United States person or a foreign branch 
of a United States person as registered owner. An international 
financial organization is a central bank or monetary authority of a 
foreign government or a public international organization of which the 
United States is a member to the extent that such central bank, 
authority, or organization holds obligations solely for its own account 
and is exempt from tax under section 892 or 895.
    (5) Examples. The application of the provisions of this paragraph 
(e) is illustrated by the following examples:

    Example 1. FC is a foreign corporation that is not a U.S. payor or 
U.S. middleman, as defined in paragraph (c)(5) of this section. A holds 
FC coupon bonds that are not in registered form under section 163(f) and 
the regulations thereunder. FB, a foreign branch of DC, is the 
designated paying agent with respect to the bonds issued by FC. A does 
not have an account with FB. A presents a coupon from a FC bond for 
payment to FB at its office outside the United States. FB pays A with a 
check drawn against a bank account maintained in the United States. For 
purposes of section 6049, the place of payment of interest on the FC 
bond by FB to A is considered to be outside the United States under 
paragraph (e)(3) of this section.
    Example 2. Individual C deposits funds in an account with FB, a 
foreign country X branch of DB, a U.S. corporation engaged in the 
commercial banking business. FB maintains an office and employees in 
foreign country X, accepts deposits, and conducts one or more of the 
other activities listed in Sec. 1.864-4(c)(5)(i). The terms of C's 
deposit provide that it will be payable with accrued interest. Under 
paragraph (e)(2) of this section, FB is considered to pay the interest 
on C's deposit outside the United States.
    Example 3. DC, a U.S. corporation engaged in the commercial banking 
business, maintains FB, a branch in foreign country X. FB has an office 
and employees in foreign country X, accepts deposits, and engages in one 
or more of the other activities listed in Sec. 1.864-4(c)(5)(i). D, a 
United States citizen, purchases a certificate of deposit issued in 1980 
by FB. The certificate of deposit has a maturity of 20 years and has 
detachable interest coupons payable at six-month intervals. D presents 
some of the coupons at the U.S. office of DC and receives payment in 
cash. Because the coupon is presented to DC for payment within the 
United States, DC is considered to have made the payment within the 
United States under paragraph (e)(3) of this section.
    Example 4. FB is recognized by both foreign country X and by the 
Federal Reserve Bank as a foreign country X branch of DC, a U.S. 
corporation engaged in the commercial banking business. A local foreign 
country X bank serves as FB's resident agent in Country X. FB maintains 
no physical office or employees in foreign country X. All the records, 
accounts, and transactions of FB are handled at the United States office 
of DC. E deposits funds in an amount maintained with FB. Interest earned 
on the deposit is periodically credited to E's account with FB by 
employees of DC. For purposes of section 6049, the place of payment of 
the interest on E's deposit with FB is considered to be within the 
United States by reason of paragraphs (e)(1) and (e)(2) of this section.
    Example 5. DC is a U.S. corporation. A holds bonds that were issued 
by DC in registered form under section 163(f), as in effect prior to the 
amendment by section 502 of the HIRE Act of 2010, and the regulations 
thereunder and that are foreign-targeted registered obligations as 
defined in Sec. 1.871-

[[Page 402]]

14(e)(2). DB, a commercial banking business, is the registrar of bonds 
issued by DC. Interest on the DC bonds is paid to A and other 
bondholders by check prepared by DB at its principal office inside the 
United States and mailed from there to A's address outside the United 
States. The check is drawn on a United States account maintained by DC 
with DB within the United States. The place of payment to A by DB of the 
interest on the DC bonds is considered to be outside the United States 
under paragraph (e)(4) of this section.

    (f) Original issue discount treated as payment of interest. In 
determining whether an obligation is one which was issued at a discount 
and the amount of discount which is includible in income of the holder, 
a payor (other than the issuer of the obligation) may rely on the 
Internal Revenue Service's publication of publicly traded original issue 
discount obligations. In the case of an obligation as to which there is 
during any calendar year an amount of original issue discount includible 
in the gross income of any holder (as determined under sections 1232 and 
1232A and the regulations thereunder), the issuer of the obligation or a 
middleman (as defined in Sec. 1.6049-4(f)(4)) shall be treated as 
having paid to such holder during such calendar year an amount of 
interest equal to the amount of original issue discount so includible 
without regard to any reduction by reason of a purchase allowance under 
sections 1232(a)(2)(C)(ii), 1232A (a)(6) or (b)(4) or a purchase at a 
premium under 1232A(c)(4)(A) or paragraph (d)(2) of Sec. 1.1232-3. 
Thus, the determination of the amount of original issue discount 
includible in the gross income of any holder with respect to any 
obligation shall be determined as if any holder of the obligation were 
the original holder. However, see Sec. 1.6049-9 for the reporting of 
premium for a debt instrument acquired on or after January 1, 2014. In 
the case of (1) an obligation to which section 1232A does not apply (for 
example, a short-term government obligation as defined in section 
1232(a)(3)) and (2) an obligation issued on or before December 31, 1982, 
in bearer form, the amount of original issue discount includible in 
gross income shall be treated as if paid in the calendar year in which 
the date of maturity occurs or in which the date of redemption occurs if 
redemption occurs before maturity. The amount subject to reporting on an 
obligation issued in bearer form with a maturity at the date of issue of 
more than 1 year (a long term obligation) is the amount of original 
issue discount includible in the gross income of the holder during the 
calendar year of maturity or redemption if redemption occurs before 
maturity. The amount of original issue discount subject to reporting on 
a long term obligation shall not be reduced to reflect any purchase 
allowance. Discount on short term government obligations as defined in 
section 1232(a)(3), such as Treasury bills, and discount on other 
obligations with a maturity at the date of issue of not more than 1 year 
(a short term obligation), including commercial paper, when paid at 
maturity or redemption if redemption occurs before maturity, shall 
constitute a payment of interest for purposes of section 6049. In 
general, the amount subject to reporting on short term obligations is 
the difference between the stated redemption price at maturity and the 
original issue price. The procedure set forth in section 3455(b)(2)(B) 
and Sec. 31.3455(b)-1(b)(3) for establishing the price at which a 
holder purchased an obligation subsequent to the date of original issue 
shall apply for purposes of section 6049. Original issue discount on an 
obligation (including an obligation with a maturity of not more than six 
months from the date of original issue) held by a nonresident alien 
individual or foreign corporation is interest described in paragraph 
(b)(1)(vi)(A) or (B) of this section and, therefore is not interest 
subject to reporting under section 6049 unless it is described in Sec. 
1.6049-8(a) (relating to deposit interest paid on or after January 1, 
2013, to certain nonresident alien individuals).
    (g) Effective/applicability date. This section applies to payments 
made on or after January 6, 2017. (For payments made after June 30, 
2014, and before January 6, 2017, see this section as in effect and 
contained in 26 CFR part 1, as revised April 1, 2016. For payments made 
after December 31, 2000, and before July 1, 2014, see this section as in 
effect and contained in 26 CFR part 1, as revised April 1, 2013.)

[T.D. 7881, 48 FR 12972, Mar. 28, 1983]

[[Page 403]]


    Editorial Note 1.: For Federal Register citations affecting Sec. 
1.6049-5, see the List of CFR Sections Affected, which appears in the 
Finding Aids section of the printed volume and at www.govinfo.gov.



Sec. 1.6049(d)-5T  Reporting by brokers of interest and original
issue discount on and after January 1, 1986 (temporary).

    For purposes of Sec. 1.6049-5 (c), relating to original issue 
discount treated as interest subject to reporting, on and after January 
1, 1986, a payor who is a broker or middleman holding as a nominee--
    (a) A bank certificate of deposit (without regard to whether the 
broker or middleman sold the certificate of deposit to the owner), or
    (b) Any other original issue discount debt instrument that is 
specified by the Commissioner,


must determine whether that obligation is one that was issued at a 
discount and the amount of discount that is includible in the income of 
the owner. However, before January 1, 1987, reporting is required only 
with respect to certificates of deposit (or any such other obligations) 
held by a broker or middleman as a nominee on or after June 1, 1986, 
that were sold by the broker or middleman (whether for the broker's 
account or as an agent of the issuer) to the owner. The preceding two 
sentences do not apply to certificates of deposit (or any such other 
obligations) held on or after January 1, 1986, but disposed of before 
June 1, 1986; reporting requirements with respect to such certificates 
of deposit (or any other such obligations) shall be determined under the 
provisions of Sec. 1.6049-5 (c) as in effect immediately prior to 
publication of this Sec. 1.6049-5T.

[T.D. 8109, 51 FR 45106, Dec. 17, 1986. Redesignated by T.D. 9658, 79 FR 
12800, Mar. 6, 2014]



Sec. 1.6049-6  Statements to recipients of interest payments and 
holders of obligations for attributed original issue discount.

    (a) Requirement of furnishing statement to recipient. Every person 
filing a Form 1099 under section 6049(a) and Sec. 1.6049-4(e) shall 
furnish to the person whose identifying number is required to be shown 
on the form a written statement showing the information required by 
paragraph (b) of this section. With respect to interest other than 
interest reported on a transactional basis under Sec. 1.6049-4(e), no 
statement is required to be furnished under section 6049(c) and this 
section if the aggregate of the payments for the calendar year is less 
than $10, unless such payment is subject to the tax imposed under 
section 3406. In the case of any payment that is subject to withholding 
under section 3406, a statement shall be furnished irrespective of the 
amount of the payment. With respect to payments which are reported on a 
transactional basis, no statement is required to be furnished under 
section 6049(c) and this section to a person if the payment of interest 
to (or received on behalf of) such person for the transaction is less 
than $10 unless the payment is subject to withholding under section 
3406. Again, in the case of any payment that is subject to withholding 
under section 3406, a statement shall be furnished irrespective of the 
amount of the payment.
    (b) Form of statement. The written statement required to be 
furnished to a person under paragraph (a) of this section shall show the 
following information:
    (1) With respect to payments of interest (other than original issue 
discount) to any person during a calendar year, the statement shall 
show:
    (i) The aggregate amount of payments shown on Form 1099 as having 
been made to (or received on behalf of) such person;
    (ii) The amount of tax withheld under section 3406, if any;
    (iii) The name and address of the person filing the form; and
    (iv) A legend stating that such amount is being reported to the 
Internal Revenue Service.
    (2) With respect to original issue discount includible in the gross 
income of a holder of an obligation during a calendar year, the 
statement shall show:
    (i) The aggregate amount of original issue discount includible in 
the gross income by (or on behalf of) such person for the calendar year 
with respect to the obligation (determined by applying the rules of 
paragraph (b)(2) of Sec. 1.6049-4);
    (ii) The amount of tax withheld under section 3406, if any;

[[Page 404]]

    (iii) The account, serial, or other identifying number of each 
obligation with respect to which a return is being made;
    (iv) All other items shown on Form 1099 for such calendar year; and
    (v) A legend stating that such amount and such items are being 
reported to the Internal Revenue Service.
    (3) With respect to both statements to persons receiving payments of 
interest and persons holding obligations, the statement shall include 
the name, address, and taxpayer identifying number of such person. An 
IRS truncated taxpayer identifying number (TTIN) may be used as the 
identifying number for the person. For provisions relating to the use of 
TTINs, see Sec. 301.6109-4 of this chapter (Procedure and 
Administration Regulations).
    (c) Time for furnishing statements. Each statement required by this 
section to be furnished to any person for a calendar year with respect 
to a payment of interest (other than interest where a middleman or a 
Federal agency makes a return on a transactional basis (as described in 
paragraph (e) of Sec. 1.6049-4)) shall be furnished to such person 
after April 30 of the year of payment and on or before January 31 of the 
following year, but no statement may be furnished before the final 
interest payment for the calendar year. If a middleman or a Federal 
agency makes a return on a transactional basis, the statement shall be 
furnished at, or any time subsequent to, the time of payment, but in no 
event later than January 31 of the year following the calendar year of 
payment. However, for a statement required to be furnished after 
December 31, 2008, the February 15 due date under section 6045 applies 
to the statement if the statement is furnished in a consolidated 
reporting statement under section 6045. See Sec. Sec. 1.6045-1(k)(3), 
1.6045-2(d)(2), 1.6045-3(e)(2), 1.6045-4(m)(3), and 1.6045-5(a)(3)(ii).
    (d) Special rule. The requirements of this section for the 
furnishing of a statement to any person, including the legend 
requirement of paragraph (b)(1)(iv) and (2)(v) of this section, may be 
met by the furnishing to such person a copy of the Form 1099 filed 
pursuant to Sec. 1.6049-4, or an acceptable substitute, in respect of 
such person. However, in the case of Form 1099 with respect to original 
issue discount on obligations subject to section 1232A, a copy of the 
instructions must also be sent to such person. A statement shall be 
considered to be furnished to a person within the meaning of this 
section if it is mailed to such person at his last known address.
    (e) Statements to recipients--(1) Requirement. A person required to 
make an information return under section 6049(a) and Sec. 1.6049-4 must 
furnish a statement to each recipient whose identifying number is 
required to be shown on the related information return for interest or 
original issue discount paid or accrued.
    (2) Form, manner, and time for providing statements to recipients. 
The statement required by paragraph (e)(1) of this section must be 
either the official Form 1099 prescribed by the Internal Revenue Service 
for the respective calendar year or an acceptable substitute statement. 
The rules under Sec. 1.6042-4 (relating to statements with respect to 
dividends) apply comparably in determining the form of an acceptable 
substitute statement permitted by this paragraph (e). Those rules also 
apply for purposes of determining the manner of and time for providing 
the Form 1099 or its acceptable substitute to a recipient under 
paragraph (e)(1) of this section. However, with respect to original 
issue discount, the Form 1099 or acceptable substitute statement 
required by paragraph (e)(1) of this section must show the aggregate 
amount of original issue discount includible in the gross income by the 
recipient for the calendar year with respect to the obligation 
(determined by applying the rules of Sec. 1.6049-4(b)(2)), and the 
amount, serial number, or other identifying number of each obligation 
with respect to which a return is being made. With respect to interest 
or original issue discount, the Form 1099 or acceptable substitute 
statement required by paragraph (e)(1) of this section must be furnished 
to the recipient on or before January 31 of the year following the 
calendar year for which the return under section 6049(a)(1) was required 
to be made. However, for a statement required to be furnished after 
December

[[Page 405]]

31, 2008, the February 15 due date under section 6045 applies to the 
statement if the statement is furnished in a consolidated reporting 
statement under section 6045. See Sec. Sec. 1.6045-1(k)(3), 1.6045-
2(d)(2), 1.6045-3(e)(2), 1.6045-4(m)(3), and 1.6045-5(a)(3)(ii).
    (3) Cross-reference to penalty. For provisions relating to the 
penalty provided for failure to furnish timely a correct payee statement 
required under section 6049(c) and Sec. 1.6049-6(a), see Sec. 
301.6722-1 of this chapter (Procedure and Administration Regulations). 
See Sec. 301.6724-1 of this chapter for the waiver of a penalty if the 
failure is due to reasonable cause and is not due to willful neglect.
    (4) Special rule for amounts described in Sec. 1.6049-8(a). In the 
case of amounts described in Sec. 1.6049-8(a) (relating to payments of 
deposit interest to certain nonresident alien individuals) paid on or 
after January 1, 2013, any person who makes a Form 1042-S, ``Foreign 
Person's U.S. Source Income Subject to Withholding,'' under section 
6049(a) and Sec. 1.6049-4(b)(5) shall furnish a statement to the 
recipient either in person or by first class mail to the recipient's 
last known address. The statement shall include a copy of the Form 1042-
S required to be prepared pursuant to Sec. 1.6049-4(b)(5) and a 
statement to the effect that the information on the form is being 
furnished to the United States Internal Revenue Service. A person 
required by this paragraph (e)(4) to furnish a recipient copy of Form 
1042-S may furnish such copy electronically by complying with the 
requirements provided in Sec. 1.6050W-2(a)(2) through (5) applicable to 
statements required under section 6050W (substituting the phrase ``Form 
1042-S'' for the phrases ``statement required under section 6050W'' or 
``statements required by section 6050W(f)'' each place they appear).
    (5) Effective/applicability date. Paragraph (b)(3) applies to payee 
statements due after December 31, 2014. Paragraph (e)(4) of this section 
applies to payee statements reporting payments of deposit interest to 
nonresident alien individuals paid on or after January 2, 2020, but it 
may be applied to payments made on or after January 1, 2016. For payee 
statements reporting payments of deposit interest to nonresident alien 
individuals paid on or after January 1, 2013 and before January 2, 2020, 
see paragraph (e)(4) of this section as in effect and contained in 26 
CFR part 1 revised April 1, 2019. For the substantially similar 
statement mailing requirements that apply with respect to forms required 
to be filed after October 22, 1986, and before January 1, 1996, see Rev. 
Proc. 84-70 (1984-2 C.B. 716) (or successor revenue procedures). See 
Sec. 601.601(d)(2) of this chapter. (For interest paid to a Canadian 
nonresident alien individual on or before December 31, 2012, see 
paragraph (e)(4) of this section as in effect and contained in 26 CFR 
part 1 revised April 1, 2000.)

[T.D. 7881, 48 FR 12976, Mar. 28, 1983, as amended by T.D. 8637, 60 FR 
66111, Dec. 21, 1995; 61 FR 11307, Mar. 20, 1996; T.D. 8664, 61 FR 
17574, Apr. 22, 1996; T.D. 8664, 61 FR 40993, Aug. 7, 1996; T.D. 8734, 
62 FR 53491, Oct. 14, 1997; T.D. 9504, 75 FR 64103, Oct. 18, 2010; T.D. 
9584, 77 FR 23394, Apr. 19, 2012; T.D. 9675, 79 FR 41130, July 15, 2014; 
T.D. 9890, 85 FR 206, Jan. 2, 2020]



Sec. 1.6049-7  Returns of information with respect to REMIC regular
interests and collateralized debt obligations.

    (a) Definition of interest--(1) In general. For purposes of section 
6049(a), for taxable years beginning after December 31, 1986, the term 
interest includes:
    (i) Interest actually paid with respect to a collateralized debt 
obligation (as defined in paragraph (d)(2) of this section),
    (ii) Interest accrued with respect to a REMIC regular interest (as 
defined in section 860G(a)(1)), or
    (iii) Original issue discount accrued with respect to a REMIC 
regular interest or a collateralized debt obligation.
    (2) Interest deemed paid. For purposes of this section and in 
determining who must make an information return under section 6049(a), 
interest as defined in paragraphs (a)(1) (ii) and (iii) of this section 
is deemed paid when includible in gross income under section 860B (b) or 
section 1272.
    (b) Information required to be reported to the Internal Revenue 
Service--(1) Requirement of filing Form 8811 by REMICs and other 
issuers--(i) In general. Except in the case of a REMIC all of whose 
regular interests are owned by one other REMIC, every REMIC and every

[[Page 406]]

issuer of a collateralized debt obligation (as defined in paragraph 
(d)(2) of this section) must make an information return on Form 8811, 
Information Return for Real Estate Mortgage Investment Conduits (REMICs) 
and Issuers of Collateralized Debt Obligations. Form 8811 must be filed 
in the time and manner prescribed in paragraph (b)(1)(iii) of this 
section. The submission of Form 8811 to the Internal Revenue Service 
does not satisfy the election requirement specified in Sec. 1.860D-
1T(d) and does not require election of REMIC status.
    (ii) Information required to be reported. The following information 
must be reported to the Internal Revenue Service on Form 8811--
    (A) The name, address, and employer identification number of the 
REMIC or the issuer of a collateralized debt obligation (as defined in 
paragraph (d)(2) of this section);
    (B) The name, title, and either the address or the address and 
telephone number of the official or representative of the REMIC or the 
issuer of a collateralized debt obligation who will provide to any 
person specified in paragraph (e)(4) of this section the interest and 
original issue discount information specified in paragraph (e)(2) of 
this section;
    (C) The startup day (as defined in section 860G(a)(9)) of the REMIC 
or the issue date (as defined in section 1275(a)(2)) of the 
collateralized debt obligation;
    (D) The Committee on Uniform Security Identification Procedure 
(CUSIP) number, aocount number, serial number, or other identifying 
number or information, of each class of REMIC regular interest or 
collateralized debt obligation;
    (E) The name, title, address, and telephone number of the official 
or representative of the REMIC or the issuer of a collateralized debt 
obligation whom the Internal Revenue Service may contact, and
    (F) Any other information required by Form 8811.
    (iii) Time and manner of filing of information return--
    (A) Manner of filing. Form 8811 must be filed with the Internal 
Revenue Service at the address specified on the form. The information 
specified in paragraph (b(1)(ii) of this section must be provided on 
Form 8811 regardless of whether other information returns are filed by 
use of electronic media.
    (B) Time for filing. Form 8811 must be filed by each REMIC or issuer 
of a collateralized debt obligation on or before the later of July 31, 
1989, or the 30th day after--
    (1) the startup day (as defined in section 860G(a)(9)) in the case 
of a REMIC, or
    (2) the issue date (as defined in section 1275(a)(2)) in the case of 
a collateralized debt obligation.


Further, each REMIC or issuer of a collateralized debt obligation must 
file a new Form 8811 on or before the 30th day after any change in the 
information previously provided on Form 8811.
    (2) Requirement of reporting by REMICs, issuers, and nominees--(i) 
In general. Every person described in paragraph (b)(2)(ii) of this 
section who pays to another person $10 or more of interest (as defined 
in paragraph (a) of this section) during any calendar year must file an 
information return on Form 1099, unless the interest is paid to a person 
specified in paragraph (c) of this section.
    (ii) Person required to make reports. The persons required to make 
an information return under section 6049(a) and this section are--
    (A) REMICs or issuers of collateralized debt obligations (as defined 
in paragraph (d)(2) of this section), and
    (B) Any broker who holds as a nominee or middleman who holds as a 
nominee any REMIC regular interest or any collateralized debt 
obligation.
    (iii) Information to be reported--(A) REMIC regular interests and 
collateralized debt obligations not issued with original issue discount. 
An information return on Form 1099 must be made for each holder of a 
REMIC regular interest or collateralized debt obligation not issued with 
original issue discount, but only if the holder has been paid interest 
(as defined in paragraph (a) of this section) of $10 or more for the 
calendar year. The information return must show--

[[Page 407]]

    (1) The name, address, and taxpayer identification number of the 
record holder,
    (2) The CUSIP number, account number, serial number, or other 
identifying number or information, of each REMIC regular interest or 
collateralized debt obligation, with respect to which a return is being 
made,
    (3) The aggregate amount of interest paid or deemed paid to the 
record holder for the period during the calendar year for which the 
return is made,
    (4) The name, address, and taxpayer identification number of the 
person required to file this return, and
    (5) Any other information required by the form.
    (B) REMIC regular interests and collateralized debt obligations 
issued with original issue discount. An information return on Form 1099 
must be made for each holder of a REMIC regular interest or a 
collateralized debt obligation issued with original issue discount, but 
only if the holder has been paid interest (as defined in paragraph (a) 
of this section) of $10 or more for the calendar year. The information 
return must show--
    (1) The name, address, and taxpayer identification number of the 
record holder,
    (2) The CUSIP number, account number, serial number, or other 
identifying number or information, of each REMIC regular interest or 
collateralized debt obligation, with respect to which a return is being 
made,
    (3) The aggregate amount of original issue discount deemed paid to 
the record holder for the period during the calendar year for which the 
return is made,
    (4) The aggregate amount of interest, other than original issue 
discount, paid or deemed paid to the record holder for the period during 
the calendar year for which the return is made,
    (5) The name, address, and taxpayer identification number of the 
person required to file this return, and
    (6) Any other information required by the form.
    (C) Cross-reference. See Sec. 1.67-3T(f)(3)(ii) for additional 
information required to be included on an information return on Form 
1099 with respect to certain holders of regular interests in REMICs 
described in Sec. 1.67-3T(a)(2)(ii).
    (iv) Time and place for filing a return with respect to amounts 
includible as interest. The returns required under this paragraph (b)(2) 
for any calendar year must be filed after September 30 of that year, but 
not before the payor's final payment to the payee for the year, and on 
or before February 28 (March 31 if filed electronically) of the 
following year. These returns must be filed with the appropriate 
Internal Revenue Service Center, the address of which is listed in the 
instructions for Form 1099. For extensions of time for filing returns 
under this section, see Sec. 1.6081-1. For magnetic media filing 
requirements, see Sec. 301.6011-2 of this chapter.
    (c) Information returns not required. An information return is not 
required under section 6049(a) and this section with respect to payments 
of interest on a REMIC regular interest or collateralized debt 
obligation, if the holder of the REMIC regular interest or the 
collateralized debt obligation is--
    (1) An organization exempt from taxation under section 501(a) or an 
individual retirement plan;
    (2) The United States or a State, the District of Columbia, a 
possession of the United States, or a political subdivision or a wholly-
owned agency or instrumentality of any one or more of the foregoing;
    (3) A foreign government, a political subdivision thereof, or an 
international organization;
    (4) A foreign central bank of issue (as defined in Sec. 1.895-
1(b)(1)) or the Bank for International Settlements;
    (5) A trust described in section 4947(a)(1) (relating to certain 
charitable trusts);
    (6) For calendar quarters and calendar years after 1988, a broker 
(as defined in section 6045(c) and Sec. 1.6045-1(a)(1));
    (7) For calendar quarters and calendar years after 1988, a person 
who holds the REMIC regular interest or collateralized debt obligation 
as a middleman (as defined in Sec. 1.6049-4(f)(4));
    (8) For calendar quarters and calendar years after 1988, a 
corporation

[[Page 408]]

(as defined in section 7701(a)(3)), whether domestic or foreign;
    (9) For calendar quarters and calendar years after 1988, a dealer in 
securities or commodities required to register as such under the laws of 
the United States or a State;
    (10) For calendar quarters and calendar years after 1988, a real 
estate investment trust (as defined in section 856);
    (11) For calendar quarters and calendar years after 1988, an entity 
registered at all times during the taxable year under the Investment 
Company Act of 1940;
    (12) For calendar quarters and calendar years after 1988, a common 
trust fund (as defined in section 584 (a));
    (13) For calendar quarters and calendar years after 1988, a 
financial institution such as a mutual savings bank, savings and loan 
association, building and loan association, cooperative bank, homestead 
association, credit union, industrial loan association or bank, or other 
similar organization;
    (14) For calendar quarters and calendar years after 1988, any trust 
which is exempt from tax under section 664(c) (i.e., a charitable 
remainder annuity trust or a charitable remainder unitrust); and
    (15) For calendar quarters and calendar years after 1988, a REMIC.
    (d) Special provisions and definitions--(1) Incorporation of 
referenced rules. The special rules of Sec. 1.6049-4(d) are 
incorporated in this section, as applicable, except that Sec. 1.6049-
4(d)(2) does not apply to any REMIC regular interest or any other debt 
instrument to which section 1272(a)(6) applies. Further, Sec. 1.6049-
5(c) does not apply to any REMIC regular interest or any other debt 
instrument to which section 1272(a)(6) applies.
    (2) Collateralized debt obligation. For purposes of this section, 
the term ``collateralized debt obligation'' means any debt instrument 
(except a tax-exempt obligation) described in section 1272(a)(6)(C)(ii) 
that is issued after December 31, 1986.
    (e) Requirement of furnishing information to certain nominees, 
corporations, and other specified persons--(1) In general. For calendar 
quarters and calendar years after 1988, each REMIC or issuer of a 
collateralized debt obligation (as defined in paragraph (d)(2) of this 
section) must provide the information specified in paragraph (e)(2) of 
this section in the time and manner prescribed in paragraph (e)(3) of 
this section to any persons specified in paragraph (e)(4) of this 
section who request the information.
    (2) Information required to be reported. For each class of REMIC 
regular interest or collateralized debt obligation and for each calendar 
quarter specified by the person requesting the information, the REMIC or 
issuer of a collateralized debt obligation must provide the following 
information--
    (i) The name, address and Employer Identification Number of the 
REMIC or issuer of a collateralized debt obligation;
    (ii) The CUSIP number, account number, serial number, or other 
identifying number or information, of each specified class of REMIC 
regular interest or collateralized debt obligation and, for calendar 
quarters and calendar years after 1991, whether the information being 
reported is with respect to a REMIC regular interest or a collateralized 
debt obligation;
    (iii) Interest paid on a collateralized debt obligation in the 
specified class for each calendar quarter, and the aggregate amount for 
the calendar year if the request is made for the last quarter of the 
calendar year;
    (iv) Interest accrued on a REMIC regular interest in the specified 
class for each accrual period any day of which is in the specified 
calendar quarter, and the aggregate amount for the calendar year if the 
request is made for the last quarter of the calendar year;
    (v) Original issue discount accrued on a collateralized debt 
obligation or REMIC regular interest in the specified class for each 
accrual period any day of which is in that calendar quarter, and the 
aggregate amount for the calendar year if the request is made for the 
last quarter of the calendar year;
    (vi) The daily portion of original issue discount per $1,000 of 
original principal amount (or for calendar quarters prior to 1992, per 
other specified unit) as determined under section 1272(a)(6) and the 
regulations thereunder for each accrual period any day

[[Page 409]]

of which is in the specified calendar quarter;
    (vii) The length of the accrual period;
    (viii) The adjusted issue price (as defined in section 
1275(a)(4)(B)(ii)) of the REMIC regular interest or the collateralized 
debt obligation at the beginning of each accrual period any day of which 
is in the specified calendar quarter;
    (ix) The information required by paragraph (f)(3) of this section;
    (x) Information required to compute the accrual of market discount 
including, for calendar years after 1989, the information required by 
paragraphs (f)(2)(i)(G) or (f)(2)(ii)(K) of this section; and
    (xi) For calendar quarters and calendar years after 1991, if the 
REMIC is a single class REMIC (as described in Sec. 1.67-3T 
(a)(2)(ii)(B)), the information described in Sec. 1.67-3T (f)(1) and 
(f)(3)(ii) (A) and (B).
    (3) Time and manner for providing information--(i) Manner of 
providing information. The information specified in paragraph (e)(2) of 
this section may be provided as follows--
    (A) By telephone;
    (B) By written statement sent by first class mail to the address 
provided by the requesting party;
    (C) By causing it to be printed in a publication generally read by 
and available to persons specified in paragraph (e)(4) and by notifying 
the requesting persons in writing or by telephone of the publication in 
which it will appear, the date of its appearance, and, if possible, the 
page upon which it appears; or
    (D) By any other method agreed to by the parties. If the information 
is published, then the publication should also specify the date and, if 
possible, the page on which corrections, if any, will be printed.
    (ii) Time for furnishing the information. Each REMIC or issuer of a 
collateralized debt obligation must furnish the information specified in 
paragraph (e)(2) of this section on or before the later of--
    (A) The 30th day after the close of the calendar quarter for which 
the information was requested, or
    (B) The day that is two weeks after the receipt of the request.
    (4) Persons entitled to request information. The following persons 
may request the information specified in paragraph (e)(2) of this 
section with respect to a specified class of REMIC regular interests or 
collateralized debt obligations from a REMIC or issuer of a 
collateralized debt obligation in the manner prescribed in paragraph 
(e)(5) of this section--
    (i) Any broker who holds on its own behalf or as a nominee any REMIC 
regular interest or collateralized debt obligation in the specified 
class,
    (ii) Any middleman who is required to make an information return 
under section 6049 (a) and paragraph (b)(2) of this section and who 
holds as a nominee any REMIC regular interest or collateralized debt 
obligation in the specified class,
    (iii) Any corporation or non-calendar year taxpayer who holds a 
REMIC regular interest or collateralized debt obligation in the 
specified class directly, rather than through a nominee,
    (iv) Any other person specified in paragraphs (c)(9) through (15) of 
this section who holds a REMIC regular interest or collateralized debt 
obligation in the specified class directly, rather than through a 
nominee, or
    (v) A representative or agent for a person specified in paragraphs 
(e)(4)(i), (ii), (iii) or (iv) of this section.
    (5) Manner of requesting information from the REMIC. A requesting 
person specified in paragraph (e)(4) of this section should obtain 
Internal Revenue Service Publication 938, Real Estate Mortgage 
Investment Conduit (REMIC) and Collateralized Debt Obligation Reporting 
Information (or other guidance published by the Internal Revenue 
Service). This publication contains a directory of REMICs and issuers of 
collateralized debt obligations. The requesting person can locate the 
REMIC or issuer from whom information is needed and request the 
information from the official or representative of the REMIC or issuer 
in the manner specified in the publication. The publication will specify 
either an address or an address and telephone number. If the publication 
provides only an address, the request must be made in

[[Page 410]]

writing and mailed to the specified address. Further, the request must 
specify the calendar quarters (e.g., all calendar quarters in 1989) and 
the classes of REMIC regular interests or collateralized debt 
obligations for which information is needed.
    (f) Requirement of furnishing statement to recipient--(1) In 
general. Every person filing a Form 1099 under section 6049 (a) and this 
section must furnish to the holder (the person whose identifying number 
is required to be shown on the form) a written statement showing the 
information required by paragraph (f)(2) of this section. The written 
statement provided by a REMIC must also contain the information 
specified in paragraph (f)(3) of this section.
    (2) Form of statement--(i) REMIC regular interests and 
collateralized debt obligations not issued with original issue discount. 
For a REMIC regular interest or collateralized debt obligation issued 
without original issue discount, the written statement must specify for 
the calendar year the following information--
    (A) The aggregate amount shown on Form 1099 to be included in income 
by that person for the calendar year;
    (B) The name, address, and taxpayer identification number of the 
person required to furnish this statement;
    (C) The name, address, and taxpayer identification number of the 
person who must include the amount of interest in gross income;
    (D) A legend, including a statement that the amount is being 
reported to the Internal Revenue Service, that conforms to the legend on 
Form 1099, Copy B, For Recipient;
    (E) The CUSIP number, account number, serial number, or other 
identifying number or information, of each REMIC regular interest or 
collateralized debt obligation, with respect to which a return is being 
made;
    (F) All other items shown on Form 1099 for the calendar year; and
    (G) Information necessary to compute accrual of market discount. For 
calendar years after 1989, this requirement is satisfied by furnishing 
to the holder for each accrual period during the year a fraction 
computed in the manner described in either paragraph (f)(2)(i)(G)(1) or 
(f)(2)(i)(G)(2) of this section. For calendar years after December 31, 
1991, the REMIC or the issuer of the collateralized debt obligation must 
be consistent in the method used to compute this fraction.
    (1) The numerator of the fraction equals the interest, other than 
original issue discount, allocable to the accrual period. The 
denominator of the fraction equals the interest, other than original 
issue discount, allocable to the accrual period plus the remaining 
interest, other than original issue discount, as of the end of that 
accrual period. The interest allocable to each accrual period and the 
remaining interest are calculated by taking into account events which 
have occurred before the close of the accrual period and the prepayment 
assumption, if any, determined as of the startup day (as defined in 
section 860G(a)(9)) of the REMIC or the issue date (as defined in 
section 1275(a)(2)) of the collateralized debt obligaition that would be 
made in computing original issue discount if the debt instrument had 
been issued with original issue discount.
    (2) If the REMIC regular interest or the collateralized debt 
obligation has de minimis original issue discount (as defined in section 
1273(a)(3) and any regulations thereunder), then, at the option of the 
REMIC or the issuer of the collateralized debt obligation, the fraction 
may be computed in the manner specified in paragraph (f)(2)(ii)(K) of 
this section taking into account the de minimis original issue discount.
    (ii) REMIC regular interests and collateralized debt obligations 
issued with original issue discount. For a REMIC regular interest or 
collateralized debt obligation issued with original issue discount, the 
written statement must specify for the calendar year the following 
information--
    (A) The aggregate amount of original issue discount includible in 
the gross income of the holder for the calendar year with respect to the 
REMIC regular interest or the collateralized debt obligation;
    (B) The aggregate amount of interest, other than original issue 
discount, includible in the gross income of the holder for the calendar 
year with respect to the REMIC regular interest or the collateralized 
debt obligation;

[[Page 411]]

    (C) The name, address, and taxpayer identification number of the 
person required to file this form;
    (D) The name, address, and taxpayer identification number of the 
person who must include the amount of interest specified in paragraphs 
(f)(2)(ii) (A) and (B) of this section in gross income;
    (E) For calendar years after 1987, the daily portion of original 
issue discount per $l,000 of original principal amount (or for calendar 
years prior to 1992, per other specified unit) as determined under 
section 1272(a)(6) and the regulations thereunder for each accrual 
period any day of which is in that calendar year;
    (F) For calendar years after 1987, the length of the accrual period;
    (G) All other items shown on Form 1099 for the calendar year;
    (H) A legend, including a statement that the information required 
under paragraphs (f)(2)(ii) (A), (B), (C), (D) and (G) of this section 
is being reported to the Internal Revenue Service, that conforms to the 
legend on Form 1099, Copy B, For Recipient;
    (I) For calendar years after 1987, the adjusted issue price (as 
defined in section 1275(a)(4)(B)(ii)) of the REMIC regular interest or 
the collateralized debt obligation at the beginning of each accrual 
period with respect to which interest income is required to be reported 
on Form 1099 for the calendar year;
    (J) The CUSIP number, account number, serial number, or other 
identifying number or information, of each class of REMIC regular 
interest or collateralized debt obligation, with respect to which a 
return is being made; and
    (K) Information necessary to compute accrual of market discount. For 
calendar years after 1989, this information includes:
    (1) For each accrual period in the calendar year, a fraction, the 
numerator of which equals the original issue discount allocable to that 
accrual period, and the denominator of which equals the original issue 
discount allocable to that accrual period plus the remaining original 
issue discount as of the end of that accrual period, and
    (2) [Reserved]
    The original issue discount allocable to each accrual period and the 
remaining original issue discount are calculated by taking into account 
events which have occurred before the close of the accrual period and 
the prepayment assumption determined as of the startup day (as defined 
in section 860G (a)(9)) of the REMIC or the issue date (as defined in 
section 1275 (a)(2)) of the collateralized debt obligation.
    (3) Information with respect to REMIC assets--(i) 95 percent asset 
test. For calendar years after 1988, the written statement provided by a 
REMIC must also contain the following information for each calendar 
quarter--
    (A) The percentage of REMIC assets that are qualifying real property 
loans under section 593,
    (B) The percentage of REMIC assets that are assets described in 
section 7701 (a)(19), and
    (C) The percentage of REMIC assets that are real estate assets 
defined in section 856 (c)(6)(B), computed by reference to the average 
adjusted basis (as defined in section 1011) of the REMIC assets during 
the calendar quarter (as described in Sec. 1.860F-4 (e)(1)(iii)). If 
for any calendar quarter the percentage of REMIC assets represented by a 
category is at least 95 percent, then the statement need only specify 
that the percentage for that category, for that calendar quarter, was at 
least 95 percent.
    (ii) Additional information required if the 95 percent test not met. 
If, for any calendar quarter after 1988, less than 95 percent of the 
assets of the REMIC are real estate assets defined in section 856 
(c)(6)(B), then, for that calendar quarter, the REMIC's written 
statement must also provide to any real estate investment trust (REIT) 
that holds a regular interest the following information--
    (A) The percentage of REMIC assets described in section 856 
(c)(5)(A), computed by reference to the average adjusted basis of the 
REMIC assets during the calendar quarter (as described in Sec. 1.860F-4 
(e)(1)(iii)),
    (B) The percentage of REMIC gross income (other than gross income 
from prohibited transactions defined in section 860F (a)(2)) described 
in section 856 (c)(3)(A) through (E), computed as of the close of the 
calendar quarter, and

[[Page 412]]

    (C) The percentage of REMIC gross income (other than gross income 
from prohibited transactions defined in section 860F (a)(2)) described 
in section 856 (c)(3)(F), computed as of the close of the calendar 
quarter. For purposes of this paragraph (f)(3)(ii)(C), the term 
``foreclosure property'' contained in section 856 (c)(3)(F) shall have 
the meaning specified in section 860G (a)(8).
    In determining whether a REIT satisfies the limitations of section 
856 (c)(2), all REMIC gross income is deemed to be derived from a source 
specified in section 856 (c)(2).
    (iii) Calendar years 1988 and 1989. For calendar years 1988 and 
1989, the percentage of assets required in paragraphs (f)(3)(i) and (ii) 
of this section may be computed by reference to the average fair market 
value of the assets of the REMIC during the calendar quarter (as 
described in Sec. 1.860F-4 (e)(1)(iii)), instead of by reference to the 
average adjusted basis of the assets of the REMIC during the calendar 
quarter.
    (4) Cross-reference. See Sec. 1.67-3T (f)(2)(ii) for additional 
information that may be separately stated on the statement required by 
this paragraph (f) with respect to certain holders of regular interests 
in REMICs described in Sec. 1.67-3T (a)(2)(ii).
    (5) Time for furnishing statements--(i) For calendar quarters and 
calendar years after 1988. For calendar quarters and calendar years 
after 1988, each statement required under this paragraph (f) to be 
furnished to any person for a calendar year with respect to amounts 
includible as interest must be furnished to that person after April 30 
of that year and on or before March 15 of the following year, but not 
before the final interest payment (if any) for the calendar year.
    (ii) For calendar quarters and calendar years prior to 1989--(A) In 
general. For calendar quarters and calendar years prior to 1989, each 
statement required under this paragraph (f) to be furnished to any 
person for a calendar year with respect to amounts includible as 
interest must be furnished to that person after April 30 of that year 
and on or before January 31 of the following year, but not before the 
final interest payment (if any) for the calendar year.
    (B) Nominee reporting. For calendar quarters and calendar years 
prior to 1989, each statement required under this paragraph (f) to be 
furnished by a nominee must be furnished to the actual owner of a REMIC 
regular interest or a collateralized debt obligation to which section 
1272 (a)(6) applies on or before the later of--
    (1) The 30th day after the nominee receives such information, or
    (2) January 31 of the year following the calendar year to which the 
statement relates.
    (6) Special rules--(i) Copy of Form 1099 permissible. The 
requirements of this paragraph (f) for the furnishing of a statement to 
any person, including the legend requirement of paragraphs (f)(2)(i)(D) 
and (f)(2)(ii)(H) of this section, may be met by furnishing to that 
person--
    (A) A copy of the Form 1099 filed pursuant to paragraph (b)(2) of 
this section in respect of that person, plus a separate statement 
(mailed with the Form 1099) that contains the information described in 
paragraphs (f)(2)(i)(E) and (G), (f)(2)(ii)(E), (F), (I), and (K), 
(f)(3), and (f)(4) of this section, if applicable, or
    (B) A substitute form that contains all the information required 
under this paragraph (f) and that complies with any current revenue 
procedure concerning the reproduction of paper substitutes of Forms 1099 
and the furnishing of substitute statements to forms recipients. The 
inclusion on the substitute form of the information specified in this 
paragraph (f) that is not required by the official Forms 1099 will not 
cause the substitute form to fail to meet any requirements that limit 
the information that may be provided with a substitute form.
    (ii) Statement furnished by mail. A statement mailed to the last 
known address of any person shall be considered to be furnished to that 
person within the meaning of this section.
    (7) Requirement that nominees furnish information to corporations 
and certain other specified persons--(i) In general. For calendar 
quarters and calendar years after 1988, every broker or middleman must 
provide in writing or by

[[Page 413]]

telephone the information specified in paragraph (e)(2) of this section 
to--
    (A) A corporation,
    (B) A non-calendar year taxpayer, or
    (C) Any other person specified in paragraphs (c)(9) through (15) of 
this section


who requests the information and for whom the broker or middleman holds 
as a nominee a REMIC regular interest or a collateralized debt 
obligation. A corporation, non-calendar year taxpayer, or any other 
person specified in paragraphs (c)(9) through (15) of this section may 
request the information in writing or by telephone for any REMIC regular 
interest or collateralized debt obligation for calendar quarters any day 
of which the person held the interest or obligation.
    (ii) Time for furnishing information. The statement required in 
paragraph (f)(7)(i) of this section must be furnished on or before the 
later of--
    (A) The 45th day after receipt of the request,
    (B) The 45th day after the close of the calendar quarter for which 
the information was requested, or
    (C) If the request is made for the last calendar quarter in a year, 
March 15 of the year following the calendar quarter for which the 
information was requested.

[T.D. 8366, 56 FR 49518, Sept. 30, 1991; 57 FR 5054, Feb. 12, 1992, as 
amended by T.D. 8431, 57 FR 40322, Sept. 3, 1992; 57 FR 46243, Oct. 7, 
1992; T.D. 8734, 62 FR 53491, Oct. 14, 1997; T.D. 8888, 65 FR 37702, 
June 16, 2000; T.D. 8895, 65 FR 50407, Aug. 18, 2000]



Sec. 1.6049-8  Interest and original issue discount paid to certain
nonresident aliens.

    (a) Interest subject to reporting requirement. For purposes of 
Sec. Sec. 1.6049-4, 1.6049-6, and this section, and except as provided 
in paragraph (b) of this section, the term interest means interest 
described in section 871(i)(2)(A) that relates to a deposit maintained 
at an office within the United States, and that is paid to a nonresident 
alien individual who is a resident of a country that is identified, in 
an applicable revenue procedure (see Sec. 601.601(d)(2) of this 
chapter) as of December 31 prior to the calendar year in which the 
interest is paid, as a country with which the United States has in 
effect an income tax or other convention or bilateral agreement relating 
to the exchange of tax information within the meaning of section 
6103(k)(4), under which the competent authority is the Secretary of the 
Treasury or his delegate and the United States agrees to provide, as 
well as receive, information. Notwithstanding the foregoing, for 
purposes of Sec. Sec. 1.6049-4, 1.6049-6, and this section, for any 
year for which the information return under Sec. 1.6049-4(b)(5) is 
required, a payor may elect to treat interest as including all interest 
described in section 871(i)(2)(A) that relates to a deposit maintained 
at an office within the United States and that is paid to any 
nonresident alien individual. A payor shall make this election by 
reporting all such interest. For purposes of the regulations under 
section 6049 (Sec. Sec. 1.6049-1 through 1.6049-8), a nonresident alien 
individual is a person described in section 7701(b)(1)(B). A payor or 
middleman may rely upon the permanent residence address provided on a 
valid Form W-8BEN, ``Beneficial Owners Certificate of Foreign Status for 
U.S. Tax Withholding'', to determine the country in which a nonresident 
alien individual is resident unless such payor or middleman knows or has 
reason to know that such documentation of the country of residence is 
unreliable or incorrect. Amounts described in this paragraph (a) are not 
subject to backup withholding under section 3406 if the payor may treat 
the payee as a foreign beneficial owner or foreign payee under the rules 
of Sec. 1.6049-5(b)(12). See Sec. 31.3406(g)-1(d) of this chapter. 
However, if the payor or middleman does not have either a valid Form W-
8BEN or valid Form W-9, ``Request for Taxpayer Identification Number and 
Certification'', the payor or middleman must report the payment as made 
to a U.S. non-exempt recipient if it must so treat the payee under the 
presumption rules of Sec. 1.6049-5(d)(2) and Sec. 1.1441-1(b)(3)(iii), 
and the payor must also backup withhold under section 3406. (For 
interest paid to a Canadian nonresident alien individual on or before 
December 31, 2012, see paragraph (a) of this section as in effect and 
contained in 26 CFR part 1 revised April 1, 2000).

[[Page 414]]

    (b) Interest excluded from reporting requirement. The term interest 
does not include an amount that is paid by the issuer or its agent 
outside the United States with respect to an obligation that is 
described in paragraph (b) (1) or (2) of this section.
    (1)(i) The obligation is not in registered form (within the meaning 
of section 163(f) and the regulations thereunder); is part of a larger 
single public offering of securities; and is described in section 
163(f)(2)(B).
    (ii) Unless it has actual knowledge to the contrary, a middleman may 
treat an obligation as if it is described in section 163(f)(2)(B) if the 
obligation or coupon therefrom, whichever is presented for payment, 
contains the statement described in section 163(f)(2)(B)(ii)(II) and the 
regulations thereunder.
    (2)(i) The obligation has a face or principal amount of not less 
than $500,000, and satisfies the requirements described in paragraphs 
(b)(2)(i) (A), (B), and (C) of this section.
    (A) The obligation satisfies the requirements of sections 
163(f)(2)(B) (i) and (ii)(I) and the regulations thereunder (as if it 
were a registration-required obligation within the meaning of section 
163(f)(2)(A)) and is issued in accordance with the procedures of Sec. 
1.163-5(c)(2)(i)(D)).
    (B) If the obligation is in registered form, it is registered in the 
name of an exempt recipient described in Sec. 1.6049-4(c)(1)(ii).
    (C) The obligation has on its face and on any detachable coupons the 
following statement (or a similar statement having the same effect): 
``By accepting this obligation or coupon, the holder represents and 
warrants that it is not a United States person (other than an exempt 
recipient described in the regulations under section 6049(b)(4) of the 
Internal Revenue Code and the regulations thereunder) and that it is not 
acting for or on behalf of a United States person (other than an exempt 
recipient described in the regulations under section 6049(b)(4) of the 
Internal Revenue Code and the regulations thereunder).''
    (ii) Unless the middleman has actual knowledge to the contrary, it 
may treat an obligation as satisfying the requirements of sections 
163(f)(2)(B) (i) and (ii)(I) and the regulations thereunder if the 
obligation or a coupon therefrom, whichever is presented for payment, 
contains the statement in paragraph (b)(2)(i)(C) of this section.

[T.D. 8664, 61 FR 17574, Apr. 22, 1996, as amended by T.D. 8734, 62 FR 
53491, Oct. 14, 1997; T.D. 9584, 77 FR 23395, Apr. 19, 2012]



Sec. 1.6049-9  Premium subject to reporting for a debt instrument
acquired on or after January 1, 2014.

    (a) General rule. Notwithstanding Sec. 1.6049-5(f), for a debt 
instrument acquired on or after January 1, 2014, if a broker (as defined 
in Sec. 1.6045-1(a)(1)) is required to file a statement for the debt 
instrument under Sec. 1.6049-6, the broker generally must report any 
bond premium (as defined in Sec. 1.171-1(d)) or acquisition premium (as 
defined in Sec. 1.1272-2(b)(3)) for the calendar year. This section, 
however, only applies to a debt instrument that is a covered security as 
defined in Sec. 1.6045-1(a)(15).
    (b) Reporting of bond premium amortization. Unless a broker has been 
notified in writing in accordance with Sec. 1.6045-1(n)(5) that a 
customer does not want to amortize bond premium under section 171, the 
broker must report the amount of any amortizable bond premium allocable 
to a stated interest payment made to the customer during the calendar 
year. See Sec. Sec. 1.171-2 and 1.171-3 to determine the amount of 
amortizable bond premium allocable to a stated interest payment. Instead 
of reporting a gross amount for both stated interest and amortizable 
bond premium, a broker may report a net amount of stated interest that 
reflects the offset of the stated interest payment by the amount of 
amortizable bond premium allocable to the payment. In this case, the 
broker must not report the amortizable bond premium as a separate item. 
This paragraph (b) also applies to amortizable bond premium on a tax-
exempt obligation, which is required to be amortized under section 171.
    (c) Reporting of acquisition premium amortization. A broker must 
report the amount of any acquisition premium amortization that reduces 
the amount of original issue discount includible in

[[Page 415]]

income by the customer during a calendar year. For a debt instrument 
acquired on or after January 1, 2015, a broker must use the rules in 
Sec. 1.1272-2(b)(4) to determine the amount of acquisition premium 
amortization. However, for a debt instrument acquired on or after 
January 1, 2014, and before January 1, 2015, if a customer timely 
notifies the broker in accordance with Sec. 1.6045-1(n)(5), a broker 
may use the rules in Sec. 1.1272-3 to determine the amount of 
acquisition premium amortization. Instead of reporting a gross amount 
for both original issue discount and acquisition premium amortization, a 
broker may report a net amount of original issue discount that reflects 
the offset of the original issue discount includible in income by the 
customer for the calendar year by the amount of acquisition premium 
allocable to the original issue discount. In this case, the broker must 
not report the acquisition premium amortization as a separate item. See 
Sec. 1.6049-10 for the reporting of acquisition premium on a tax-exempt 
obligation.

[T.D. 9713, 80 FR 13239, Mar. 13, 2015; T.D. 9750, 81 FR 24702, Apr. 27, 
2016]



Sec. 1.6049-10  Reporting of original issue discount on a tax-exempt
obligation.

    (a) In general. For purposes of section 6049, a payor (as defined in 
Sec. 1.6049-4(a)(2)) of original issue discount (OID) on a tax-exempt 
obligation (as defined in section 1288(b)(2)) is required to report the 
daily portions of OID on the obligation as if the daily portions of OID 
that accrued during a calendar year were paid to the holder (or holders) 
of the obligation in the calendar year. The amount of the daily portions 
of OID that accrues during a calendar year is determined as if section 
1272 and Sec. 1.1272-1 applied to a tax-exempt obligation. 
Notwithstanding any other rule in section 6049 and the regulations 
thereunder, a payor must determine whether a tax-exempt obligation was 
issued with OID and the amount of OID that accrues for each relevant 
period. As prescribed by section 1288(b)(1), OID on a tax-exempt 
obligation is determined without regard to the de minimis rules in 
section 1273(a)(3) and Sec. 1.1273-1(d).
    (b) Acquisition premium. A payor is required to report acquisition 
premium amortization on a tax-exempt obligation in accordance with the 
rules in Sec. 1.6049-9(c) as if section 1272 applied to a tax-exempt 
obligation. See paragraph (a) of this section to determine the amount of 
OID allocable to an accrual period.
    (c) Effective/applicability date. This section applies to a tax-
exempt obligation that is a covered security (within the meaning of 
Sec. 1.6045-1(a)(15) and (n)(12)) acquired on or after January 1, 2017. 
For a taxable year beginning after December 31, 2016, a broker, however, 
may rely on this section to report OID and acquisition premium for a 
tax-exempt obligation that is a covered security acquired before January 
1, 2017.

[T.D. 9750, 81 FR 8154, Feb. 18, 2016]



Sec. 1.6050A-1  Reporting requirements of certain fishing boat 
operators.

    (a) Requirement of reporting. The operator of a boat on which one or 
more individuals during a calendar year performed services described in 
Sec. 31.3121(b)(20)-1(a) shall make an information return on Form 1099-
MISC for that calendar year. The return shall include the following 
information:
    (1) The name and taxpayer identification number of each individual 
performing the services;
    (2) The percentage of each individual's share of the catch of fish 
or other forms of aquatic life (hereinafter ``fish'');
    (3) The percentage of the operator's share of the catch of fish;
    (4) If the individual receives all or part of his share of the catch 
in kind, the type and weight of the share and, if it can be ascertained, 
the fair market value of his share;
    (5) If the individual receives a share of the proceeds of the catch, 
the dollar amount received; and
    (6) Any other information that is required by the form.


For purposes of this section, the term, ``boat operator'' means an 
employer (as defined in Sec. 31.3121(d)-2) of an employee whose 
services are excepted from employment by section 3121(b)(20) and Sec. 
31.3121(b)(20)-1. The boat operator may make separate returns on Form 
1099-

[[Page 416]]

MISC for each crew member for each voyage, or he may aggregate the 
information required by this paragraph for an individual for all or any 
part of a return period in which the type of catch (if required) and the 
percentage due the crew member remain the same.
    (b) Time and place for filing. Returns required to be made under 
this section on Form 1099-MISC shall be filed with the Internal Revenue 
Service Center, designated in the instructions for Form 1099-MISC, on or 
before February 28 (March 31 if filed electronically) of the year 
following the calendar year in which the relevant services were 
performed.
    (c) Requirement of and time for furnishing statement--(1) 
requirement of furnishing statement. Every person filing a Form 1099-
MISC under this section shall furnish to the individual whose 
identifying number is (or should be) shown on the form a written 
statement showing the information required by paragraph (a) of this 
section. The requirement of the preceding sentence may be met by 
furnishing to the individual copy B of Form 1099-MISC or a reasonable 
facsimile of Form 1099-MISC that was filed pursuant to this section. An 
IRS truncated taxpayer identifying number (TTIN) may be used as the 
identifying number for the individual in lieu of the identifying number 
appearing on the information return filed with the Internal Revenue 
Service. For provisions relating to the use of TTINs, see Sec. 
301.6109-4 of this chapter (Procedure and Administration Regulations).
    (2) Time for furnishing statement. Each statement required by this 
paragraph to be furnished to any individual for a calendar year shall be 
furnished on or before January 31 of the year following the calendar 
year for which the return was made.
    (d) Cross-reference to penalties. For provisions relating to the 
penalty provided for failure to file timely a correct information return 
required under section 6050A(a) and Sec. 1.6050A-1(a), see Sec. 
301.6721-1 of this chapter (Procedure and Administration Regulations). 
For provisions relating to the penalty provided for failure to furnish 
timely a correct payee statement required under section 6050A(b) and 
Sec. 1.6050A-1(c), see Sec. 301.6722-1 of this chapter. See Sec. 
301.6724-1 of this chapter for the waiver of a penalty if the failure is 
due to reasonable cause and is not due to willful neglect.
    (e) Effective/applicability date. The rules in this section apply to 
information returns and payee statements due after December 31, 2014. 
For rules applicable for information returns and payee statements due 
before January 1, 2015, Sec. 1.6050A-1(c)(1) (as contained in 26 CFR 
part 1, revised April 2013) shall apply.

[T.D. 7716, 45 FR 57123, Aug. 27, 1980, as amended by T.D. 8734, 62 FR 
53492, Oct. 14, 1997; T.D. 8895, 65 FR 50407, Aug. 18, 2000; T.D. 9675, 
79 FR 41130, July 15, 2014]



Sec. 1.6050B-1  Information returns by person making unemployment 
compensation payments.

    For taxable years beginning after December 31, 1978, every person 
who makes payments of unemployment compensation (as defined in section 
85 (c)) aggregating $10 or more to any individual during any calendar 
year shall file a Form 1099UC in accordance with the instructions to 
such form.

[T.D. 7705, 45 FR 46070, July 9, 1980]



Sec. 1.6050D-1  Information returns relating to energy grants
and financing.

    (a) Requirement of reporting. Every person who administers a 
Federal, State, or local program a principal purpose of which is to 
provide subsidized energy financing (as defined in section 23(c)(10)(C) 
and the regulations thereunder) or grants for projects designed to 
conserve or produce energy shall make an information return for each 
calendar year beginning after December 31, 1983. However, the preceding 
sentence shall not apply if none of the financing and grants provided 
under such program during the calendar year relate either to 
expenditures described in section 23(c)(1) or (2), relating to the 
residential energy credit, made by a taxpayer before January 1, 1986, 
with respect to a dwelling unit or to section 38 property (as defined in 
section 48 and the regulations thereunder). That return shall be made on 
Form 6497 or, in the case of taxable gants, on Form 1099-G. (The latter 
form is prescribed

[[Page 417]]

pursuant to section 6041 as well as section 6050D.) The return shall 
include the following information:
    (1) The name, address, and taxpayer identification number of each 
taxpayer receiving financing or a grant made under such program during 
the calendar year with respect to either section 38 property or in the 
case of financing or a grant for energy conservation expenditures or 
renewable energy source expenditures made by the taxpayer before January 
1, 1986, a dwelling unit that is located in the United States;
    (2) The aggregate amount of financing and grants received by the 
taxpayer under the program during the calendar year,
    (3) In the case of returns for financing or nontaxable grants, the 
name of the program under which the financing or grants are made; and
    (4) Any other information that is required by the form.


For purposes of this section, the term ``person'' means the officer or 
employee having control of the program, or the person appropriately 
designated for purposes of section 6050D and this section.
    (b) Time and place for filing. Returns required to be made under 
this section shall be filed with the Internal Revenue Service Center 
designated in the instructions for Form 6497 or 1099-G on or before the 
last day of February (March 31 if filed electronically) of the year 
following the calendar year for which the return is made.

(Secs. 6050D and 7805, Internal Revenue Code of 1954 (94 Stat. 259, 26 
U.S.C. 6050D; 68A Stat. 917, 26 U.S.C. 7805))

[T.D. 8018, 50 FR 12532, Mar. 29, 1985, as amended by T.D. 8146, 52 FR 
26673, July 16, 1987; T.D. 8895, 65 FR 50407, Aug. 18, 2000]



Sec. 1.6050E-1  Reporting of State and local income tax refunds.

    (a) Applicability. Section 6050E and this section apply to any 
refund officer who, with respect to an individual, makes payments of 
refunds of State or local income taxes or allows credits or offsets with 
respect to such taxes aggregating $10 or more for such individual in any 
calendar year.
    (b) Definitions. For purposes of this section--
    (1) The term refund officer means the officer or employee of a State 
or local taxing jurisdiction having control of payments of refunds or 
the allowance of credits or offsets, or the person approporiately 
designated for purposes of this section.
    (2) The term State shall include the District of Columbia but shall 
not include the Commonwealth of Puerto Rico or any possession of the 
United States.
    (3) The term individual shall not include an estate or trust.
    (4) The term credit or offset means an overpayment of tax which, in 
lieu of being refunded to the taxpayer, is:
    (i) Applied against an existing liability of the taxpayer,
    (ii) Available for application against a future liability of the 
taxpayer, or
    (iii) Otherwise used or available for use for the taxpayer's 
benefit.
    (c) Requirement of reporting. Every refund officer described in 
paragraph (a) of this section shall make an information return in 
accordance with this section for each calendar year. An information 
return must be made even if the refund officer is not required to 
furnish a statement to the applicable taxpayer under paragraph (k)(2) of 
this section.
    (d) Prescribed Form. Except as otherwise provided in paragraph (i) 
of this section, the information return required by paragraph (c) of 
this section shall be made on Forms 1096 and 1099.
    (e) Refunds involving different taxable years. In the case of 
refunds paid or credits or offsets allowed during a calendar year with 
respect to two or more taxable years of an individual, a separate Form 
1099 shall be filed with respect to each taxable year of the individual. 
Thus, if during calendar year 1983 a refund officer pays to an 
individual a refund of $15 with respect to that individual's taxable 
year ending in 1982 and $20 with respect to that individual's taxable 
year ending in 1981, a separate Form 1099 shall be filed for each of the 
two payments. If, instead, the refund with respect to the individual's 
taxable year ending in 1982 were $5 instead of $15, no return would be 
required for the payment of $5.

[[Page 418]]

    (f) Information required. The information required to be reported on 
Forms 1096 and 1099 includes the aggregate amount of refunds, credits, 
and offsets made or allowed during the calendar year with respect to the 
taxable year of the individual covered by the return; the name, address 
and taxpayer identification number of the individual with respect to 
whom such payment, credit, or offset was made or allowed; the taxable 
year covered by the return; and such other information as may be 
required by the forms. In addition, the nature of the tax is required to 
be indicated on the Form 1099 in any case where the refund, credit or 
offset is made or allowed with respect to a payment attributable to an 
income tax that applies exclusively to income from a trade or business 
and is not a tax of general application.
    (g) When credit or offset deemed allowed. For purposes of a return 
of information under this section, a credit or offset is deemed to be 
allowed when the liability to pay or credit such amount is admitted by 
the State or local taxing jurisdiction. Thus, if an amount with respect 
to a taxpayer's 1982 taxable year is credited in 1983 to reduce the 
liability of the taxpayer to make estimated tax payments in 1983, it is 
reportable as a credit allowed in 1983. It is not reportable in the 
taxable year that gives rise to the refund, credit or offset.
    (h) Time and place for filing. The returns required under this 
section for any calendar year shall be filed after September 30 of that 
calendar year, but not before the refund officer's final payment (or 
allowance of credit or offset) for the year, and on or before February 
28 (March 31 if filed electronically) of the following year. Returns 
shall be filed with the appropriate Internal Revenue Service Center, the 
addresses of which are listed in the instructions for Forms 1099. For 
extensions of time for filing returns under this section, see Sec. 
1.6081-1.
    (i) Use of magnetic media and substitute forms--(1) Magnetic media. 
A refund officer may be required to file the Forms 1099 required by this 
section on magnetic media or machine-readable paper forms. See section 
6011(e) and applicable regulations and revenue procedures thereunder. If 
a refund officer is not required to file the Forms 1099 required by this 
section on magnetic media, the refund officer may request permission 
under applicable regulations and revenue procedures to submit the 
information required by this section on magnetic media.
    (2) Substitute forms. A refund officer may prepare and use a form 
which contains provisions identical with those of Form 1096 if the 
refund officer complies with all revenue procedures relating to 
substitute Form 1096 in effect at that time. In addition, if a refund 
officer is not required to file the Forms 1099 required by this section 
on magnetic media or machine-readable paper forms, the refund officer 
may prepare and use a form which contains provisions identical with 
those of Form 1099 if the refund officer complies with all revenue 
procedures relating to substitute Form 1099 in effect at that time.
    (j) Voluntary information exchange agreements. The requirements of 
reporting information to the Internal Revenue Service under this section 
may be satisfied for any calendar year by submission of the information 
required under paragraph (f) of this section in accordance with the 
terms of a voluntary information exchange agreement between the State 
and the United States in effect during such year.
    (k) Requirement of furnishing statements to recipients--(1) In 
general. Except as provided in paragraph (k)(2) of this section, every 
refund officer required to make a return of information under this 
section shall furnish to the individual whose identifying number is 
required to be shown on the return a written statement showing the 
aggregate amount shown on the information return of refunds, credits and 
offsets made or allowed to such individual with respect to each taxable 
year of the individual, the name of the State or local taxing 
jurisdiction paying such refund or allowing such credits or offsets, the 
taxable year giving rise to the refund, credit or offset and a legend 
stating that such amount is being reported to the Internal Revenue 
Service. The requirement of this paragraph may be met by furnishing to 
the individual

[[Page 419]]

a copy of the Form 1099 filed with respect to that individual provided 
that the form bears a legend stating that such amount is being reported 
to the Internal Revenue Service. For purposes of this paragraph, a 
statement shall be considered to be furnished to an individual if it is 
mailed to the individual at the individual's last known address. An IRS 
truncated taxpayer identifying number (TTIN) may be used as the 
identifying number of the individual in lieu of the identifying number 
appearing on the information return filed with the Internal Revenue 
Service. For provisions relating to the use of TTINs, see Sec. 
301.6109-4 of this chapter (Procedure and Administration Regulations).
    (2) Exception for nonitemizers. A refund officer need not furnish a 
statement to an individual under paragraph (k)(1) of this section if the 
refund officer verifies that the individual did not claim itemized 
deductions for Federal income tax purposes for the taxable year giving 
rise to the refund, credit, or offset. This exception shall not apply, 
however, if the refund, credit, or offset is made or allowed with 
respect to a payment attributable to an income tax that applies 
exclusively to income from a trade or business and is not a tax of 
general application. For purposes of this paragraph (k)(2), verification 
shall be made solely from--
    (i) The State or local income tax return, or
    (ii) Information obtained through a voluntary information exchange 
agreement with the United States for the applicable taxable year.
    (3) Verification from the State or local income tax return. A refund 
officer shall verify from the State or local income tax return that an 
individual did not claim itemized deductions for Federal income tax 
purposes for the applicable taxable year only if--
    (i)(A) An individual who itemized deductions for Federal income tax 
purposes either must attach a copy of Schedule A of the individual's 
Federal income tax return to the State or local income tax return or 
must transcribe information from Schedule A of the individual's Federal 
income tax return on the State or local income tax return;
    (B) The information contained on or transcribed from the Schedule A 
is required for the purpose of computing liability for the State or 
local income tax; and
    (C) The omission of a copy of the Schedule A, or of the information 
required to be transcribed from the Schedule A, is consistent with the 
taxpayer's computation of tax on the State or local income tax return; 
or
    (ii) Individuals are required to transcribe information from their 
Federal income tax return (other than from Schedule A) on the State or 
local income tax return for the purpose of computing liability for the 
State or local income tax and the information can be used to determine 
conclusively whether the taxpayer itemized deductions for Federal income 
tax purposes.
    (4) Example. The provisions of paragraph (k)(3)(ii) of this section 
may be illustrated by the following example:

    Example. State X asks for transcription of the following information 
on its 1983 income tax return from the taxpayer's 1983 Federal income 
tax return: Adjusted gross income; taxable income; and number of 
exemptions claimed. The amount of adjusted gross income and the number 
of exemptions claimed on the Federal income tax return are taken into 
account in computing the liability for income tax under the laws of 
State X. The amount of taxable income transcribed from the Federal 
return, however, does not enter into the computation of liability for 
income tax under the laws of State X. Thus, this amount may not be taken 
into account by the refund officer of State X for purposes of verifying 
whether a taxpayer itemized deductions for Federal income tax purposes. 
Since the refund officer of State X will not be able to determine 
conclusively from the amount of adjusted gross income and the number of 
exemptions transcribed from the Federal return whether a taxpayer 
itemized deductions for Federal income tax purposes, the transcribed 
information does not meet the requirements of paragraph (k)(3)(ii) of 
this section.

    (l) Time for furnishing statements--(1) General rule. The statement 
required under paragraph (k) of this section shall be furnished after 
December 31 of the year in which the refund is paid or credit or offset 
is allowed, and on or before January 31 of the following year.
    (2) Extensions of time. For good cause shown upon written 
application of the

[[Page 420]]

refund officer, the service center director may grant an extension of 
time not exceeding 30 days in which to furnish statements under this 
paragraph. The application shall be addressed to the Service Center with 
which the Forms 1099 required under this section are required to be 
filed and shall contain a concise statement of the reasons for 
requesting the extension to aid the service center director in 
determining the period of the extension, if any, which will be granted. 
The application shall state at the top of the first page that it is made 
under this section and shall be signed by the refund officer. In 
general, the application shall be filed after September 30 of the year 
in which the refund is paid or credit or offset is allowed, and before 
January 15 of the following year.
    (m) Effective/applicability date. This section applies to payments 
of refunds and credits and offsets allowed after December 31, 1982. The 
amendments to paragraph (k)(1) apply to payee statements due after 
December 31, 2014. For payee statements due before January 1, 2015, 
Sec. 1.6050E-5(k)(1) (as contained in 26 CFR part 1, revised April 
2013) shall apply.

[T.D. 8052, 50 FR 37349, Sept. 13, 1985, as amended by T.D. 8895, 65 FR 
50408, Aug. 18, 2000; T.D. 9675, 79 FR 41131, July 15, 2014]



Sec. 1.6050H-0  Table of contents.

    This section lists the major captions that appear in Sec. Sec. 
1.6050H-1 and 1.6050H-2.

Sec. 1.6050H-1 Information reporting of mortgage interest received in a 
                  trade or business from an individual.

    (a) Information reporting requirement.
    (1) Overview.
    (2) Reporting requirement.
    (3) Optional reporting.
    (b) Qualified mortgage.
    (1) In general.
    (2) Mortgage.
    (i) In general.
    (ii) Transitional rule for certain obligations existing on December 
31, 1984.
    (iii) Transitional rule for certain obligations existing on December 
31, 1987.
    (3) Payor of record.
    (4) Lender of record.
    (c) Interest recipient.
    (1) Trade or business requirement.
    (2) Interest received or collected on behalf of another person.
    (i) General rule.
    (ii) Exception.
    (3) Interest received in the form of points.
    (i) In general.
    (ii) If designation agreement is in effect.
    (4) Governmental unit.
    (5) Examples.
    (d) Additional rules.
    (1) Reporting by foreign person.
    (2) Reporting with respect to nonresident alien individual.
    (i) In general.
    (ii) Nonresident alien individual status.
    (3) Reporting by cooperative housing corporations.
    (e) Amount of interest received on mortgage for calendar year.
    (1) In general.
    (2) Calendar year.
    (i) In general.
    (ii) De minimis rule.
    (iii) Applicability to points.
    (3) Certain interest not received on mortgage.
    (i) Interest received from seller on payor of record's mortgage.
    (ii) Interest received from governmental unit.
    (4) Interest calculated under Rule of 78s method of accounting.
    (f) Points treated as interest.
    (1) General rule.
    (2) Limitations.
    (3) Special rule.
    (i) Amounts paid directly by payor of record.
    (ii) Examples.
    (4) Construction loans.
    (i) In general.
    (ii) Limitation on refinancing of construction loans.
    (5) Amounts paid to mortgage brokers.
    (6) Effect on deduction of points.
    (g) Effective date.
    (1) In general.
    (2) Points.

Sec. 1.6050H-2 Time, form, and manner of reporting interest received on 
                           qualified mortgage.

    (a) Requirement to file return.
    (1) Form of return.
    (2) Information included on return.
    (3) Reimbursements of interest on a qualified mortgage.
    (4) Time and place for filing return.
    (5) Use of magnetic media.
    (b) Requirement to furnish statement.
    (1) In general.
    (2) Information included on statement.
    (3) Statement furnished pursuant to Federal mortgage program.
    (4) Copy of Form 1098 to payor of record.
    (5) Furnishing statement with other information reports.
    (6) Time and place for furnishing statement.

[[Page 421]]

    (c) Notice requirement for use of Rule of 78s method of accounting.
    (1) In general.
    (2) Time and manner.
    (d) Reporting under designation agreement.
    (1) In general.
    (2) Qualified person.
    (3) Designation agreement.
    (4) Penalties.
    (e) Penalty provisions.
    (1) Returns and statements the due date for which (determined 
without regard for extensions) is after December 31, 1987, and before 
December 31, 1989.
    (i) Failure to file return or to furnish statement.
    (ii) Failure to furnish TIN.
    (iii) Failure to include correct information.
    (2) Returns and statements the due date for which (determined 
without regard for extensions) is after December 31, 1989.
    (i) Failure to file return or to furnish statement.
    (ii) Failure to furnish TIN.
    (iii) Failure to include correct information.
    (f) Requirement to request and to obtain TIN.
    (1) In general.
    (2) Manner of requesting TIN.
    (g) Effective date.
    (1) In general.
    (2) Points.

[T.D. 8571, 59 FR 63250, Dec. 8, 1994]



Sec. 1.6050H-1  Information reporting of mortgage interest received 
in a trade or business from an individual.

    (a) Information reporting requirement--(1) Overview. The information 
reporting requirements of section 6050H, this section, and Sec. 
1.6050H-2 apply to an interest recipient who receives at least $600 of 
interest on a qualified mortgage for a calendar year or who makes a 
reimbursement of interest described in Sec. 1.6050H-2(a)(2)(iv). 
Paragraph (b) of this section defines qualified mortgage. Paragraph (c) 
of this section defines interest recipient. Paragraph (d) of this 
section contains additional rules relating to the reporting requirement 
for foreign persons, cooperative housing corporations, and nonresident 
alien individuals. Paragraph (e) of this section contains rules for 
determining the amount of interest received on a mortgage for a calendar 
year. Paragraph (f) of this section provides rules for determining when 
prepaid interest in the form of points is taken into account as interest 
for purposes of section 6050H, this section, and Sec. 1.6050H-2.
    (2) Reporting requirement. Except as otherwise provided in this 
section and Sec. 1.6050H-2, an interest recipient that either receives 
at least $600 of interest on a qualified mortgage for a calendar year or 
makes reimbursements of interest described in Sec. 1.6050H-2(a)(2)(iv) 
must, with respect to that interest--
    (i) File an information return with the Internal Revenue Service; 
and
    (ii) Furnish a statement to the payor of record on the mortgage.
    (3) Optional reporting. An interest recipient may, but is not 
required to, report its receipt of less than $600 of interest on a 
qualified mortgage for a calendar year. Similarly, an interest recipient 
also may report reimbursements of interest on a qualified mortgage even 
if the reimbursements are not required to be reported by Sec. 1.6050H-
2(a)(2)(iv). An interest recipient that chooses, but is not required, to 
file a return as provided in this section and Sec. 1.6050H-2(a) or to 
furnish a statement as provided in this section and Sec. 1.6050H-2(b) 
is subject to the requirements of this section and Sec. 1.6050H-2.
    (b) Qualified mortgage--(1) In general. A mortgage is a qualified 
mortgage if the payor of record on the mortgage is an individual, 
including an individual acting in a capacity as a sole proprietor of a 
business. A mortgage is not a qualified mortgage if the payor of record 
on the mortgage is not an individual (such as a trust, estate, 
partnership, association, company, or corporation), even though an 
individual is a co-borrower on the mortgage and all the trustees, 
beneficiaries, partners, members, or shareholders of the payor of record 
are individuals.
    (2) Mortgage--(i) In general. Except as otherwise provided in 
paragraphs (b)(2)(ii) and (b)(2)(iii) of this section, an obligation is 
a mortgage if real property (regardless of where located) secures all or 
part of the obligation. An interest recipient must determine whether 
real property secures an obligation at the time the obligation is 
created or, if security is added or removed at a later time, at that 
later time. Real property includes a manufactured home as defined in 
section

[[Page 422]]

25(e)(10). An obligation includes a line of credit or a credit card 
obligation. For purposes of this section and Sec. 1.6050H-2, a borrower 
incurs a line of credit or credit card obligation when the borrower 
first has the right to borrow against the line of credit or credit card, 
whether the borrower actually borrows an amount at that time. An 
obligation will not fail to be treated as a mortgage solely because, 
under an applicable State or local homestead law or other debtor 
protection law in effect on August 16, 1986, the security interest is 
ineffective or the enforceability of the security interest is 
restricted.
    (ii) Transitional rule for certain obligations existing on December 
31, 1984--(A) In general. An obligation that existed on December 31, 
1984, is not a mortgage if, at the time the payor of record incurred the 
obligation, the interest recipient reasonably classified the obligation 
as other than a mortgage, real property loan, real estate loan, or other 
similar type of obligation. A reasonable classification of an obligation 
must be consistent with industry practices and determined according to 
the purpose of the obligation, the property securing the obligation, and 
any other reasonable factor. For purposes of this paragraph 
(b)(2)(ii)(A), an obligation was not reasonably classified as other than 
a mortgage, real property loan, real estate loan, or other similar type 
of obligation if, at the time the payor of record incurred the 
obligation, more than one-half of the obligations in the particular 
class in which the obligation was classified were secured primarily by 
real property.
    (B) Examples. The following examples illustrate the rules of 
paragraph (b)(2)(ii)(A) of this section:

    Example 1. B offers an unsecured line of credit and a line of credit 
secured by real property. B separately markets the two credit lines, and 
they are governed by different terms and conditions. For accounting 
purposes, B classifies the two types of loans as a single class. For 
purposes of paragraph (b)(2)(ii)(A) of this section, the two types of 
loans are different classes of obligations.
    Example 2. B operates a program to make loans to small businesses. 
Depending on the amount of the loan and the credit history of the 
borrower, B may or may not require security for the loan. If B requires 
security, it may consist of real or personal property. For accounting 
purposes, B classifies all of the loans within this program as a single 
class. For purposes of paragraph (b)(2)(ii)(A) of this section, all of 
the loans within this program may be classified as belonging to a single 
class.

    (iii) Transitional rule for certain obligations existing on December 
31, 1987. An obligation that was incurred after December 31, 1984, and 
that existed on December 31, 1987, is not a mortgage if the obligation 
is not primarily secured by real property.
    (3) Payor of record. A payor of record on a mortgage is the person 
carried on the books and records of the interest recipient as the 
principal borrower on the mortgage. If the books and records of the 
interest recipient do not indicate which borrower is the principal 
borrower, the interest recipient must designate a borrower as the 
principal borrower.
    (4) Lender of record. The lender of record is the person who, at the 
time the loan is made, is named as the lender on the loan documents and 
whose right to receive payment from the payor of record is secured by 
the payor of record's principal residence. An intention by the lender of 
record to sell or otherwise transfer the loan to a third party 
subsequent to the close of the transaction will not affect the 
determination of who is the lender of record.
    (c) Interest recipient--(1) Trade or business requirement. Except as 
provided in paragraph (c)(4) of this section, an interest recipient is a 
person that is engaged in a trade or business (whether or not the trade 
or business of lending money) and that, in the course of the trade or 
business, either receives interest on a mortgage or makes a 
reimbursement of interest on a qualified mortgage described in Sec. 
1.6050H-2(a)(3). For purposes of this paragraph (c)(1), if a person 
holds a mortgage which was originated or acquired in the course of a 
trade or business, the interest on the mortgage is considered to be 
received in the course of that trade or business. For example, if real 
estate developer A lends money to individual B to enable B to purchase a 
house in a subdivision owned and developed by A, and B gives a mortgage 
to A for the loan, A is an interest recipient for interest received

[[Page 423]]

on the mortgage. Alternatively, if C, a person engaged in the trade or 
business of being a physician, lends money to individual D to enable D 
to purchase C's home, and D gives a mortgage to C for the loan, C is not 
an interest recipient for interest received on the mortgage, because C 
will not receive the interest in the course of the trade or business of 
being a physician.
    (2) Interest received or collected on behalf of another person--(i) 
General rule. Except as otherwise provided in paragraph (c)(2)(ii) or 
(3) of this section, a person that, in the course of its trade or 
business, receives or collects interest on a mortgage on behalf of 
another person (e.g., the lender of record) is the interest recipient 
(the initial recipient) for the mortgage. In this case, the reporting 
requirement of paragraph (a) of this section does not apply to the 
transfer of interest from the initial recipient to the person for which 
the initial recipient receives or collects the interest. For example, if 
financial institution A collects interest on behalf of financial 
institution B, A is the initial recipient for the mortgage and is 
subject to the reporting requirements of section 6050H, and B is not 
required to report the interest received on the mortgage from A.
    (ii) Exception--(A) Scope of exception. Paragraph (c)(2)(i) of this 
section does not apply for any period for which--
    (1) An initial recipient does not possess the information needed to 
comply with the reporting requirement of paragraph (a) of this section; 
and
    (2) The person for which the interest is received or collected would 
receive the interest in the course of its trade or business if the 
interest were paid directly to that person. For purposes of this 
paragraph (c)(2)(ii)(A)(2), if interest is received or collected on 
behalf of a person other than an individual, that person is presumed to 
receive interest in a trade or business.
    (B) Application of exception. If the exception provided by this 
paragraph (c)(2)(ii) applies, the person for which the interest is 
received or collected is the interest recipient with respect to interest 
received or collected on the mortgage during the period described in 
this paragraph (c)(2)(ii).
    (3) Interest received in the form of points. For purposes of this 
section and Sec. 1.6050H-2, in the case of prepaid interest received in 
the form of points (as defined in paragraph (f) of this section):
    (i) In general. Except as provided in paragraph (c)(3)(ii) of this 
section, only the lender of record or a qualified person (as defined in 
Sec. 1.6050H-2(d)(2)) is treated as receiving the points. The lender of 
record or qualified person is treated as receiving all points paid 
directly by the payor of record in connection with the purchase of the 
principal residence.
    (ii) If designation agreement is in effect. If a designation 
agreement is executed pursuant to Sec. 1.6050H-2(d) with respect to 
points, only the designated party under the agreement is treated as 
receiving points with respect to any mortgage to which the agreement 
applies. The designated party is treated as receiving all points with 
respect to any mortgage to which the agreement applies.
    (4) Governmental unit. A governmental unit or an agency or 
instrumentality of a governmental unit that receives interest on a 
mortgage is an interest recipient without regard to the requirement of 
paragraph (c)(1) of this section that the interest be received in the 
course of a trade or business. A governmental unit or an agency or 
instrumentality of a governmental unit that is an interest recipient 
must designate an officer or employee to satisfy the reporting 
requirements of paragraph (a) of this section.
    (5) Examples. The following examples illustrate the rules of 
paragraph (c) of this section:

    Example 1. Financial institution F collects mortgage interest on 
behalf of financial institution G and deposits the amount collected into 
G's account held with F. F possesses the information needed to comply 
with the reporting requirement of paragraph (a) of this section. F is 
the interest recipient for the mortgage. G is not required to report.
    Example 2. The facts are the same as in example (1), except that F 
does not possess the information needed to comply with the reporting 
requirement. G, the person for which F collects the interest, is the 
interest recipient for the mortgage. F is not required to report.
    Example 3. S, an individual, sells real property to another 
individual, P, and takes back

[[Page 424]]

a mortgage from P to finance the sale. S does not receive the interest 
in the course of a trade or business. B, a bank, collects P's payments 
of principal and interest on behalf of S and deposits that amount into 
an account held at the bank in S's name. B does not possess the 
information needed to comply with the reporting requirement of paragraph 
(a) of this section. B is the interest recipient for P's mortgage 
without regard to paragraph (c)(2)(ii) of this section, because S would 
not receive the interest in the course of a trade or business. S is not 
required to report.
    Example 4. X collects mortgage interest on behalf of Y, who would 
receive the interest in the course of a trade or business. X possesses 
the information needed to comply with the reporting requirement of 
paragraph (a) of this section. On July 1, 1988, Z assumes X's interest 
collection responsibilities. Z does not possess the information needed 
to comply with the reporting requirement of paragraph (a) of this 
section. X is the interest recipient for interest received from January 
1, 1988, through June 30, 1988. Because Z does not possess the requisite 
information and Y would receive the interest in the course of a trade or 
business, Y is the interest recipient for interest received from July 1, 
1988, through December 31, 1988.
    Example 5. On December 1, Borrower obtains from Lender funds with 
which to purchase an existing structure to be used as Borrower's 
principal residence. In connection with the mortgage, Lender charges 
Borrower $300 as points. Borrower pays this amount to Lender at closing 
using unborrowed funds. In addition, Lender receives from Borrower with 
respect to the mortgage $300 as interest (as determined under paragraph 
(e) of this section) other than points. Because Lender has received at 
least $600 in interest, including points, with respect to Borrower's 
mortgage during the calendar year, Lender must report the payments in 
accordance with paragraph (a) of this section and Sec. 1.6050H-2. Under 
those sections, Lender must separately state on the information return 
and the statement to Borrower the $300 received as interest (other than 
points) and the $300 received as points.

    (d) Additional rules--(1) Reporting by foreign person. An interest 
recipient that is not a United States person (as defined in section 
7701(a)(30)) must report interest received on a qualified mortgage only 
if it receives the interest--
    (i) At a location in the United States, or
    (ii) At a location outside the United States if the interest 
recipient is--
    (A) A controlled foreign corporation (within the meaning of section 
957(a)), or
    (B) A person, 50 percent or more of the gross income of which, from 
all sources for the three-year period ending with the close of the 
taxable year preceding the receipt of interest (or for such part of the 
period as the person was in existence), was effectively connected with 
the conduct of a trade or business within the United States.
    (2) Reporting with respect to nonresident alien individual--(i) In 
general. The reporting requirement of paragraph (a) of this section does 
not apply if--
    (A) The payor of record is a nonresident alien individual, and
    (B) Real property located in the United States does not secure the 
mortgage.
    (ii) Nonresident alien individual status. For purposes of paragraph 
(d)(2)(i)(A) of this section, an interest recipient must apply the 
following documentary evidence rules to determine whether a payor of 
record is a nonresident alien individual:
    (A) If interest is paid outside the United States, the interest 
recipient must satisfy the documentary evidence standard provided in 
Sec. 1.6049-5(c) with respect to the payor of record; and
    (B) If interest is paid within the United States, the interest 
recipient must secure from the payor of record a Form W-8 or a 
substantially similar statement signed by the payor under penalty of 
perjury as described in Sec. 1.1441-1(e)(1).


For purposes of this paragraph (d)(2)(ii), the place of payment is the 
place where the payor of record completes the acts necessary to effect 
payment. An amount paid by transfer to an account maintained by an 
interest recipient in the United States or by mail to a United States 
address is considered to be paid within the United States.
    (3) Reporting by cooperative housing corporations. For purposes of 
this section and Sec. 1.6050H-2, an amount received by a cooperative 
housing corporation from an individual tenant-stockholder that 
represents the tenant-stockholder's proportionate share of interest 
described in section 216(a)(2) is

[[Page 425]]

interest received on a qualified mortgage in the course of the 
cooperative housing corporation's trade or business. A cooperative 
housing corporation is an interest recipient with respect to each 
tenant-stockholder's proportionate share of interest and must report 
$600 or more of interest received from an individual tenant-stockholder. 
The terms ``cooperative housing corporation,'' ``tenant-stockholder,'' 
and ``tenant-stockholder's proportionate share'' are defined in section 
216 and the regulations thereunder.
    (e) Amount of interest received on mortgage for calendar year--(1) 
In general. For purposes of this section and Sec. 1.6050H-2, interest 
includes mortgage prepayment penalties and late charges other than late 
charges for a specific mortgage service. Interest also includes prepaid 
interest in the form of points (as defined in paragraph (f) of this 
section). Whether an interest recipient receives $600 or more of 
interest on a mortgage for a calendar year is determined on a mortgage-
by-mortgage basis. An interest recipient need not aggregate interest 
received on all of the mortgages of a payor of record held by the 
interest recipient to determine whether the $600 threshold is met. 
Therefore, an interest recipient need not report interest of less than 
$600 received on a mortgage, even though it receives a total of $600 or 
more of interest on all of the mortgages of the payor of record for a 
calendar year.
    (2) Calendar year--(i) In general. Except as otherwise provided in 
paragraph (e)(2)(ii) or (iii) of this section, the calendar year for 
which interest is received is the later of the calendar year in which 
the interest is received or the calendar year in which the interest 
properly accrues.
    (ii) De minimis rule. An interest recipient may treat interest 
received during the current calendar year which properly accrues by 
January 15 of the subsequent calendar year as interest received for the 
current calendar year. For example, if an interest recipient receives a 
monthly interest payment on December 31, 1988, which includes interest 
accruing for the period December 5, 1988, to January 5, 1989, the 
interest recipient may treat the entire interest payment as received for 
1988. If a portion of an interest payment received in a current calendar 
year accrues after January 15 of the subsequent calendar year, an 
interest recipient must report as interest received for the current 
calendar year only the portion that properly accrues by the end of the 
current calendar year. For example, if an interest recipient receives a 
monthly payment that includes interest accruing for the period December 
20, 1988, through January 20, 1989, the interest recipient may not 
report as interest received for 1988 any interest accruing after 
December 31, 1988. The interest recipient must report the interest 
accruing after December 31, 1988, as received for calendar year 1989.
    (iii) Applicability to points. Paragraphs (e)(2)(i) and (ii) of this 
section do not apply to prepaid interest in the form of points (as 
defined in paragraph (f) of this section). Points (as defined in 
paragraph (f) of this section) must be reported in the calendar year in 
which they are received.
    (3) Certain interest not received on mortgage--(i) Interest received 
from seller on payor of record's mortgage. Interest received from a 
seller or a person related to a seller within the meaning of section 
267(b) or section 707(b)(1) on a payor of record's mortgage is not 
interest received on a mortgage. For example, interest is not received 
on a mortgage if a real estate developer deposits an amount in escrow 
with an interest recipient and advises it to draw on the account to pay 
interest on a payor of record's mortgage (e.g., a buy-down mortgage). 
Similarly, interest is not received on a mortgage if an interest 
recipient receives a lump sum from a real estatge developer for interest 
on a payor of record's mortgage.
    (ii) Interest received from governmental unit. Interest received 
from a governmental unit or an agency or instrumentality of a 
governmental unit is not interest received on a mortgage. For example, 
interest is not received on a mortgage if received as a housing 
assistance payment from the Department of Housing and Urban Development 
on a mortgage insured under section 235 of the National Housing Act (12 
U.S.C. 1701-1715z (1982 & Supp. 1983)).

[[Page 426]]

Except as otherwise provided in paragraph (e) (1) and (2) of this 
section, interest received on a mortgage is only the excess of interest 
received on the mortgage over interest received from a governmental unit 
or an agency or instrumentality of a governmental unit.
    (4) Interest calculated under Rule of 78s method of accounting. An 
interest recipient permitted by Revenue Procedure 83-40, 1983-1, C.B. 
774 (or other revenue procedure) to use the Rule of 78s method of 
accounting to calculate interest earned on a transaction may report as 
interest received on a mortgage interest earned on the transaction as 
calculated under the Rule of 78s method of accounting only if the 
interest recipient satisfies the notice requirement of Sec. 1.6050H-
2(c).
    (f) Points treated as interest--(1) General rule. Subject to the 
limitations of paragraph (f)(2) of this section, an amount is deemed to 
be points paid in respect of indebtedness incurred in connection with 
the purchase of the payor of record's principal residence (points) for 
purposes of this section and Sec. 1.6050H-2 to the extent that the 
amount--
    (i) Is clearly designated on the Uniform Settlement Statement 
prescribed under the Real Estate Settlement Procedures Act of 1974, 12 
U.S.C. 2601 et seq., (e.g., the Form HUD-1) as points incurred in 
connection with the indebtedness, for example as loan origination fees 
(including amounts so designated on Veterans Affairs (VA) and Federal 
Housing Administration (FHA) loans), loan discount, discount points, or 
points;
    (ii) Is computed as a percentage of the stated principal amount of 
the indebtedness incurred by the payor of record;
    (iii) Conforms to an established practice of charging points in the 
area in which the loan is issued and does not exceed the amount 
generally charged in the area;
    (iv) Is paid in connection with the acquisition by the payor of 
record of a residence that is the principal residence of the payor of 
record and that secures the loan. For this purpose, the lender of record 
may rely on a signed written statement of the payor of record that 
states whether the proceeds of the loan are for the purchase of the 
mortgagor's principal residence; and
    (v) Is paid directly by the payor of record.
    (2) Limitations. An amount is not points for purposes of this 
section to the extent that the amount is--
    (i) Paid in connection with indebtedness incurred for the 
improvement of a principal residence;
    (ii) Paid in connection with indebtedness incurred to purchase or 
improve a residence that is not the payor of record's principal 
residence, such as a second home, vacation property, investment 
property, or trade or business property;
    (iii) Paid in connection with a home equity loan or a line of 
credit, even though the loan is secured by the payor of record's 
principal residence;
    (iv) Paid in connection with a refinancing loan (except as provided 
by paragraph (f)(4) of this section), including a loan incurred to 
refinance indebtedness owed by the borrower under the terms of a land 
contract, a contract for deed, or similar forms of seller financing;
    (v) Paid in lieu of amounts that ordinarily are stated separately on 
the Form HUD-1, such as appraisal fees, inspection fees, title fees, 
attorney fees, and property taxes; or
    (vi) Paid in connection with the acquisition of a principal 
residence, to the extent that the amount is allocable to indebtedness in 
excess of the aggregate amount that may be treated as acquisition 
indebtedness under section 163(h)(3)(B)(ii).
    (3) Special rule--(i) Amounts paid directly by payor of record. For 
purposes of this section, an amount is considered paid directly by the 
payor of record if it is--
    (A) Provided by the payor of record from funds that have not been 
borrowed from the lender of record for this purpose as part of the 
overall transaction. The amount provided may include amounts designated 
as down payments, escrow deposits, earnest money applied at the closing, 
and other funds actually paid over by the payor of record at or before 
the time of closing; or
    (B) Paid as points (within the meaning of this paragraph (f)) on 
behalf of

[[Page 427]]

the payor of record by the seller. For this purpose, an amount paid as 
points to an interest recipient by the seller on behalf of the payor of 
record is treated as paid to the payor of record and then paid directly 
by the payor of record to the interest recipient.
    (ii) Examples. The provisions of this paragraph (f) are illustrated 
by the following examples:

    Example 1. Financed payment of points. Buyer purchases a principal 
residence for $100,000. There is a total of $7,000 in closing costs 
(exclusive of down payment) charged in connection with the sale. Of this 
amount, $3,000 is charged as points (within the meaning of paragraph (f) 
of this section). At closing, Buyer makes a down payment of $20,000 and 
provides unborrowed funds in the amount of $4,000 for the payment of 
various closing costs other than points. Buyer finances payment of the 
points by increasing the principal amount of the loan by $3,000. Seller 
makes no payments on Buyer's behalf. Because Buyer has provided at 
closing funds that have not been borrowed from the lender of record for 
this purpose in an amount at least equal to the amount charged as points 
in the transaction, the lender of record (or a qualified person) must 
report $3,000 as points in accordance with this section and Sec. 
1.6050H-2.
    Example 2. Seller-paid points. Buyer purchases a principal residence 
for $100,000. There is a total of $7,000 in closing costs (exclusive of 
down payment) charged in connection with the sale. Of this amount, 
$3,000 is charged as points (within the meaning of this paragraph (f)). 
Seller agrees to pay all closing costs on behalf of Buyer, including the 
amount charged as points. Accordingly, the amount paid by Seller as 
points is treated as paid directly by Buyer, and the lender of record 
(or a qualified person) must report the $3,000 as points in accordance 
with this section and Sec. 1.6050H-2.

    (4) Construction loans--(i) In general. An amount paid in connection 
with indebtedness incurred to construct a residence, or to refinance 
indebtedness incurred to construct a residence, is deemed to be points 
for purposes of this section to the extent the amount--
    (A) Is clearly designated on the loan documents as points incurred 
in connection with the indebtedness, for example, as loan origination 
fees, loan discount, discount points, or points;
    (B) Is computed as a percentage of the stated principal amount of 
the indebtedness incurred by the payor of record;
    (C) Conforms to an established practice of charging points in the 
area in which the loan is issued and does not exceed the amount 
generally charged in the area;
    (D) Is paid in connection with indebtedness incurred by the payor of 
record to construct (or to refinance construction of) a residence that 
is to be used, when completed, as the principal residence of the payor 
of record;
    (E) Is paid directly by the payor of record; and
    (F) Is not allocable to indebtedness in excess of the aggregate 
amount that may be treated as acquisition indebtedness under section 
163(h)(3)(B)(ii).
    (ii) Limitation on refinancing of construction loans. Amounts paid 
in connection with refinancing indebtedness incurred to construct a 
residence are not treated as points to the extent they are allocable to 
indebtedness that exceeds the indebtedness incurred to construct the 
residence.
    (5) Amounts paid to mortgage brokers. Amounts received directly or 
indirectly by a mortgage broker are treated as points under this 
paragraph (f) to the same extent the amounts would be so treated if they 
were paid to and retained by the lender of record, and must be reported 
by the lender of record in accordance with this section and Sec. 
1.6050H-2.
    (6) Effect on deduction of points. This section and Sec. 1.6050H-2 
address only the information reporting requirements of section 6050H and 
do not affect a payor of record's deduction for any amount in accordance 
with applicable provisions of the Internal Revenue Code.
    (g) Effective date--(1) In general. Except as provided in paragraph 
(g)(2) of this section, this section is effective for mortgage interest 
received after December 31, 1987.
    (2) Points. The reporting requirements of this section do not apply 
to prepaid interest received in the form of points before January 1, 
1995. In addition, the inclusion of points in the determination of 
interest under paragraph (e)(1) of this section applies only

[[Page 428]]

to transactions occurring after December 31, 1994.

[T.D. 8191, 53 FR 12002, Apr. 12, 1988, as amended by T.D. 8571, 59 FR 
63251, Dec. 8, 1994; T.D. 8734, 62 FR 53492, Oct. 14, 1997; T.D. 9849, 
84 FR 9237, Mar. 14, 2019]



Sec. 1.6050H-2  Time, form, and manner of reporting interest received 
on qualified mortgage.

    (a) Requirement to file return--(1) Form of return. An interest 
recipient must file a return required by Sec. 1.6050H-1(a) on Form 1098 
(with Form 1096 as the transmittal form). An interest recipient may use 
forms containing provisions substantially similar to those in Forms 1098 
and 1096 if it complies with applicable revenue procedures relating to 
substitute Forms 1098 and 1096. An interest recipient must file a 
separate return for each qualified mortgage for which it receives $600 
or more of interest for a calendar year.
    (2) Information included on return. An interest recipient must 
include on Form 1098:
    (i) The name, address, and taxpayer identification number (TIN) (as 
defined in section 7701(a)(41)) of the payor of record;
    (ii) The name, address, and TIN of the interest recipient;
    (iii) The amount of interest (other than points) required to be 
reported with respect to the qualified mortgage for the calendar year;
    (iv) With respect to reimbursements of interest on a qualified 
mortgage (as discussed in paragraph (a)(3) of this section) made to the 
payor of record in the calendar year--
    (A) Reimbursements aggregating $600 or more; and
    (B) Reimbursements aggregating less than $600, but only if $600 or 
more of interest on the qualified mortgage is received in the calendar 
year from the payor of record;
    (v) The amount of points paid directly by the payor of record 
(within the meaning of Sec. 1.6050H-1(f)(3)) required to be reported 
with respect to the qualified mortgage for the calendar year; and
    (vi) Any other information required by Form 1098 or its 
instructions.


Section 1.6050H-1(e) contains rules to determine the amount of interest 
received on a mortgage for a calendar year.
    (3) Reimbursements of interest on a qualified mortgage. For purposes 
of paragraph (a)(2)(iv) of this section, a reimbursement of interest on 
a qualified mortgage is a reimbursement of an amount received in a prior 
year that was required to be reported for that prior year under 
paragraph (a)(2)(iii) of this section by any interest recipient. Only 
the interest recipient that makes the reimbursement is required to 
report the reimbursement under this section. Form 1098 and the statement 
furnished to the payor of record under paragraph (b) of this section 
must not include any amount that constitutes interest on the 
reimbursement paid to the payor of record. Rules relating to the 
requirement to report interest on a reimbursement are, in the case of a 
person carrying on the banking business (or a middleman, as defined in 
Sec. 1.6049-4(f)(4), of a person carrying on the banking business), 
provided in section 6049 and the regulations thereunder, and, for other 
persons, provided in section 6041 and the regulations thereunder. 
Reimbursements of interest on a qualified mortgage (as described in this 
section) made in 1993 and subsequent calendar years must be reported on 
Form 1098 and statements furnished to payors of record. Reimbursements 
made prior to 1993 are not required to be reported.
    (4) Time and place for filing return. An interest recipient must 
file a return required by this paragraph (a) on or before February 28 
(March 31 if filed electronically) of the year following the calendar 
year for which it receives the mortgage interest. If no interest is 
required to be reported for the calendar year, but a reimbursement of 
interest on a qualified mortgage is required to be reported for the 
calendar year, then a return required by this paragraph (a) must be 
filed on or before February 28 (March 31 if filed electronically) of the 
year following the calendar year in which the reimbursement was made. An 
interest recipient must file the return required by paragraph (a) of 
this section with the IRS office designated in the instructions for Form 
1098.
    (5) Use of magnetic media. An interest recipient must file the 
return required

[[Page 429]]

by paragraph (a) of this section on magnetic media only if required by 
section 6011(e) and the regulations thereunder. An interest recipient 
not required by section 6011(e) to file returns on magnetic media may 
request permission to do so. Section 301.6011-2 contains rules relating 
to the use of magnetic media. A failure to file on magnetic media when 
required constitutes a failure to file an information return under 
section 6721.
    (b) Requirement to furnish statement--(1) In general. An interest 
recipient that must file a return under paragraph (a) of this section 
must furnish a statement to the payor of record.
    (2) Information included on statement. An interest recipient must 
include on the statement that it must furnish to a payor of record:
    (i) The information required under paragraph (a)(2) of this section;
    (ii) A legend that--
    (A) Identifies the statement as important tax information that is 
being furnished to the IRS; and
    (B) Notifies the payor of record that if the payor of record is 
required to file a return, a negligence penalty or other sanction may be 
imposed on the payor of record if the IRS determines that an 
underpayment of tax results because the payor of record overstated a 
deduction for this mortgage interest (if any) or understated income from 
this mortgage interest reimbursement (if any) on the payor of record's 
return;
    (iii) A legend stating that the payor of record may be unable to 
deduct the full amount of mortgage interest reported on the statement; 
that limitations based on the cost and value of the property securing 
the mortgage may apply; and that the payor of record may only deduct 
mortgage interest to the extent it was incurred, actually paid by the 
payor of record, and not reimbursed by another person; and
    (iv) With respect to any information required to be reported under 
paragraph (a)(2)(iv) of this section, an instruction providing that the 
amount of the reimbursement is not to be deducted and that the amount 
must be included in the gross income of the payor of record if the 
reimbursed interest was deducted by the payor of record in a prior year 
so as to reduce income tax.
    (3) Statement furnished pursuant to Federal mortgage program. An 
interest recipient that furnishes a statement to a payor of record under 
a Federal mortgage program will satisfy the requirement of paragraph 
(b)(1) of this section if the statement contains all the information and 
legends required by paragraph (b)(2) of this section and is furnished by 
the time and at the place required by paragraph (b)(6) of this section.
    (4) Copy of Form 1098 to payor of record. An interest recipient will 
satisfy the requirement of paragraph (b)(1) of this section by 
furnishing to a payor of record a copy of Form 1098 (or a substitute 
statement that complies with applicable revenue procedures) containing 
all the information filed with the Internal Revenue Service and all the 
legends required by paragraph (b)(2) of this section by the time and at 
the place required by paragraph (b)(6) of this section.
    (5) Furnishing statement with other information reports. An interest 
recipient may transmit the statement required by paragraph (b)(1) of 
this section to the payor of record with other information, including 
other information returns, as permitted by applicable revenue 
procedures.
    (6) Time and place for furnishing statement. An interest recipient 
must furnish a statement required by paragraph (b)(1) of this section to 
a payor of record on or before January 31 of the year following the 
calendar year for which it receives the mortgage interest. If no 
mortgage interest is required to be reported for the calendar year, but 
a reimbursement of interest on a qualified mortgage is required to be 
reported for the calendar year, then the statement required by paragraph 
(b)(1) of this section must be furnished on or before January 31 of the 
year following the calendar year in which the reimbursement was made. 
The interest recipient will be considered to have furnished the 
statement to the payor of record if it mails the statement to the payor 
of record's last known address.
    (c) Notice requirement for use of Rule of 78s method of accounting--
(1) In general. An interest recipient seeking to report

[[Page 430]]

interest received on a mortgage under the Rule of 78s method of 
accounting as permitted under Sec. 1.6050H-1(e)(4) must notify the 
payor of record that the Rule of 78s method of accounting was used to 
calculate interest received on the mortgage and that the payor of record 
may not deduct as interest the amount calculated under the Rule of 78s 
method of accounting unless the payor of record properly uses that 
method to determine interest deductions. The notice must state that the 
payor of record may use the Rule of 78s method of accounting to 
determine interest paid for Federal income tax purposes only for a self-
amortizing consumer loan requiring level payments at regular intervals 
(at least annually) over no longer than a five-year period, with no 
balloon payment at the end of the loan term, and only when the loan 
agreement provides for use of the Rule of 78s method of accounting to 
determine interest earned. See Rev. Proc. 83-40, 1983-1 C.B. 774; Rev. 
Rul. 83-84, 1983-1 C.B. 97.
    (2) Time and manner. An interest recipient must provide notice 
required by paragraph (c)(1) of this section to a payor of record on or 
with the statement required by paragraph (b) of this section. An 
interest recipient may provide notice on a separate paper or on the 
statement required by paragraph (b) of this section.
    (d) Reporting under designation agreement--(1) In general. An 
interest recipient that receives or collects interest (including points) 
on a mortgage may designate a qualified person to satisfy the reporting 
requirements of paragraphs (a), (b), and (c) of this section. If a 
designated qualified person reports as permitted under this paragraph 
(d), it will satisfy the requirement of paragraph (a)(2)(ii) of this 
section by including on Form 1098 (and Form 1096) the name, address, and 
TIN of the designated qualified person.
    (2) Qualified person. A qualified person is either--
    (i) A trade or business with respect to which the interest recipient 
is under common control within the meaning of Sec. 1.414(c)-2; or
    (ii) A person who is named as the designee by the lender of record 
or by a qualified person (under paragraph (d)(2) of this section) in a 
designation agreement entered into in accordance with paragraph (d)(3) 
of this section, and who either was involved in the original loan 
transaction or is a subsequent purchaser of the loan.
    (3) Designation agreement. An interest recipient that designates a 
qualified person to satisfy the reporting requirements described in 
paragraphs (a), (b), and (c) of this section must make that designation 
in a written designation agreement. The designation agreement must 
identify the mortgage(s) and calendar years for which the designated 
qualified person must report, and must be signed by both the designator 
and designee. A designee may report an amount as having been paid 
directly by the payor of record (for purposes of paragraph (a)(2)(v) of 
this section) only if the designation agreement contains the 
designator's representation that it did not lend such amount to the 
payor of record as part of the overall transaction. The designator must 
retain a copy of the designation agreement for four years following the 
close of the calendar year in which the loan is made. The designation 
agreement need not be filed with the Internal Revenue Service.
    (4) Penalties. A designated qualified person is subject to any 
applicable penalties provided in part II of subchapter B of chapter 68 
of the Internal Revenue Code as if it were an interest recipient. A 
designator is relieved from liability for applicable penalties by 
designating a qualified person under the provisions of paragraph (d)(3) 
of this section. Paragraph (e) of this section describes applicable 
penalties.
    (e) Penalty provisions--(1) Returns and statements the due date for 
which (determined without regard for extensions) is after December 31, 
1987, and before December 31, 1989. For purposes of this paragraph 
(e)(1) only, all references to sections of the Internal Revenue Code 
refer to sections of the Internal Revenue Code of 1986, as amended on or 
before December 31, 1987.
    (i) Failure to file return or to furnish statement. The section 6721 
penalty applies to an interest recipient that fails to file a return 
required by paragraph (a) of this section with respect to a

[[Page 431]]

payor of record. The section 6722 penalty applies to an interest 
recipient that fails to furnish a statement required by paragraph (b) of 
this section to a payor of record.
    (ii) Failure to furnish TIN. The section 6676 penalty may apply to 
an interest recipient that fails to furnish the TIN of a payor of record 
on a return required by paragraph (a) of this section. The section 6676 
penalty may apply to an interest recipient that fails to request and to 
obtain the TIN of a payor of record under paragraph (f) of this section.
    (iii) Failure to include correct information. The section 6723 
penalty may apply to an interest recipient that fails to include correct 
information on a return required by paragraph (a) of this section or on 
a statement required by paragraph (b) of this section to be furnished to 
a payor of record.
    (2) Returns and statements the due date for which (determined 
without regard for extensions) is after December 31, 1989--(i) Failure 
to file return or to furnish statement. The section 6721 penalty applies 
to an interest recipient that fails to file a return required by 
paragraph (a) of this section with respect to a payor of record. The 
section 6722 penalty applies to an interest recipient that fails to 
furnish a statement required by paragraph (b) of this section to a payor 
of record.
    (ii) Failure to furnish TIN. The section 6721 penalty may apply to 
an interest recipient that fails to furnish the TIN of a payor of record 
on a return required by paragraph (a) of this section. The section 6721 
penalty may apply to an interest recipient that fails to request and to 
obtain the TIN of a payor of record under paragraph (f) of this section.
    (iii) Failure to include correct information. The section 6721 
penalty may apply to an interest recipient that fails to include correct 
information on a return required by paragraph (a) of this section. The 
section 6722 penalty may apply to an interest recipient that fails to 
include correct information on a statement required by paragraph (b) of 
this section to be furnished to a payor record.
    (f) Requirement to request and to obtain TIN--(1) In general. For 
obligations incurred after December 31, 1987, an interest recipient must 
make all reasonable efforts to obtain the TIN of a payor of record when 
the payor of record incurs the obligation. For example, an interest 
recipient may require a borrower to furnish a TIN during the mortgage 
approval or application process. If an interest recipient does not 
maintain the TIN of a payor of record on a mortgage, whenever incurred, 
it must request the TIN at least annually and must process responses 
properly and promptly.
    (2) Manner of requesting TIN. An interest recipient need not 
separately mail a request for a TIN. An interest recipient may include a 
request in its regular mailing of payment coupon booklets or annual 
statements. If an interest recipient makes no mailing to a payor of 
record during the year in which the payor of record incurs the 
obligation, it must request the TIN in a separate mailing. No particular 
form is required to request a TIN. Nevertheless, an interest recipient 
must make the request on a separate paper and must clearly notify a 
payor of record that the Internal Revenue Service requires the payor of 
record to furnish a TIN in order to verify any mortgage interest 
deduction. An interest recipient must notify a payor of record that 
failure to furnish a TIN subjects the payor of record to a $50 penalty 
imposed by the Internal Revenue Service. A request for a TIN made on 
Form W-9 satisfies the requirement of this paragraph (f)(2).
    (g) Effective date--(1) In general. Except as provided in paragraph 
(g)(2) of this section, this section is effective for mortgage interest 
received after December 31, 1987.
    (2) Points. The reporting requirement of this section does not apply 
to prepaid interest in the form of points received before January 1, 
1995.

[T.D. 8191, 53 FR 12005, Apr. 12, 1988, as amended by T.D. 8507, 58 FR 
68753, Dec. 29, 1993; T.D. 8571, 59 FR 63253, Dec. 8, 1994; T.D. 8895, 
65 FR 50408, Aug. 18, 2000; T.D. 9849, 84 FR 9237, Mar. 14, 2019]



Sec. 1.6050H-3  Information reporting of mortgage insurance premiums.

    (a) Information reporting requirements. Any person who, in the 
course of a

[[Page 432]]

trade or business, receives premiums, including prepaid premiums, for 
mortgage insurance (as described in paragraph (b) of this section) from 
any individual aggregating $600 or more for any calendar year, must make 
an information return setting forth the total amount received from that 
individual during the calendar year.
    (b) Scope. Paragraph (a) of this section applies to mortgage 
insurance provided by the Federal Housing Administration, Department of 
Veterans Affairs, or the Rural Housing Service (or their successor 
organizations), or to private mortgage insurance (as defined by section 
2 of the Homeowners Protection Act of 1998 (12 U.S.C. 4901) as in effect 
on December 20, 2006). The rule stated in paragraph (a) of this section 
applies to the receipt of all payments of mortgage insurance premiums, 
by cash or financing, without regard to source.
    (c) Aggregation. Whether a person receives $600 or more of mortgage 
insurance premiums is determined on a mortgage-by-mortgage basis. A 
recipient need not aggregate mortgage insurance premiums received on all 
of the mortgages of an individual to determine whether the $600 
threshold is met. Therefore, a recipient need not report mortgage 
insurance premiums of less than $600 received on a mortgage, even though 
it receives a total of $600 or more of mortgage insurance premiums on 
all of the mortgages for an individual for a calendar year.
    (d) Time, form, and manner of reporting. Mortgage insurance premiums 
required to be reported under paragraph (a) of this section must be 
reported on the Form 1098 or successor form that is filed pursuant to 
Sec. 1.6050H-2(a) with respect to the mortgage of the individual who 
paid the mortgage insurance premiums. For the requirements for 
furnishing statements with respect to Forms 1098 filed with the Internal 
Revenue Service, see Sec. 1.6050H-2(b).
    (e) Cross reference. For rules concerning the allocation of certain 
prepaid qualified mortgage insurance premiums, see Sec. 1.163-11 of 
this chapter.
    (f) Limitation on the reporting of mortgage insurance premiums. This 
section applies to mortgage insurance premiums described in paragraph 
(b) of this section that are paid or accrued on or after January 1, 
2013, and during periods to which section 163(h)(3)(E) applies. This 
section does not apply to any amounts of mortgage insurance premiums 
that are allocable to any periods to which section 163(h)(3)(E) does not 
apply.
    (g) Effective/applicability date. This section applies to mortgage 
insurance premiums received on or after January 1, 2013. For regulations 
applicable before May 5, 2012, see Sec. 1.6050H-3T as contained in 26 
CFR part 1 (revised as of April 1, 2012).

[T.D. 9642, 78 FR 70858, Nov. 27, 2013]



Sec. 1.6050I-0  Table of contents.

    This section lists the major captions that appear in Sec. Sec. 
1.6050I-1 and 1.6050I-2.

 Sec. 1.6050I-1 Returns relating to cash in excess of $10,000 received 
                         in a trade or business.

    (a) Reporting requirement.
    (1) Reportable transaction.
    (i) In general.
    (ii) Certain financial transactions.
    (2) Cash received for the account of another.
    (3) Cash received by agents.
    (i) General rule.
    (ii) Exception.
    (iii) Example.
    (b) Multiple payments.
    (1) Initial payment in excess of $10,000.
    (2) Initial payment of $10,000 or less.
    (3) Subsequent payments.
    (4) Example.
    (c) Meaning of terms.
    (1) Cash.
    (i) Amounts received prior to February 3, 1992.
    (ii) Amounts received on or after February 3, 1992.
    (iii) Designated reporting transaction.
    (iv) Exception for certain loans.
    (v) Exception for certain installment sales.
    (vi) Exception for certain down payment plans.
    (vii) Examples.
    (2) Consumer durable.
    (3) Collectible.
    (4) Travel or entertainment activity.
    (5) Retail sale.
    (6) Trade or business.
    (7) Transaction.
    (8) Recipient.
    (d) Exceptions to the reporting requirements of section 6050I.
    (1) Receipt of cash by certain financial institutions.
    (2) Receipt of cash by certain casinos having gross annual gaming 
revenue in excess of $1,000,000.

[[Page 433]]

    (i) In general.
    (ii) Casinos exempt under 31 CFR 103.45(c).
    (iii) Reporting of cash received in a nongaming business.
    (iv) Example.
    (3) Receipt of cash not in the course of the recipient's trade or 
business.
    (4) Receipt is made with respect to a foreign cash transaction.
    (i) In general.
    (ii) Example.
    (e) Time, manner, and form of reporting.
    (1) Time of reporting.
    (2) Form of reporting.
    (3) Manner of reporting.
    (i) Where to file.
    (ii) Verification.
    (iii) Retention of returns.
    (f) Requirement of furnishing statements.
    (1) In general.
    (2) Form of statement.
    (3) When statement is to be furnished.
    (g) Cross-reference to penalty provisions.
    (1) Failure to file correct information return.
    (2) Failure to furnish correct statement.
    (3) Criminal penalties.

 Sec. 1.6050I-2 Returns relating to cash in excess of $10,000 received 
                        as bail by court clerks.

    (a) Reporting requirement.
    (b) Meaning of terms.
    (c) Time, form, and manner of reporting.
    (1) Time of reporting.
    (i) In general.
    (ii) Multiple payments.
    (2) Form of reporting.
    (3) Manner of reporting.
    (i) Where to file.
    (ii) Verification of identity.
    (d) Requirement to furnish statements.
    (1) Information to Federal prosecutors.
    (i) In general.
    (ii) Form of statement.
    (2) Information to payors of bail.
    (i) In general.
    (ii) Form of statement.
    (iii) Aggregate amount.
    (e) Cross-reference to penalty provisions.
    (f) Effective date.

[T.D. 8652, 61 FR 7, Jan. 2, 1996, as amended by T.D. 8974, 66 FR 67687, 
Dec. 31, 2001]



Sec. 1.6050I-1  Returns relating to cash in excess of $10,000 received
in a trade or business.

    (a) Reporting requirement--(1) Reportable transaction--(i) In 
general. Any person (as defined in section 7701(a)(1)) who, in the 
course of a trade or business in which such person is engaged, receives 
cash in excess of $10,000 in 1 transaction (or 2 or more related 
transactions) shall, except as otherwise provided, make a return of 
information with respect to the receipt of cash.
    (ii) Certain financial transactions. Section 6050I of title 26 of 
the United States Code requires persons to report information about 
financial transactions to the Internal Revenue Service, and section 5331 
of title 31 of the United States Code requires persons to report similar 
information about certain transactions to the Financial Crimes 
Enforcement Network. This information shall be reported on the same form 
as prescribed by the Secretary.
    (2) Cash received for the account of another. Cash in excess of 
$10,000 received by a person for the account of another must be reported 
under this section. Thus, for example, a person who collects delinquent 
accounts receivable for an automobile dealer must report with respect to 
the receipt of cash in excess of $10,000 from the collection of a 
particular account even though the proceeds of the collection are 
credited to the account of the automobile dealer (i.e., where the rights 
to the proceeds from the account are retained by the automobile dealer 
and the collection is made on a fee-for-service basis).
    (3) Cash received by agents--(i) General rule. Except as provided in 
paragraph (a)(3)(ii) of this section, a person who in the course of a 
trade or business acts as an agent (or in some other similar capacity) 
and receives cash in excess of $10,000 from a principal, must report the 
receipt of cash under this section.
    (ii) Exception. An agent who receives cash from a principal and uses 
all of the cash within 15 days in a cash transaction (the ``second cash 
transaction'') which is reportable under section 6050I or 5312 of title 
31 of the United States Code and the regulations thereunder (31 CFR Part 
103), and who discloses the name, address, and taxpayer identification 
number of the principal to the recipient in the second cash transaction 
need not report the initial receipt of cash under this section. An agent 
will be deemed to have met the disclosure requirements of this paragraph 
(a)(3)(ii) if the agent discloses only the name of the principal and the 
agent knows that the recipient has the principal's address and taxpayer 
identification number.

[[Page 434]]

    (iii) Example. The following example illustrates the application of 
the rules in paragraphs (a)(3) (i) and (ii) of this section:

    Example. B, the principal, gives D, an attorney, $75,000 in cash to 
purchase real property on behalf of B. Within 15 days D purchases real 
property for cash from E, a real estate developer, and discloses to E, 
B's name, address, and taxpayer identification number. Because the 
transaction qualifies for the exception provided in paragraph (a)(3)(ii) 
of this section, D need not report with respect to the initial receipt 
of cash under this section. The exception does not apply, however, if D 
pays E by means other than cash, or effects the purchase more than 15 
days following receipt of the cash from B, or fails to disclose B's 
name, address, and taxpayer identification number (assuming D does not 
know that E already has B's address and taxpayer identification number), 
or purchases the property from a person whose sale of the property is 
not in the course of that person's trade or business. In any such case, 
D is required to report the receipt of cash from B under this section.

    (b) Multiple payments. The receipt of multiple cash deposits or cash 
installment payments (or other similar payments or prepayments) on or 
after January 1, 1990, relating to a single transaction (or two or more 
related transactions), is reported as set forth in paragraphs (b)(1) 
through (b)(3) of this section.
    (1) Initial payment in excess of $10,000. If the initial payment 
exceeds $10,000, the recipient must report the initial payment within 15 
days of its receipt.
    (2) Initial payment of $10,000 or less. If the initial payment does 
not exceed $10,000, the recipient must aggregate the initial payment and 
subsequent payments made within one year of the initial payment until 
the aggregate amount exceeds $10,000, and report with respect to the 
aggregate amount within 15 days after receiving the payment that causes 
the aggregate amount to exceed $10,000.
    (3) Subsequent payments. In addition to any other required report, a 
report must be made each time that previously unreportable payments made 
within a 12-month period with respect to a single transaction (or two or 
more related transactions), individually or in the aggregate, exceed 
$10,000. The report must be made within 15 days after receiving the 
payment in excess of $10,000 or the payment that causes the aggregate 
amount received in the 12- month period to exceed $10,000. (If more than 
one report would otherwise be required for multiple cash payments within 
a 15-day period that relate to a single transaction (or two or more 
related transactions), the recipient may make a single combined report 
with respect to the payments. The combined report must be made no later 
than the date by which the first of the separate reports would otherwise 
be required to be made.) A report with respect to payments of $10,000 or 
less that are reportable under this paragraph (b)(3) and are received 
after December 31, 1989, but before July 10, 1990, is due July 24, 1990.
    (4) Example. The following example illustrates the application of 
the rules in paragraphs (b)(1) through (b)(3) of this section:

    Example. On January 10, 1991, M receives an initial cash payment of 
$11,000 with respect to a transaction. M receives subsequent cash 
payments with respect to the same transaction of $4,000 on February 15, 
1991, $6,000 on March 20, 1991, and $12,000 on May 15, 1991. M must make 
a report with respect to the payment received on January 10, 1991, by 
January 25, 1991. M must also make a report with respect to the payments 
totalling $22,000 received from February 15, 1991, through May 15, 1991. 
This report must be made by May 30, 1991, that is, within 15 days of the 
date that the subsequent payments, all of which were received within a 
12-month period, exceeded $10,000.

    (c) Meaning of terms. The following definitions apply for purposes 
of this section--
    (1) Cash--(i) Amounts received prior to February 3, 1992. For 
amounts received prior to February 3, 1992, the term cash means the coin 
and currency of the United States or of any other country, which 
circulate in and are customarily used and accepted as money in the 
country in which issued.
    (ii) Amounts received on or after February 3, 1992. For amounts 
received on or after February 3, 1992, the term cash means--
    (A) The coin and currency of the United States or of any other 
country, which circulate in and are customarily used and accepted as 
money in the country in which issued; and
    (B) A cashier's check (by whatever name called, including 
``treasurer's

[[Page 435]]

check'' and ``bank check''), bank draft, traveler's check, or money 
order having a face amount of not more than $10,000--
    (1) Received in a designated reporting transaction as defined in 
paragraph (c)(1)(iii) of this section (except as provided in paragraphs 
(c)(1)(iv), (v), and (vi) of this section), or
    (2) Received in any transaction in which the recipient knows that 
such instrument is being used in an attempt to avoid the reporting of 
the transaction under section 6050I and this section.
    (iii) Designated reporting transaction. A designated reporting 
transaction is a retail sale (or the receipt of funds by a broker or 
other intermediary in connection with a retail sale) of--
    (A) A consumer durable,
    (B) A collectible, or
    (C) A travel or entertainment activity.
    (iv) Exception for certain loans. A cashier's check, bank draft, 
traveler's check, or money order received in a designated reporting 
transaction is not treated as cash pursuant to paragraph 
(c)(l)(ii)(B)(1) of this section if the instrument constitutes the 
proceeds of a loan from a bank (as that term is defined in 31 CFR part 
103). The recipient may rely on a copy of the loan document, a written 
statement from the bank, or similar documentation (such as a written 
lien instruction from the issuer of the instrument) to substantiate that 
the instrument constitutes loan proceeds.
    (v) Exception for certain installment sales. A cashier's check, bank 
draft, traveler's check, or money order received in a designated 
reporting transaction is not treated as cash pursuant to paragraph 
(c)(1)(ii)(B)(1) of this section if the instrument is received in 
payment on a promissory note or an installment sales contract (including 
a lease that is considered to be a sale for Federal income tax 
purposes). However, the preceding sentence applies only if--
    (A) Promissory notes or installment sales contracts with the same or 
substantially similar terms are used in the ordinary course of the 
recipient's trade or business in connection with sales to ultimate 
consumers; and
    (B) The total amount of payments with respect to the sale that are 
received on or before the 60th day after the date of the sale does not 
exceed 50 percent of the purchase price of the sale.
    (vi) Exception for certain down payment plans. A cashier's check, 
bank draft, traveler's check, or money order received in a designated 
reporting transaction is not treated as cash pursuant to paragraph 
(c)(1)(ii)(B)(1) of this section is the instrument is received pursuant 
to a payment plan requiring one or more down payments and the payment of 
the balance of the purchase price by a date no later than the date of 
the sale (in the case of an item of travel or entertainment, a date no 
later than the earliest date that any item of travel or entertainment 
pertaining to the same trip or event is furnished). However, the 
preceding sentence applies only if--
    (A) The recipient uses payment plans with the same or substantially 
similar terms in the ordinary course of its trade or business in 
connection with sales to ultimate consumers; and
    (B) The instrument is received more than 60 days prior to the date 
of the sale (in the case of an item of travel or entertainment, the date 
on which the final payment is due).
    (vii) Examples. The following examples illustrate the definition of 
``cash'' set forth in paragraphs (c)(l)(ii) through (vi) of this 
section.

    Example 1. D, an individual, purchases gold coins from M, a coin 
dealer, for $13,200. D tenders to M in payment United States currency in 
the amount of $6,200 and a cashier's check in the face amount of $7,000 
which D had purchased. Because the sale is a designated reporting 
transaction, the cashier's check is treated as cash for purposes of 
section 6050I and this section. Therefore, because M has received more 
than $10,000 in cash with respect to the transaction, M must make the 
report required by section 6050I and this section.
    Example 2. E, an individual, purchases an automobile from Q, an 
automobile dealer, for $11,500. E tenders to Q in payment United States 
currency in the amount of $2,000 and a cashier's check payable to E and 
Q in the amount of $9,500. The cashier's check constitutes the proceeds 
of a loan from the bank issuing the check. The origin of the proceeds is 
evident from provisions inserted by the bank on the check that instruct 
the dealer

[[Page 436]]

to cause a lien to be placed on the vehicle as security for the loan. 
The sale of the automobile is a designated reporting transaction. 
However, under paragraph (c)(1)(iv) of this section, because E has 
furnished Q documentary information establishing that the cashier's 
check constitutes the proceeds of a loan from the bank issuing the 
check, the cashier's check is not treated as cash pursuant to paragraph 
(c)(1)(ii)(B)(1) of this section.
    Example 3. F, an individual, purchases an item of jewelry from S, a 
retail jeweler, for $12,000. F gives S traveler's checks totalling 
$2,400 and pays the balance with a personal check payable to S in the 
amount of $9,600. Because the sale is a designated reporting 
transaction, the traveler's checks are treated as cash for purposes of 
section 6050I and this section. However, because the personal check is 
not treated as cash for purposes of section 6050I and this section, S 
has not received more than $10,000 in cash in the transaction and no 
report is required to be filed under section 6050I and this section.
    Example 4. G, an individual, purchases a boat from T, a boat dealer, 
for $16,500. G pays T with a cashier's check payable to T in the amount 
of $16,500. The cashier's check is not treated as cash because the face 
amount of the check is more than $10,000. Thus, no report is required to 
be made by T under section 6050I and this section.
    Example 5. H, an individual, arranges with W, a travel agent, for 
the chartering of a passenger aircraft to transport a group of 
individuals to a sports event in another city. H also arranges with W 
for hotel accommodations for the group and for admission tickets to the 
sports event. In payment, H tenders to W money orders which H had 
previously purchased. The total amount of the money orders, none of 
which individually exceeds $10,000 in face amount, exceeds $10,000. 
Because the transaction is a designated reporting transaction, the money 
orders are treated as cash for purposes of section 6050I and this 
section. Therefore, because W has received more than $10,000 in cash 
with respect to the transaction, W must make the report required by 
section 6050I and this section.

    (2) Consumer durable. The term consumer durable means an item of 
tangible personal property of a type that is suitable under ordinary 
usage for personal consumption or use, that can reasonably be expected 
to be useful for at least 1 year under ordinary usage, and that has a 
sales price of more than $10,000. Thus, for example, a $20,000 
automobile is a consumer durable (whether or not it is sold for business 
use), but a $20,000 dump truck or a $20,000 factory machine is not.
    (3) Collectible. The term collectible means an item described in 
paragraphs (A) through (D) of section 408(m)(2) (determined without 
regard to section 408(m)(3)).
    (4) Travel or entertainment activity. The term travel or 
entertainment activity means an item of travel or entertainment (within 
the meaning of Sec. 1.274-2(b)(1)) pertaining to a single trip or event 
where the aggregate sales price of the item and all other items 
pertaining to the same trip or event that are sold in the same 
transaction (or related transactions) exceeds $10,000.
    (5) Retail sale. The term retail sale means any sale (whether for 
resale or for any other purpose) made in the course of a trade or 
business if that trade or business principally consists of making sales 
to ultimate consumers.
    (6) Trade or business. The term trade or business has the same 
meaning as under section 162 of the Internal Revenue Code of 1954.
    (7) Transaction--(i) The term transaction means the underlying event 
precipitating the payer's transfer of cash to the recipient. 
Transactions include (but are not limited to) a sale of goods or 
services; a sale of real property; a sale of intangible property; a 
rental of real or personal property; an exchange of cash for other cash; 
the establishment or maintenance of or contribution to a custodial, 
trust, or escrow arrangement; a payment of a preexisting debt; a 
conversion of cash to a negotiable instrument; a reimbursement for 
expenses paid; or the making or repayment of a loan. A transaction may 
not be divided into multiple transactions in order to avoid reporting 
under this section.
    (ii) The term related transactions means any transaction conducted 
between a payer (or its agent) and a recipient of cash in a 24-hour 
period. Additionally, transactions conducted between a payer (or its 
agent) and a cash recipient during a period of more than 24 hours are 
related if the recipient knows or has reason to know that each 
transaction is one of a series of connected transactions.
    (iii) The following examples illustrate the definition of paragraphs 
(c)(7) (i) and (ii).


[[Page 437]]


    Example 1. A person has a tacit agreement with a gold dealer to 
purchase $36,000 in gold bullion. The $36,000 purchase represents a 
single transaction under paragraph (c)(7)(i) of this section and the 
reporting requirements of this section cannot be avoided by recasting 
the single sales transaction into 4 separate $9,000 sales transactions.
    Example 2. An attorney agrees to represent a client in a criminal 
case with the attorney's fee to be determined on an hourly basis. In the 
first month in which the attorney represents the client, the bill for 
the attorney's services comes to $8,000 which the client pays in cash. 
In the second month in which the attorney represents the client, the 
bill for the attorney's services comes to $4,000, which the client again 
pays in cash. The aggregate amount of cash paid ($12,000) relates to a 
single transaction as defined in paragraph (c)(7)(i) of this section, 
the sale of legal services relating to the criminal case, and the 
receipt of cash must be reported under this section.
    Example 3. A person intends to contribute a total of $45,000 to a 
trust fund, and the trustee of the fund knows or has reason to know of 
that intention. The $45,000 contribution is a single transaction under 
paragraph (c)(7)(i) of this section and the reporting requirement of 
this section cannot be avoided by the grantor's making five separate 
$9,000 cash contributions to a single fund or by making five $9,000 cash 
contributions to five separate funds administered by a common trustee.
    Example 4. K, an individual, attends a one day auction and purchases 
for cash two items, at a cost of $9,240 and $1,732.50 respectively (tax 
and buyer's premium included). Because the transactions are related 
transactions as defined in paragraph (c)(7)(ii) of this section, the 
auction house is required to report the aggregate amount of cash 
received from the related sales ($10,972.50), even though the auction 
house accounts separately on its books for each item sold and presents 
the purchaser with separate bills for each item purchased.
    Example 5. F, a coin dealer, sells for cash $9,000 worth of gold 
coins to an individual on three successive days. Under paragraph 
(c)(7)(ii) of this section the three $9,000 transactions are related 
transactions aggregating $27,000 if F knows, or has reason to know, that 
each transaction is one of a series of connected transactions.

    (8) Recipient. (i) The term recipient means the person receiving the 
cash. Except as provided in paragraph (c)(8)(ii) of this section, each 
store, division, branch, department, headquarters, or office 
(``branch'') (regardless of physical location) comprising a portion of a 
person's trade or business shall for purposes of this section be deemed 
a separate recipient.
    (ii) A branch that receives cash payments will not be deemed a 
separate recipient if the branch (or a central unit linking such branch 
with other branches) would in the ordinary course of business have 
reason to know the identity of payers making cash payments to other 
branches of such person.
    (iii) Examples. The following examples illustrate the application of 
the rules in paragraphs (c)(8)(i) and (ii) of this section:

    Example 1. N, an individual, purchases regulated futures contracts 
at a cost of $7,500 and $5,000, respectively, through two different 
branches of Commodities Broker X on the same day. N pays for each 
purchase with cash. Each branch of Commodities Broker X transmits the 
sales information regarding each of N's purchases to a central unit of 
Commodities Broker X (which settles the transactions against N's 
account). Under paragraph (c)(8)(ii) of this section the separate 
branches of Commodities Broker X are not deemed to be separate 
recipients; therefore. Commodities Broker X must report with respect to 
the two related regulated futures contracts sales in accordance with 
this section.
    Example 2. P, a corporation, owns and operates a racetrack. P's 
racetrack contains 100 betting windows at which pari-mutuel wagers may 
be made. R, an individual, places cash wagers of $3,000 each at five 
separate betting windows. Assuming that in the ordinary course of 
business each betting window (or a central unit linking windows) does 
not have reason to know the identity of persons making wagers at other 
betting windows, each betting window would be deemed to be a separate 
cash recipient under paragraph (c)(8)(i) of this section. As no 
individual recipient received cash in excess of $10,000, no report need 
be made by P under this section.

    (d) Exceptions to the reporting requirements of section 6050I--(1) 
Receipt of cash by certain financial institutions. A financial 
institution as defined in subparagraphs (A), (B), (C), (D), (E), (F), 
(G), (J), (K), (R), and (S) of section 5312 (a)(2) of title 31, United 
States Code is not required to report the receipt of cash exceeding 
$10,000 under section 6050I.
    (2) Receipt of cash by certain casinos having gross annual gaming 
revenue in excess of $1,000,000--(i) In general. If a casino receives 
cash in excess of $10,000 and is required to report the receipt of

[[Page 438]]

such cash directly to the Treasury Department under 31 CFR 103.22(a)(2) 
and 103.25 and is subject to the recordkeeping requirements of 31 CFR 
103.36, then the casino is not required to make a return with respect to 
the receipt of such cash under section 6050I and these regulations.
    (ii) Casinos exempt under 31 CFR 103.45(c). Under the authority of 
section 6050I(c)(1)(A), the Secretary may exempt from the reporting 
requirements of section 6050I casinos with gross annual gaming revenue 
in excess of $1,000,000 that are exempt under 31 CFR 103.45(c) from 
reporting certain cash transactions to the Treasury Department under 31 
CFR 103.22(a)(2) and 103.25. The determination whether a casino which is 
granted an exemption under 31 CFR 103.45(c) will be required to report 
under section 6050I will be made on a case by case basis, concurrently 
with the granting of such an exemption.
    (iii) Reporting of cash received in a nongaming business. Nongaming 
businesses (such as shops, restaurants, entertainment, and hotels) at 
casino hotels and resorts are separate trades or businesses in which the 
receipt of cash in excess of $10,000 is reportable under section 6050I 
and these regulations. Thus, a casino exempt under paragraph (d)(2) (i) 
or (ii) of this section must report with respect to cash in excess of 
$10,000 received in its nongaming businesses.
    (iv) Example. The following example illustrates the application of 
the rules in paragraphs (d)(2) (i) and (iii) of this section:

    Example. A and B are casinos having gross annual gaming revenue in 
excess of $1,000,000. C is a casino with gross annual gaming revenue of 
less than $1,000,000. Casino A receives $15,000 in cash from a customer 
with respect to a gaming transaction which the casino reports to the 
Treasury Department under 31 CFR 103.22(a)(2) and 103.25. Casino B 
receives $15,000 in cash from a customer in payment for accommodations 
provided to that customer at Casino B's hotel. Casino C receives $15,000 
in cash from a customer with respect to a gaming transaction. Casino A 
is not required to report the transaction under section 6050I or these 
regulations because the exception for certain casinos provided in 
paragraph (d)(2)(i) (``the casino exception'') applies. Casino B is 
required to report under section 6050I and these regulations because the 
casino exception does not apply to the receipt of cash from a nongaming 
activity. Casino C is required to report under section 6050I and these 
regulations because the casino exception does not apply to casinos 
having gross annual gaming revenue of $1,000,000 or less which do not 
have to report to the Treasury Department under 31 CFR 103.22(a)(2) and 
103.25.

    (3) Receipt of cash not in the course of the recipient's trade or 
business. The receipt of cash in excess of $10,000 by a person other 
than in the course of the person's trade or business is not reportable 
under section 6050I. Thus, for example, F, an individual in the trade or 
business of selling real estate, sells a motorboat for $12,000, the 
purchase price of which is paid in cash. F did not use the motorboat in 
any trade or business in which F was engaged. F is not required to 
report under section 6050I or these regulations because the exception 
provided in this paragraph (d)(3) applies.
    (4) Receipt is made with respect to a foreign cash transaction--(i) 
In general. Generally, there is no requirement to report with respect to 
a cash transaction if the entire transaction occurs outside the United 
States (the fifty states and the District of Columbia). An entire 
transaction consists of both the transaction as defined in paragraph 
(c)(7)(i) of this section and the receipt of cash by the recipient. If, 
however, any part of an entire transaction occurs in the Commonwealth of 
Puerto Rico or a possession or territory of the United States and the 
recipient of cash in that transaction is subject to the general 
jurisdiction of the Internal Revenue Service under title 26 of the 
United States Code, the recipient is required to report the transaction 
under this section.
    (ii) Example. The following example illustrates the application of 
the rules in paragraph (d)(4)(i) of this section:

    Example. W, an individual engaged in the trade or business of 
selling aircraft, reaches an agreement to sell an airplane to a U.S. 
citizen living in Mexico. The agreement, no portion of which is 
formulated in the United States, calls for a purchase price of $125,000 
and requires delivery of and payment for the airplane to be made in 
Mexico. Upon delivery of the airplane in Mexico, W receives $125,000 in 
cash. W is not required to report under section 6050I or these 
regulations because the exception provided in paragraph (d)(4)(i) of

[[Page 439]]

this section (``foreign transaction exception'') applies. If, however, 
any part of the agreement to sell had been formulated in the United 
States, the foreign transaction exception would not apply and W would be 
required to report the receipt of cash under section 6050I and these 
regulations.

    (e) Time, manner, and form of reporting--(1) Time of reporting. The 
reports required by this section must be filed with the Internal Revenue 
Service by the 15th day after the date the cash is received. However, in 
the case of multiple payments relating to a single transaction (or two 
or more related transactions), see paragraph (b) of this section.
    (2) Form of reporting. A report required by paragraph (a) of this 
section must be made on Form 8300. A return of information made in 
compliance with this paragraph must contain the name, address, and 
taxpayer identification number of the person from whom the cash was 
received; the name, address, and taxpayer identification number of the 
person on whose behalf the transaction was conducted (if the recipient 
knows or has reason to know that the person from whom the cash was 
received conducted the transaction as an agent for another person); the 
amount of cash received; the date and nature of the transaction; and any 
other information required by Form 8300. Form 8300 can be obtained from 
any Internal Revenue Service Forms Distribution Center.
    (3) Manner of reporting--(i) Where to file. A person making a return 
of information under this section must file Form 8300 by mailing it to 
the address shown in the instructions to the form.
    (ii) Verification. A person making a return of information under 
this section must verify the identity of the person from whom the 
reportable cash is received. Verification of the identity of a person 
who purports to be an alien must be made by examination of such person's 
passport, alien identification card, or other official document 
evidencing nationality or residence. Verification of the identity of any 
other person may be made by examination of a document normally 
acceptable as a means of identification when cashing or accepting checks 
(for example, a driver's license or a credit card). In addition, a 
return will be considered incomplete if the person required to make a 
return knows (or has reason to know) that an agent is conducting the 
transaction for a principal, and the return does not identify both the 
principal and the agent.
    (iii) Retention of returns. A person required to make an information 
return under this section must keep a copy of each return filed for five 
years from the date of filing.
    (f) Requirement of furnishing statements--(1) In general. Any person 
required to make an information return under this section must furnish a 
single, annual, written statement to each person whose name is set forth 
in a return (``identified person'') filed with the Internal Revenue 
Service.
    (2) Form of statement. The statement required by the preceding 
paragraph need not follow any particular format, but it must contain the 
following information:
    (i) The name and address of the person making the return;
    (ii) The aggregate amount of reportable cash received by the person 
who made the information return required by this section during the 
calendar year in all cash transactions relating to the identified 
person; and
    (iii) A legend stating that the information contained in the 
statement is being reported to the Internal Revenue Service.
    (3) When statement is to be furnished. Statements required under 
this paragraph (f) must be furnished to an identified person on or 
before January 31 of the year following the calendar year in which the 
cash is received. A statement shall be considered to be furnished to an 
identified person if it is mailed to the identified person at the 
identified person's last known address.
    (g) Cross-reference to penalty provisions--(1) Failure to file 
correct information return. See section 6721 for civil penalties 
relating to the failure to file a correct return under section 6050I(a) 
and paragraph (a) of this section.
    (2) Failure to furnish correct statement. See section 6722 for civil 
penalties relating to the failure to furnish a correct statement to 
identified persons under section 6050I(e) and paragraph (f) of this 
section.

[[Page 440]]

    (3) Criminal penalties. Any person who willfully fails to make a 
return or makes a false return under section 6050I and this section may 
be subject to criminal prosecution.

[T.D. 8098, 51 FR 31611, Sept. 4, 1986; 51 FR 33033, Sept. 18, 1986, as 
amended by T.D. 8373, 56 FR 57976, 57977, Nov. 15, 1991; 58 FR 16496, 
Mar. 29, 1993; T.D. 8479, 58 FR 33764, June 21, 1993; T.D. 8974, 66 FR 
67687, Dec. 31, 2001]



Sec. 1.6050I-2  Returns relating to cash in excess of $10,000 received
as bail by court clerks.

    (a) Reporting requirement. Any clerk of a Federal or State court who 
receives more than $10,000 in cash as bail for any individual charged 
with a specified criminal offense must make a return of information with 
respect to that cash receipt. For purposes of this section, a clerk is 
the clerk's office or the office, department, division, branch, or unit 
of the court that is authorized to receive bail. If someone other than a 
clerk receives bail on behalf of a clerk, the clerk is treated as 
receiving the bail for purposes of this paragraph (a).
    (b) Meaning of terms. The following definitions apply for purposes 
of this section--
    Cash means--
    (1) The coin and currency of the United States, or of any other 
country, that circulate in and are customarily used and accepted as 
money in the country in which issued; and
    (2) A cashier's check (by whatever name called, including 
treasurer's check and bank check), bank draft, traveler's check, or 
money order having a face amount of not more than $10,000.
    Specified criminal offense means--
    (1) A Federal criminal offense involving a controlled substance (as 
defined in section 802 of title 21 of the United States Code), provided 
the offense is described in Part D of Subchapter I or Subchapter II of 
title 21 of the United States Code;
    (2) Racketeering (as defined in section 1951, 1952, or 1955 of title 
18 of the United States Code);
    (3) Money laundering (as defined in section 1956 or 1957 of title 18 
of the United States Code); and
    (4) Any State criminal offense substantially similar to an offense 
described in this paragraph (b).
    (c) Time, form, and manner of reporting--(1) Time of reporting--(i) 
In general. The information return required by this section must be 
filed with the Internal Revenue Service by the 15th day after the date 
the cash bail is received.
    (ii) Multiple payments. If multiple payments are made to satisfy 
bail reportable under this section and the initial payment does not 
exceed $10,000, the initial payment and subsequent payments must be 
aggregated and the information return required by this section must be 
filed with the Internal Revenue Service by the 15th day after receipt of 
the payment that causes the aggregate amount to exceed $10,000. However, 
if payments are made to satisfy separate bail requirements, no 
aggregation is required. Thus, if in Month 1 a clerk receives $6,000 in 
bail for an individual charged with a specified criminal offense and 
later, in Month 2, receives $7,000 in bail for that same individual 
charged with another specified criminal offense, no aggregation is 
required.
    (2) Form of reporting. The return of information required by 
paragraph (a) of this section must be made on Form 8300 and must contain 
the following information--
    (i) The name, address, and taxpayer identification number (TIN) of 
the individual charged with the specified criminal offense;
    (ii) The name, address, and TIN of each person posting the bail 
(payor of bail), other than a person posting bail who is licensed as a 
bail bondsman in the jurisdiction in which the bail is received;
    (iii) The amount of cash received;
    (iv) The date the cash was received; and
    (v) Any other information required by Form 8300 or its instructions.
    (3) Manner of reporting--(i) Where to file. Returns required by this 
section must be filed with the Internal Revenue Service office 
designated in the instructions for Form 8300. A copy of the information 
return required to be filed under this section must be retained for five 
years from the date of filing.

[[Page 441]]

    (ii) Verification of identity. A clerk required to make an 
information return under this section must, in accordance with Sec. 
1.6050I-1(e)(3)(ii), verify the identity of each payor of bail listed in 
the return.
    (d) Requirement to furnish statements--(1) Information to Federal 
prosecutors--(i) In general. A clerk required to make an information 
return under this section must furnish a written statement to the United 
States Attorney for the jurisdiction in which the individual charged 
with the specified crime resides and the United States Attorney for the 
jurisdiction in which the specified criminal offense occurred 
(applicable United States Attorney(s)). The written statement must be 
filed with the applicable United States Attorney(s) by the 15th day 
after the date the cash bail is received.
    (ii) Form of statement. The written statement must include the 
information required by paragraph (c)(2) of this section. The 
requirement of this paragraph (d)(1)(ii) will be satisfied if the clerk 
provides to the applicable United States Attorney(s) a copy of the Form 
8300 that is filed with the Internal Revenue Service pursuant to this 
section.
    (2) Information to payors of bail--(i) In general. A clerk required 
to make an information return under this section must furnish a written 
statement to each payor of bail whose name is set forth in a return 
required by this section. A statement required under this paragraph 
(d)(2) must be furnished to a payor of bail on or before January 31 of 
the year following the calendar year in which the cash is received. A 
statement will be considered furnished to a payor of bail if it is 
mailed to the payor's last known address.
    (ii) Form of statement. The statement required by this paragraph 
(d)(2) need not follow any particular format, but must contain the 
following information--
    (A) The name and address of the clerk's office making the return;
    (B) The aggregate amount of reportable cash received during the 
calendar year by the clerk who made the information return required by 
this section in all cash transactions relating to the payor of bail; and
    (C) A legend stating that the information contained in the statement 
has been reported to the Internal Revenue Service and the applicable 
United States Attorney(s).
    (iii) Aggregate amount. The requirement of furnishing the aggregate 
amount in paragraph (d)(2)(ii)(B) of this section will be satisfied if 
the clerk provides to the payor of bail either a single written 
statement listing the aggregate amount, or a copy of each Form 8300 
relating to that payor of bail.
    (e) Cross-reference to penalty provisions. See sections 6721 through 
6724 for penalties relating to the failure to comply with the provisions 
of this section.
    (f) Effective date. This section applies to cash received by court 
clerks on or after February 13, 1995.

[T.D. 8652, 61 FR 7, Jan. 2, 1996]



Sec. 1.6050J-1T  Questions and answers concerning information returns
relating to foreclosures and abandonments of security (temporary).

    The following questions and answers relate to the requirement of 
reporting foreclosures and abandonments of security under section 6050J 
of the Internal Revenue Code Act of 1954, as added by section 148 of the 
Tax Reform Act of 1984 (98 Stat. 687).

                        Requirement of Reporting

                               In General

    Q-1: What does section 6050J provide with respect to the reporting 
of acquisitions and abandonments of property that secures indebtedness?
    A-1: Section 6050J provides that an information return must be made 
by any person who, in connection with a trade or business conducted by 
the person (except as provided in A-13), lends money and, in full or 
partial satisfaction of the debt, acquires an interest in any property 
that is security for the debt, or has reason to know that the property 
has been abandoned. For purposes of these questions and answers, a 
person who lends money in connection with a trade or business is 
referred to as a ``lender''.

                      Trade or Business Requirement

    Q-2: Must a person be in the trade or business of lending money in 
order to be subject to the reporting requirement of this section?
    A-2: No. A person does not have to be in the trade or business of 
lending money to be

[[Page 442]]

subject to this reporting requirement. Thus, if L sells automobiles and 
lends money to B to enable B to purchase an automobile from L for use in 
B's trade or business, and that automobile is security for the loan, L 
would be subject to this reporting requirement. Similarly, if P promotes 
interests in an oil well, and lends money to I to enable I to invest in 
the oil well which is security for the loan, P would be subject to this 
reporting requirement.
    Q-3: How does the reporting requirement apply in the case of pools, 
fixed investment trusts, or other similar arrangements through which 
undivided beneficial interests or participations in indebtedness are 
offered?
    A-3: In these cases, the owners of the undivided beneficial 
interests or participations are not subject to this reporting 
requirement. Instead, the trustee, record owner, or person acting in a 
similar capacity is treated as the lender for purposes of this reporting 
requirement and is the party required to report. For purposes of both 
section 6050J and the applicable penalty provisions, only one return and 
one statement must be filed with respect to each loan or other evidence 
of indebtedness. For situations when more than one return or statement 
must be filed, see A-29, A-31, and A-41. The trustee, record owner, or 
person acting in a similar capacity, rather than the owners of 
beneficial interests or participations, is subject to the applicable 
penalty provisions (see A-43).
    Q-4: How does the reporting requirement apply in the case of 
corporate, tax-exempt, or other bond issues?
    A-4: In these cases, the owners or holders of a bond issue are not 
required to report. Instead, the trustee or person acting in a similar 
capacity is treated as the lender for purposes of this reporting 
requirement and is the party required to report. For purposes of both 
section 6050J and the applicable penalty provisions, only one return and 
one statement must be filed with respect to a bond issue. For situations 
when more than one return or statement must be filed, see A-29, A-31, 
and A-41. The trustee or person acting in a similar capacity, rather 
than the owners or holders of a bond issue, is subject to the applicable 
penalty provisions (see A-43).

                      Property Subject to Reporting

    Q-5: Does the reporting requirement apply to all types of property 
securing indebtedness?
    A-5: No. The reporting requirement does not apply to any loan made 
to an individual and secured by an interest in tangible personal 
property which is neither held for investment nor used in a trade or 
business. For rules governing when the reporting requirment applies to 
tangible personal property of a type ordinarily used for personal 
purposes, see A-8.
    Q-6: Does the reporting requirement apply when property securing 
indebtedness is held both for personal use and for use in a trade or 
business?
    A-6: Yes. The reporting requirement applies when property securing 
indebtedness is held both for personal use and for use in a trade or 
business. Similarly, the reporting requirement applies when the borrower 
holds such property both for personal use and for investment purposes.
    Q-7: Does the reporting requirement apply to indebtedness secured by 
a personal residence?
    A-7: Yes. A lender is subject to the reporting requirement if the 
property that is security for the loan is real property, including a 
personal residence, whether or not held for investment or used in a 
trade or business.
    Q-8: In the case of a loan made to an individual and secured by 
personal property of a type that is ordinarily used for personal 
purposes, how does a lender know whether such property is used in a 
trade or business or held for investment purposes?
    A-8: In the case of a loan made to an individual and secured by 
personal property of a type that is ordinarily used for personal 
purposes, such as an automobile, computer, or boat, the lender is 
subject to the reporting requirement if the lender knows that the 
property will be used in a trade or business or held for investment 
purposes. For this purpose, a lender knows information if the 
information is included on the books and records of the lender or its 
agents pertaining to the loan, or is known by the lender or agent's 
officers, partners, principals or employees, but only if such 
information was acquired in the course of their ordinary business 
activities on behalf of the lender. For example, if a borrower indicates 
on the loan agreement or disclosure statement that the borrower intends 
to use the property securing the loan in the borrower's trade or 
business, the lender is subject to this reporting requirement. 
Similarly, if the borrower notifies the lender that the borrower intends 
to convert the property from personal use to use in a trade or business, 
the lender is subject to the reporting requirement.
    Q-9: If a lender maintains a system under which the lender 
classifies loans according to the use of property that secures the loan 
(such as use in a trade or business or personal use), may the lender 
rely on this system in determining whether the reporting requirement 
applies?
    A-9: Yes. A lender may rely on the classification system to 
determine whether the reporting requirement applies, provided that the 
classification system is designed and reasonably maintained to ensure 
accuracy in identifying the use of property.

[[Page 443]]

                       Acquisition of an Interest

    Q-10: For purposes of the reporting requirement, when is a lender 
treated as acquiring an interest in property that is security for 
indebtedness?
    A-10: In general, an interest in property is acquired on the earlier 
of the date title is transferred to the lender or the date possession 
and the burdens and benefits of ownership are transferred to the lender. 
If State or other applicable law provides for an objection period within 
which the borrower and other appropriate parties may object to the 
lender's proposal to retain the property in satisfaction of the 
indebtedness, a lender is treated as acquiring an interest in the 
property on the date this objection period expires. If the lender 
purchases the property at a sale held to satisfy the indebtedness, such 
as at a foreclosure or execution sale, the lender is treated as 
acquiring an interest in the property on the later of the date of the 
sale or the date the borrower's right of redemption, if any, expires. 
See 4A-15 for rules governing reporting when a party other than the 
lender acquires property securing indebtedness at a foreclosure, 
execution or similar sale.
    Q-11: If a lender takes possession of property that is security for 
a loan for a limited purpose, such as completing construction on or 
improvement to the property, is the lender treated as having acquired an 
interest in the property at that point?
    A-11: No. The lender in these circumstances is not treated as 
acquiring an interest in the property. However, the lender must report 
if he later acquires an interest in the property in full or partial 
satisfaction of the indebtedness (see A-10 or A-15).

                          Indirect Acquisition

    Q-12: If a lender acquires an interest in a partnership, trust, or 
other entity in full or partial satisfaction of a loan that is secured 
by the assets or property owned by the partnership, trust, or other 
entity, is the lender treated as acquiring an interest in the property 
securing the loan?
    A-12: Yes. A lender in this case acquires an interest in the 
underlying assets or property and the reporting requirements of this 
section apply to the acquisition of that interest in a partnership, 
trust, or other entity.

                     Treatment of Governmental Units

    Q-13: How does the reporting requirement apply to a governmental 
unit?
    A-13: A governmental unit (or any agency or instrumentality thereof) 
which lends money secured by property is subject to the reporting 
requirement without regard to the requirement that the money be lent in 
connection with a trade or business. A governmental unit (or any agency 
or instrumentality thereof) subject to the reporting requirement must 
designate an officer or employee to make the return. The officer or 
employee appropriately designated must make the return in the form and 
manner prescribed by this section.

               Notification of Sale Under Section 7425(b)

    Q-14: Does a return filed as required under this section constitute 
a notification of sale under section 7425(b)?
    A-14: No. A return filed under this section is not considered a 
notification of sale under section 7425(b).

                           Sale to Third Party

    Q-15: If a party other than the lender purchases property securing a 
loan at a foreclosure, execution, or similar sale, must the lender 
report under this section?
    A-15: Yes. The lender must report if a party other than the lender 
purchases property securing the lender's loan at a foreclosure, 
execution, or similar sale. If the proceeds of that sale are applied to 
satisfy all or any portion of the lender's loan, the lender must treat 
the property as having been abandoned. The lender will be treated as 
having reason to know that the property has been abandoned as of the 
date of the sale (see A-19). If no proceeds of such a sale are made 
available to satisfy any portion of the lender's loan but the lender's 
security interest foreclosed upon is terminated, reduced, or otherwise 
impaired by reason of the sale, the lender will be treated as having 
reason to know that the property has been abandoned as of the date of 
the sale (see A-19).

                     Treatment of Foreign Borrowers

    Q-16: How does the reporting requirement apply in the case of 
foreign borrowers where the property securing the loan is located 
outside the United States?
    A-16: No reporting is required where both of the following 
requirements are met: (a) The property securing the loan is located 
outside the United States, and (b) at any time before the lender is 
required to report, the borrower furnishes the lender with a statement, 
signed upon penalty of perjury, that he is an exempt foreign person 
(unless an employee or other agent of the lender who is responsible for 
receiving or reviewing these statements has actual knowledge that the 
statement is incorrect). For purposes of this section, the borrower is 
an exempt foreign person if he:
    (1) Is not a citizen of the United States, a resident of the United 
States, a person treated as a resident of the United States by reason of 
an election under section 6013 (g) or (h) or a United States corporation 
or other United States entity;
    (2) Is not subject to the provisions of section 877; and

[[Page 444]]

    (3) At the time the statement is furnished, is not, or reasonably 
expects not to be, engaged in a trade or business in the United States 
during the current year in connection with the loan or property securing 
the loan.

If, after providing the statement, the borrower ceases to be an exempt 
foreign person, he must so notify the lender in writing within 30 days 
of this change in status. If the lender is so notified, this exemption 
from the reporting requirement no longer applies.

                              Abandonments

    Q-17: For purposes of this reporting requirement, when has an 
abandonment occurred?
    A-17: An abandonment has occurred when the objective facts and 
circumstances indicate that the borrower intended to and has permanently 
discarded the property from use.
    Q-18: Does the fact that a lender knows or has reason to know of an 
abandonment of property securing a loan mean that the borrower is 
entitled to an abandonment loss?
    A-18: No. The definition of an abandonment of property securing a 
loan in A-17 applies only for purposes of this reporting requirement and 
is not intended to apply for other purposes, such as determining whether 
a borrower would be entitled to an abandonment loss.
    Q-19: Under what circumstances will a lender be considered to have 
reason to know that property which is security for a loan has been 
abandoned?
    A-19: Whether a lender has reason to know that property which is 
security for a loan has been abandoned is to be determined with 
reference to all the facts and circumstances concerning the status of 
the property. When the lender in the ordinary course of business becomes 
aware or should become aware of circumstances indicating that the 
property has been abandoned, the lender will be deemed to know all the 
information that would have been discovered through a reasonable 
inquiry. For example, if a borrower has failed (without adequate 
explanation) to make payments on the loan for a substantial period, the 
lender must make a reasonable inquiry to determine whether there has 
been an abandonment. If a reasonable inquiry would reveal objective 
facts and circumstances indicating that the borrower intended to and has 
permanently discarded the property from use, then the lender has reason 
to know that the property has been abandoned. If a lender knows or has 
reason to know that the property has been abandoned and reasonably 
expects to commence foreclosure, execution sale, or similar proceedings, 
see A-20.
    Q-20: If a lender has reason to know that property that is security 
for a loan has been abandoned and reasonably expects to commence within 
three months foreclosure, execution sale, or similar proceedings, is 
reporting of the abandonment required?
    A-20: In these circumstances, the lender need not report as of the 
date he knows or has reason to know that the property has been 
abandoned. Instead, the lender must report as of the date he acquires an 
interest in the property or a third party purchases the property at a 
foreclosure, execution or similar sale (see A-10 and A-15). In any other 
case, the lender must report as of the date the lender knows or has 
reason to know that the property has been abandoned (see A-18).
    Q-21: If a lender has reason to know that property that is security 
for a loan has been abandoned and reasonably expects to commence within 
three months foreclosure, execution sale or similar proceedings but in 
fact does not commence such proceedings within the three month period, 
must the lender report?
    A-21: Yes. In these circumstances, the lender's obligation to report 
the abandonment arises at the close of the three month period. For 
example, if on December 31, 1985, a lender first has reason to know that 
property securing his loan has been abandoned and reasonably expects to 
commence foreclosure proceedings within three months, the lender is not 
required to report as of December 31, 1985 (see A-20). However, if the 
lender does not in fact commence foreclosure proceedings by March 31, 
1986, the lender's obligation to report arises on this date. The lender 
must provide information on the abandonment under A-27 as of the date 
the lender first had reason to know of the abandonment (December 31, 
1985). The lender must file the return required under this section with 
the Internal Revenue Service on or before February 28, 1987, and furnish 
a statement to the borrower on or before January 31, 1987 (see A-33 and 
A-40).

                       Subsequent Holder of a Loan

    Q-22: To whom does the reporting requirement apply when a person 
lends money secured by property and subsequently transfers his interest 
in the indebtedness to another person?
    A-22: The subsequent holder of a loan is treated as the lender for 
purposes of this reporting requirement and is the party required to 
report with respect to events occurring after the date he acquires the 
loan. This rule applies to all subsequent holders of a secured loan, 
including governmental units or any agencies or instrumentalities 
thereof. For example, if the Federal National Mortgage Association 
purchases real property loans from a lender, it would be subject to the 
reporting requirement.

[[Page 445]]

                            Multiple Lenders

    Q-23: If more than one person lends money secured by the same 
property, and one lender forecloses upon or otherwise acquires an 
interest in the property, must the other lenders report under this 
section?
    A-23: Yes. In these circumstances, other lenders must report if they 
know or have reason to know that the property securing their loans is 
foreclosed upon or otherwise acquired by another lender and the sale or 
other acquisition terminates, reduces, or otherwise impairs their 
security interests in the property (see A-15). For example, if there is 
a first and second mortgage on a building, and the second mortgagee 
knows or has reason to know that the first mortgagee has foreclosed upon 
the building, the second mortgagee is subject to the reporting 
requirement even if no part of the indebtedness owed to him is satisfied 
by the proceeds of the foreclosure sale. For a description of the 
reporting requirement applicable to the first mortgagee, see A-10 and A-
15.
    Q-24: If more than one person lends money secured by property, and 
one lender knows or has reason to know that the property has been 
abandoned, must each lender report under this section?
    A-24: No. Each lender is required to report only when he knows or 
has reason to know that property has been abandoned (see A-19).

                        Form and Manner of Return

                             Form of Return

    Q-25: What form shall be used to make a return required by section 
6050J?
    A-25: Except as provided in A-35, the return must be made on Forms 
1096 and 1099. The person required to make the return, however, may 
prepare and use a form which contains provisions substantially similar 
with those of Forms 1096 and 1099 if the person complies with any 
revenue procedures relating to substitute Forms 1096 and 1099 in effect 
at that time.

                     Information Included on Return

    Q-26: What information must be included on a return required by 
reason of an acquisition of an interest in property that is security for 
a loan?
    A-26: The following information must be included on the return:
    (a) The name and address of the borrower with respect to the secured 
indebtedness;
    (b) The borrower's TIN, as defined in Section 7701(a);
    (c) A general description of the property in which an interest is 
acquired;
    (d) Whether the borrower is personally liable for repayment of the 
indebtedness;
    (e) The date on which the person acquired an interest in the 
property (see A-10 or A-15);
    (f) The amount of the indebtedness outstanding at the time the 
interest in property is acquired;
    (g) If the borrower is personally liable for repayment of the 
indebtedness, the fair market value of the property at the time the 
interest is acquired;
    (h) The amount of the indebtedness satisfied by the acquisition; and
    (i) Any other information as may be required by Forms 1096 and 1099.
    Q-27: What information must be included on a return required because 
a person knows or has reason to know that property which is security for 
a loan has been abandoned?
    A-27: The following information must be included on the return:
    (a) The information required in A-26 (a), (b), and (d);
    (b) A general description of the property abandoned;
    (c) The date on which the person first knows or has reason to know 
that the property has been abandoned;
    (d) The amount of the indebtedness outstanding as of the date on 
which the person first knows or has reason to know that the property has 
been abandoned;
    (e) If the borrower is personally liable for repayment of the 
indebtedness, the fair market value of the property at the time of 
abandonment; and
    (f) Any other information as may be required by Forms 1096 and 1099.

                          Partnership Borrower

    Q-28: If a borrower is a partnership, must the TIN of each partner 
be reported?
    A-28: No. If a borrower is a partnership, only the TIN of the 
partnership must be reported.

                           Multiple Borrowers

    Q-29: If there is more than one borrower on a single secured loan, 
must a person required to report under this section make a return with 
respect to each borrower on the loan?
    A-29: Yes. Generally, a separate return must be made with respect to 
each borrower on a secured loan. However, only one report is required if 
the lender knows that the borrowers hold property as tenants by the 
entirety or that the property is held as community property.

                     General Description of Property

    Q-30: What type of information constitutes a general description of 
the property?
    A-30: A general description of the property consists of information 
that sufficiently identifies the property. In the case of real property, 
a general description consists of the property's address unless this 
information is not available or would not sufficiently identify the 
property, in which case a legal description (i.e., section, lot, block)

[[Page 446]]

must be provided instead. A general description of personal property 
consists of the type, make and model (where applicable) of the property. 
For example, an automobile would be described as ``Car--1983 Pontiac 
Firebird.'' However, in the case of a single loan secured by more than 
one piece of personal property, a general description consists of the 
type or category of the pieces acquired or abandoned. For example, if 
the security for a single loan is six desks and seven typewriters, a 
general description of the property would be ``Office Equipment.''

                 Multiple Acquisitions and Abandonments

    Q-31: Must each acquisition and abandonment that occurs in a taxable 
year be reported on a separate return?
    A-31: Generally, each acquisition and abandonment required to be 
reported by a person for a taxable year must be reported on a separate 
return. However, in the case of a single loan secured by more than one 
piece of property, separate returns will not be required when a person 
acquires an interest in, or knows or has reason to know of the 
abandonment of, more than one piece of property that is security for the 
single loan in a taxable year. Instead, the person shall make one return 
for all of the acquisitions and one return for all of the abandonments 
of property that are security for the loan for a taxable year.

                            Fair Market Value

    Q-32: In the case of a foreclosure, execution, or similar sale, what 
is the fair market value of the property for purposes of the reporting 
requirement?
    A-32: In general, in the absence of clear and convincing evidence to 
the contrary, the proceeds of the foreclosure, execution, or similar 
sale will be considered the fair market value of the property for 
purposes of this reporting requirement.

                             Time for Filing

    Q-33: When must a person file the return or returns required by 
section 6050J with the Internal Revenue Service?
    A-33: The return or returns must be filed on or before February 28 
(March 31 if filed electronically) of the year following the calendar 
year in which the acquisition of an interest in the property occurs or 
in which the lender knows or has reason to know of the abandonment of 
the property.

                            Place for Filing

    Q-34: Where must the return or returns be filed?
    A-34: The return or returns must be filed with the appropriate 
Internal Revenue Service Center, the addresses of which are listed in 
the instructions for the Form 1099 series.

                          Use of Magnetic Media

    Q-35: What rules apply with respect to the use of magnetic media?
    A-35: Any return required under section 6050J must be filed on 
magnetic media to the extent required by section 6011(e). Any person not 
required by section 6011(e) to file returns under section 6050J on 
magnetic media may request permission to do so. See Sec. 1.9101 for 
rules relating to permission to submit information on magnetic tape or 
other media. If a person required to file returns on magnetic media 
fails to do so, the penalty under section 6652 (failure to file an 
information return) applies.

            Requirement of Furnishing Statements to Borrowers

                               In General

    Q-36: What statements must be furnished to borrowers?
    A-36: Any person required to make an information return under 
section 6050J must furnish a statement to each borrower whose name is 
required to be set forth in a return filed with the Internal Revenue 
Service. For the date when the statement must be furnished, see A-40.
    Q-37: Is the statement considered to be furnished to the borrower if 
it is mailed to the borrower at the borrower's last known address?
    A-37: Yes.

                    Information Included on Statement

    Q-38: What information must be included on the statement?
    A-38: The statement must include the following information:
    (a) Except in the case where the return is made on behalf of a 
governmental unit (or any agency or instrumentality thereof), the name 
and address of the person required to make the information return;
    (b) In the case where the return is made on behalf of a governmental 
unit or any agency or instrumentality thereof, the name and address of 
such unit, agency or instrumentality;
    (c) The information required under A-26 or A-27, whichever is 
applicable; and
    (d) A legend stating that the information is being reported to the 
Internal Revenue Service.

                     Copy of Form 1099 to Borrowers

    Q-39: May the requirement of furnishing a statement be met by 
furnishing a copy of the Form 1099 filed with respect to that borrower?
    A-39: Yes. The requirement of furnishing a statement may be met by 
furnishing to the borrower a copy of the Form 1099 containing the same 
information filed with the Service

[[Page 447]]

with respect to that borrower, or a reasonable facsimile thereof, 
provided that the form or the reasonable facsimile bears a legend 
stating that the information is being reported to the Internal Revenue 
Service.

                      Time of Furnishing Statement

    Q-40: When is a statement required to be furnished to the borrower?
    A-40: A statement is required to be furnished to the borrower on or 
before January 31 of the year following the calendar year in which the 
acquisition or abandonment of property occurs.

                           Multiple Borrowers

    Q-41: If a person required to report under this section must make an 
information return with respect to more than one borrower on a single 
loan, of an interest in the property occurs or in which the lender knows 
or has reason to know of the abandonment of the property.
    A-41: Yes. A separate statement must be furnished to each borrower 
with respect to which a separate return is required under section 6050J.

                           Extensions of Time

    Q-42: Are there any circumstances under which an extension of time 
may be granted with respect to the requirement of furnishing statements 
to borrowers?
    A-42: Yes. Upon written application of the person required to 
report, the service center director may, for good cause shown, grant 
that person an additional period (not to exceed 30 days) in which to 
furnish statements under section 6050J with respect to any calendar 
year. The application for an extension must be addressed to the director 
of the service center with which the returns must be filed. The 
application must contain a concise statement of the reasons for 
requesting the extension in order to aid the service center director in 
determining the period of extension, if any, to be granted. The 
application must state at the top of the first page that it is made 
under section 1.6050J-1T and must be signed by the person required to 
report under section 6050J. In general, the application should be filed 
not earlier than September 30 of the year in which the acquisition of an 
interest in the property occurs or in which the lender knows or has 
reason to know of the abandonment of the property, and not later than 
January 15 of the following year.

                                Penalties

    Q-43: Are there penalties for failing to comply with the 
requirements of section 6050J and the regulations thereunder?
    A-43: Yes. The penalty for failing to make any information return 
with respect to any borrower under section 6050J is provided in section 
6652. The penalty for failing to furnish a statement to any borrower is 
provided in section 6678.

                             Effective Date

    Q-44: When is section 6050J effective?
    A-44: Section 6050J is effective for acquisitions and abandonments 
of property after December 31, 1984.

(Approved by the Office of Management and Budget under control number 
1545-0877)

(Secs. 6050J and 7805 of the Internal Revenue Code of 1954 (98 Stat. 
687, 68A Stat. 917, 26 U.S.C. 6050J, 7805 respectively)

[T.D. 7971, 49 FR 34460, Aug. 31, 1984, as amended by T.D. 8895, 65 FR 
50408, Aug. 18, 2000]



Sec. 1.6050K-1  Returns relating to sales or exchanges of certain 
partnership interests.

    (a) Partnership return required--(1) In general. Except as otherwise 
provided in this paragraph (a), a partnership shall make a separate 
return on Form 8308 with respect to each section 751(a) exchange (as 
defined in paragraph (a)(4)(i) of this section) of an interest in such 
partnership which occurs after December 31, 1984. A partnership that is 
in doubt as to whether partnership property constitutes section 751 
property to any extent or as to whether a transfer of a partnership 
interest constitutes a section 751(a) exchange may file Form 8308 in 
order to avoid the risk of incurring a penalty under section 6721. The 
penalty under section 6721 will generally apply, however, to 
partnerships that do not file Form 8308 where in fact a section 751(a) 
exchange occurred, except as provided in paragraphs (a)(2) and (e) of 
this section.
    (2) Return required under section 6045. No return shall be required 
under section 6050K(a) and paragraph (a)(1) of this section with respect 
to the sale or exchange of a partnership interest if a return is 
required to be filed under section 6045 with respect to such sale or 
exchange.
    (3) Single or composite documents. The Commissioner may authorize 
the use, at the option of the partnership, of a single document which 
includes all of the partnership's returns for a calendar year in the 
case of partnerships required under paragraph (a)(1) of this section to 
make 25 or more returns on

[[Page 448]]

Form 8308 for any calendar year. In addition, the Commissioner may 
authorize the use for this purpose, also at the option of such a 
partnership, of a composite document. These authorizations shall be 
subject to such conditions, limitations, and special rules governing the 
preparation, execution, filing, and correction thereof as the 
Commissioner may deem appropriate. Such composite document shall consist 
of a form prescribed by the Commissioner and an attachment or 
attachments of magnetic tape or other approved media. To the extent that 
the use of a single or composite document has been authorized by the 
Commissioner, references in this section to Form 8303 shall be deemed to 
refer also to returns included in a single or composite document under 
this paragraph (a)(3). Any single or composite document so authorized 
shall include the information required to be provided on Form 8308 under 
paragraph (b) of this section with respect to each section 751(a) 
exchange.
    (4) Definitions. For purposes of section 6050K of the Code and this 
section--
    (i) Section 751(a) exchange. The term section 751(a) exchange means 
any sale or exchange of a partnership interest (or portion thereof) in 
which any portion of any money or other property received by a 
transferor partner in exchange for all or a part of his or her interest 
in the partnership is attributable to section 751 property. The term 
does not include a distribution which is treated as a sale or exchange 
between the distributee and the partnership under section 751(b) of the 
Code.
    (ii) Section 751 property. The term section 751 property means 
unrealized receivables, as defined in section 751(c) of the Code, and 
inventory items which have appreciated substantially in value 
(``substantially appreciated inventory items''), as defined in section 
751(d) of the Code.
    (iii) Transferor and transferee. The term transferor means the 
beneficial owner of a partnership interest immediately before the 
transfer of that interest. The term ``transferee'' means the beneficial 
owner of a partnership interest immediately after the transfer of that 
interest. However, if a partnership does not know the identity of the 
beneficial owner of an interest in the partnership, the record holder of 
such interest shall be treated as the transferor or transferee (as the 
case may be) for purposes of paragraphs (b) and (c) of this section.
    (b) Contents of return. The return on Form 8308 shall include the 
following information:
    (1) The names, addresses, and taxpayer identification numbers of the 
transferee and transferor in the exchange and of the partnership filing 
the return;
    (2) The date of the exchange; and
    (3) Such other information as may be required by Form 8308 or its 
instructions.
    (c) Statement to be furnished to transferor and transferee. Every 
partnership required to file a return under paragraph (a) of this 
section must furnish to each person whose name is required to be set 
forth in such return a written statement on or before January 31 of the 
calendar year following the calendar year in which the section 751(a) 
exchange occurred to which the return under paragraph (a) relates (or, 
if later, 30 days after the partnership is notified of the exchange as 
defined in paragraph (e) of this section). The partnership shall use a 
copy of the completed Form 8308 as a statement unless the Form 8308 
contains information with respect to more than one section 751(a) 
exchange (see paragraph (a)(3) of this section). If the partnership does 
not use a copy of Form 8308 as a statement, the statement shall include 
the information required to be shown on Form 8308 with respect to the 
section 751(a) exchange to which the person to whom the statement is 
furnished is a party. In addition, it shall state that--
    (1) The information shown on the statement has been supplied to the 
Internal Revenue Service,
    (2) A transferor of a partnership interest in a sale or exchange 
described in section 751(a) of the Internal Revenue Code is required to 
treat a portion of any gain or loss resulting from the sale or exchange 
as ordinary income or loss, and
    (3) The transferor in a section 751(a) sale or exchange is required 
under

[[Page 449]]

paragraph (a)(3) of Sec. 1.751-1 to attach a statement relating to the 
sale or exchange to his or her income tax return for the taxable year in 
which the sale or exchange occurred.
    (d) Requirement that transferor notify partnership--(1) In general. 
The transferor of any partnership interest in a section 751(a) exchange 
shall notify the partnership of such exchange in writing within 30 days 
of the exchange (or, if earlier, January 15 of the calendar year 
following the calendar year in which the exchange occurred). The written 
notification from the transferor shall include the following 
information:
    (i) The names and addresses of the transferor and transferee in the 
section 751(a) exchange;
    (ii) The taxpayer identification numbers of the transferor and, if 
known, of the transferee; and
    (iii) The date of the exchange.


Any transferor who notified a partnership under section 6050K(c)(1) 
prior to January 22, 1986 by a notification that does not meet the 
requirements of this paragraph (d) shall furnish such partnership with 
the written notification described in this paragraph (d) on or before 
February 21, 1986.
    (2) Return required under section 6045. No transferor shall be 
required to notify a partnership of the sale or exchange of a 
partnership interest under section 6050K(c)(1) or paragraph (d)(1) of 
this section if a return is required to be filed under section 6045 with 
respect to such sale or exchange.
    (e) Partnership not required to make a return or furnish statements 
under this section until it has notice of the exchange. A partnership 
shall not be required to make a return or furnish statements under 
section 6050K and this section with respect to any section 751(a) 
exchange until it has been notified of the exchange. For purposes of 
section 6050K(c)(2) and this section, a partnership is notified of a 
section 751(a) exchange when either:
    (1) The partnership receives the written notification from the 
transferor required under paragraph (d) of this section; or
    (2) The partnership has knowledge that there has been a transfer of 
a partnership interest or any portion thereof, and, at the time of the 
transfer, the partnership had any section 751 property. However, no 
return or statements are required under section 6050K if the transfer 
was not a section 751(a) exchange (e.g., a transfer which in its 
entirety constitutes a gift for federal income tax purposes). For 
purposes of this paragraph (e)(2), the partnership may rely on a written 
statement from the transferor that the transfer was not a section 751(a) 
exchange in the absence of knowledge to the contrary. For rules 
applicable where the partnership is in doubt as to whether partnership 
property constitutes section 751 property to any extent or as to whether 
a transfer of a partnership interest constitutes a section 751(a) 
exchange, see paragraph (a)(1) of this section.
    (f) Partnership return is to be attached to Form 1065--(1) In 
general. Any partnership return on Form 8308 required under this section 
shall be filed as an attachment to the partnership's Form 1065 for its 
taxable year in which the calendar year in which the section 751(a) 
exchange occurred ends and shall be filed at the time (determined with 
regard to any extension of time for filing) and place prescribed for 
filing of the partnership's Form 1065 for that taxable year (see 
paragraph (e) of Sec. 1.6031-1 for the time and place for filing Form 
1065).
    (2) Notification after Form 1065 is filed. If a partnership is 
notified of an exchange (as defined in paragraph (e) of this section) 
after the partnership has filed Form 1065 for the taxable year with 
respect to which the exchange should have been reported, Form 8308 shall 
be filed with the service center or other Internal Revenue office with 
which the partnership's Form 1065 was filed, on or before the thirtieth 
day after the partnership is notified of the exchange.
    (g) Penalties. For penalties for failure of:
    (1) Transferors to furnish the notification required by paragraph 
(d) of this section see section 6722 (b);
    (2) Partnerships to furnish any statement required under paragraph 
(c) of this section see section 6722 (a); and

[[Page 450]]

    (3) Partnerships to file the return on Form 8308 as required by 
paragraph (a) of this section see section 6721.

[T.D. 8119, 52 FR 41, Jan. 2, 1987]



Sec. 1.6050L-1  Information return by donees relating to certain 
dispositions of donated property.

    (a) Information returns--(1) Disposition of charitable deduction 
property. If a donee of any charitable deduction property (as defined in 
paragraph (e) of this section), sells, exchanges, consumes, or otherwise 
disposes of (with or without consideration) such property (or any 
portion thereof) within 2 years after the date of the donor's 
contribution of such property, the donee shall make an information 
return on the form prescribed by the Internal Revenue Service. For 
special rules with respect to successor donees, see paragraph (c) of 
this section.
    (2) Disposition of items appraised for $500 or less--(i) In general. 
Paragraph (a)(1) of this section shall not apply with respect to an item 
of charitable deduction property disposed of by sale if the Form 8283 
appraisal summary (as described in Sec. 1.170A-13(c)(4) for 
contributions made on or before July 30, 2018 and Sec. 1.170A-16(d)(3) 
for contributions made after July 30, 2018), or a successor form, signed 
by the donee with respect to the item contains, at the time of the 
donee's signature, a statement signed by the donor that the appraised 
value of the item does not exceed $500. In the case of a Form 8283 
appraisal summary that describes more than one item, this exception 
shall apply only with respect to an item clearly identified as having an 
appraised value of $500 or less. For purposes of this paragraph 
(a)(2)(i), items that form a set (such as, for example, a collection of 
books written by the same author, components of a stereo system, or a 
group of place settings of a pattern of silverware) are considered one 
item. In addition, all nonpublicly traded stock is considered one item 
as are all nonpublicly traded securities other than nonpublicly traded 
stock.
    (ii) Transitional rule. Paragraph (a)(2)(i) of this section is 
satisfied with respect to an appraisal summary submitted to the donee on 
or before January 31, 1986, if such donee obtained the required 
statement from the donor on or before March 31, 1986, on either an 
amended appraisal summary or an attachment to the original appraisal 
summary.
    (3) Consumption for distribution of exempt purpose. Paragraph (a)(1) 
of this section shall not apply with respect to an item of charitable 
deduction property consumed or distributed by a donee without 
consideration if the consumption or distribution is in furtherance of a 
purpose or function constituting a basis for such donee's exemption 
under section 501 of the Code. For example, no reporting is required 
with respect to medical supplies consumed or distributed by a tax-exempt 
relief organization in aiding disaster victims.
    (b) Information required to be provided on return. The information 
return required by paragraph (a)(1) of this section shall include the 
following:
    (1) The name, address, and employer identification number of the 
donee making the information return;
    (2) A description of the property (or portion disposed of) in 
sufficient detail to identify the charitable deduction property received 
by such donee;
    (3) The name and taxpayer identification number of the donor (social 
security number if the donor is an individual or employer identification 
number if the donor is a corporation or partnership);
    (4) The date of the contribution to such donee;
    (5) Any amount received by such donee with respect to the 
disposition;
    (6) The date of the disposition by such donee; and
    (7) Such other information as may be specified by the form or its 
instructions.
    (c) Successor donees--(1) In general. Section 6050L and this section 
shall apply to successor donees that receive charitable deduction 
property (as defined in paragraph (e) of this section) that was 
transferred by the original donee after July 5, 1988, (whether the 
successor donee received the property from the original donee or another 
successor donee). For definitions of the terms ``donor,'' ``donee,'' 
``original donee,'' and ``successor donee,'' see Sec. 1.170A-
13(c)(7)(iv)-(vii).

[[Page 451]]

    (2) Information required to be provided on return. With respect to 
charitable deduction property that is transferred to one or more 
successor donees to which this section applies, the information return 
required by paragraph (a)(1) of this section shall include, in addition 
to the information described in paragraph (b) of this section, the 
following:
    (i) The name, address, and employer identification number of the 
immediately succeeding successor donee (if any) and the immediately 
preceding successor donee (if any);
    (ii) The name, address, and employer identification number of the 
original donee if different from the information required by paragraph 
(b)(1) of this section;
    (iii) The date of contribution to the original donee; and
    (iv) Such other information as may be specified by the form or its 
instructions.
    (3) Information to be provided to transferor. Every successor donee 
to which this section applies that receives any charitable deduction 
property within the 2-year period described in paragraph (a)(1) of this 
section shall provide its name, address, and employer identification 
number to that preceding donee on or before the 15th day after the later 
of--
    (i) The date of transfer to such successor donee, or
    (ii) The date such successor donee receives a copy of the appraisal 
summary from the preceding donee.
    (4) Donees that transfer property to successor donees. In addition 
to complying with the requirements of paragraph (a)(1) of this section, 
every donee that transfers any charitable deduction property to a 
successor donee to which this section applies within the 2-year period 
described in paragraph (a)(1) of this section--
    (i) Shall provide its name, address, and employer identification 
number and a copy of the Form 8283 appraisal summary (as described in 
Sec. 1.170A-13(c)(4) for contributions made on or before July 30, 2018 
and Sec. 1.170A-16(d)(3) for contributions made after July 30, 2018) 
relating to the transferred property to the successor donee on or before 
the 15th day after the latest of--
    (A) The date of such transfer, or
    (B) The date the original donee signs the appraisal summary, or
    (C) In a case in which the transferring donee is a successor donee, 
the date such donee receives a copy of the appraisal summary from such 
donee's transferor, and
    (ii) Shall provide a copy of its information return required by 
paragraph (a)(1) this section to the successor donee on or before the 
15th day after the transferring donee files the information return 
pursuant to paragraph (e)(2) of this section.
    (5) Donee. In the case of charitable deduction property that is 
transferred to a successor donee to which this section applies, the term 
donee as used in paragraph (a)(2) and (e) of this section means only the 
original donee.
    (d) Special rules--(1) Statement to be furnished to donors. Every 
donee making a return under section 6050L and this section with respect 
to the disposition of charitable deduction property shall furnish a copy 
of the return to the donor of the property.
    (2) Retention of Form 8283 appraisal summary. Every donee shall 
retain the Form 8283 appraisal summary (as described in Sec. 1.170A-
13(c)(4) for contributions made on or before July 30, 2018 and Sec. 
1.170A-16(d)(3) for contributions made after July 30, 2018) in the 
donee's records for so long as it may be relevant in the administration 
of any internal revenue law.
    (e) Charitable deduction property. For purposes of this section, the 
term charitable deduction property means any property (other than money 
and publicly traded securities to which Sec. 1.170A-13(c)(7)(xi)(B) 
does not apply) contributed after December 31, 1984, with respect to 
which the donee signs (or is presented with for signature in cases 
described in Sec. 1.170A-13(c)(4)(iv)(C)(2)) a Form 8283 appraisal 
summary (as described in Sec. 1.170A-13(c)(4) for contributions made on 
or before July 30, 2018 and Sec. 1.170A-16(d)(3) for contributions made 
after July 30, 2018). For purposes of this section, if such donee signs 
(or is presented with for signature in cases described in Sec. 1.170A-
13(c)(4)(iv)(C)(2)) the appraisal summary after the date of contribution 
of the property, the property is deemed

[[Page 452]]

to be charitable deduction property from the date of contribution.
    (f) Place and time for filing information returns--(1) Place for 
filing. The donee information return required by section 6050L and this 
section shall be filed with the Internal Revenue Service center listed 
on the return form or its instructions.
    (2) Time for filing--(i) In general. Except as provided in paragraph 
(f)(2)(ii) of this section, the donee information return shall be filed 
on or before the 125th day after a donee sells, exchanges, consumes or 
otherwise disposes of the charitable deduction property. A donee 
information return filed pursuant to this paragraph (f)(2)(i) does not 
have to include the information required by paragraphs (b) (3), (4), 
(5), or (6), or (c)(2)(i)-(iii) of this section if such information is 
not available to the donee by the due date of the return.
    (ii) Exception. Notwithstanding paragraph (f)(2)(i) of this section, 
in the case of a donee who, on the date of receipt of the transferred 
property, had no reason to believe that the substantiation requirements 
of Sec. 1.170A-13(c) or Sec. 1.170A-16(d) apply with respect to the 
property, the donee information return is not required to be filed until 
the 60th day after the date on which such donee has reason to believe 
that the substantiation requirements of Sec. 1.170A-13(c) or Sec. 
1.170A-16(d) apply with respect to the property. A donee information 
return filed pursuant to this paragraph (f)(2)(ii) does not have to 
include the information required by paragraph (b) (3), (4), (5), or (6), 
or (c)(2)(i)-(iii) of this section if such information is not available 
to the donee by the due date of the return.
    (g) Penalties. For penalties for failure to compy with the 
requirements of this section, see sections 6676, 6721, and 6723.
    (h) Effective/applicability dates. The first two sentences of 
paragraph (a)(2)(i), paragraphs (c)(4)(i) and (d)(2), and the first 
sentences of paragraphs (e) and (f)(2)(ii) apply to contributions made 
after July 30, 2018.

[T.D. 8199, 53 FR 16085, May 5, 1988; T.D. 8199, 53 FR 18372, May 23, 
1988; T.D. 9836, 83 FR 36427, July 30, 2018]



Sec. 1.6050L-2  Information returns by donees relating to qualified
intellectual property contributions.

    (a) In general. Each donee organization described in section 170(c), 
except a private foundation (as defined in section 509(a)), other than a 
private foundation described in section 170(b)(1)(F), that receives or 
accrues net income during a taxable year from any qualified intellectual 
property contribution (as defined in section 170(m)(8)) must make an 
annual information return on the form prescribed by the IRS. The 
information return is required for any taxable year of the donee that 
includes any portion of the 10-year period beginning on the date of the 
contribution, but not for taxable years beginning after the expiration 
of the legal life of the qualified intellectual property.
    (b) Information required to be provided on return. The information 
return required by section 6050L and paragraph (a) of this section shall 
include the following--
    (1) The name, address, taxable year, and employer identification 
number of the donee making the information return;
    (2) The name, address, and taxpayer identification number of the 
donor;
    (3) A description of the qualified intellectual property in 
sufficient detail to identify the qualified intellectual property 
received by such donee;
    (4) The date of the contribution to the donee;
    (5) The amount of net income of the donee for the taxable year that 
is properly allocable to the qualified intellectual property (determined 
without regard to paragraph (10)(B) of section 170(m) and with the 
modifications described in paragraphs (5) and (6) of such section); and
    (6) Such other information as may be specified by the form or its 
instructions.
    (c) Special rule--statement to be furnished to donors. Every donee 
making an information return under section 6050L and this section with 
respect to a qualified intellectual property contribution shall furnish 
a copy of the information return to the donor of the property. The 
information return required by section 6050L and this section shall be 
furnished to the donor on or

[[Page 453]]

before the date the donee is required to file the return with the IRS.
    (d) Place and time for filing information return--(1) Place for 
filing. The information return required by section 6050L and this 
section shall be filed with the IRS location listed on the prescribed 
form or in its instructions.
    (2) Time for filing. A donee is required to file the return required 
by section 6050L and this section on or before the last day of the first 
full month following the close of the donee's taxable year to which net 
income from the qualified intellectual property is properly allocable.
    (e) Penalties. For penalties for failure to comply with the 
requirements of this section, see sections 6721 through 6724.
    (f) Effective/applicability date. The rules of this section apply to 
qualified intellectual property contributions made after June 3, 2004.

[T.D. 9392, 73 FR 18709, Apr. 7, 2008]



Sec. 1.6050M-1  Information returns relating to persons receiving 
contracts from certain Federal executive agencies.

    (a) General rule. Except as otherwise provided in paragraph (c) of 
this section, the head of every Federal executive agency or his or her 
delegate shall make an information return to the Internal Revenue 
Service reporting the following information with respect to each 
contract entered into by that Federal executive agency--
    (1) Name and address of the contractor;
    (2) Contractor's TIN and, if the contractor is a member of an 
affiliated group of corporations that files its Federal income tax 
returns on a consolidated basis, the name and TIN of the common parent 
of the affiliated group;
    (3) The date of the contract action;
    (4) The expected date of completion of the contract as determined 
under any reasonable method, such as the expected contract delivery date 
under the contract schedule;
    (5) The total amount obligated under the contract action; and
    (6) Any other information required by Forms 8596 and 8596A and their 
instructions, or by any other administrative guidance issued by the 
Internal Revenue Service (such as a revenue procedure).


See paragraph (e) of this section relating to the manner in which to 
report increases in amounts obligated under existing contracts. See 
paragraph (d)(5) of this section for special rules for agencies that 
submit contract information to the Federal Procurement Data Center. For 
provisions concerning the requesting and furnishing of identifying 
numbers, see section 6109 and the regulations thereunder.
    (b) Definitions. The following definitions apply for purposes of 
this section--
    (1) Federal executive agency. The term ``Federal executive agency'' 
means--
    (i) Any executive agency (as defined in 5 U.S.C. 105) other than the 
General Accounting Office;
    (ii) Any military department (as defined in 5 U.S.C. 102); and
    (iii) The United States Postal Service and the Postal Rate 
Commission.
    (2) Contract--(i) General rule. The term ``contract'' means an 
obligation of a Federal executive agency to make payment of money (or 
other property) to a person in return for the sale of property, the 
rendering of services, or other consideration. The term ``contract'' 
includes, for example, such an obligation arising from a written 
agreement executed by the agency and the contractor, an award or notice 
of award, a job order or task letter issued under a basic ordering 
agreement, a letter contract, an order that becomes effective only upon 
written acceptance or performance, or an action described in paragraph 
(e) of this section.
    (ii) Exceptions. For purposes of this section, the term ``contract'' 
does not include--
    (A) A license granted by a Federal executive agency;
    (B) An obligation of a contractor (other than a Federal executive 
agency) to a subcontractor;
    (C) A debt instrument of the United States Government or a Federal 
agency, such as a Treasury note, Treasury bond, Treasury bill, savings 
bond, or similar instrument; or
    (D) An obligation of a Federal executive agency to lend money, lease 
property to a lessee, or sell property.

[[Page 454]]

    (iii) Special rule for certain contracts of the Small Business 
Administration. Any subcontract entered into by the Small Business 
Administration (SBA) under a prime contract between the SBA and a 
procuring Federal executive agency pursuant to section 8(a) of the Small 
Business Act (15 U.S.C. 637(a)) shall not be treated as a contract of 
the SBA but shall be treated as a contract of the procuring agency for 
purposes of this section.
    (iv) Certain schedule contracts. For purposes of this section, any 
of the following contracts entered into on behalf of one or more Federal 
executive agencies is not a ``contract'' to be reported by the General 
Services Administration or the Department of Veteran's Affairs at the 
time of execution:
    (A) A Federal Supply Schedule Contract entered into by the General 
Services Administration,
    (B) An Automated Data Processing Schedule Contract entered into by 
the General Services Administration, or
    (C) A schedule contract entered into by the Department of Veteran's 
Affairs.


Instead, an order placed by a Federal executive agency, including the 
General Services Administration or the Department of Veteran's Affairs, 
under such a schedule contract is a ``contract'' for purposes of this 
section.
    (v) Blanket purchase agreements. For purposes of this section, the 
term contract does not include a blanket purchase agreement between one 
or more Federal executive agencies and one or more contractors. Instead, 
an order placed by a Federal executive agency under the terms of a 
blanket purchase agreement is a ``contract'' for purposes of this 
section.
    (vi) Contracts entered into using non-appropriated funds. [Reserved]
    (3) Contractor. The term contractor means any person who enters into 
a contract with a Federal executive agency.
    (4) Person and TIN. The terms person and TIN are defined in sections 
7701(a) (1) and (41), respectively.
    (c) Exceptions to information reporting requirement--(1) General 
exceptions. The following do not need to be reported pursuant to this 
section:
    (i) Any contract or contract action for which the amount obligated 
is $25,000 or less;
    (ii) Any contract with a contractor who, in making the agreement, is 
acting in his or her capacity as an employee of a Federal executive 
agency (e.g., any contract of employment under which the employee is 
paid wages subject to the withholding provisions contained in chapter 24 
of subtitle C);
    (iii) Any contract between a Federal executive agency and another 
Federal governmental unit (or any agency or instrumentality thereof);
    (iv) Any contract with a foreign government (or any agency or 
instrumentality thereof);
    (v) Any contract with a state or local governmental unit (or any 
agency or instrumentality thereof);
    (vi) Any contract with a person who is not required to have a TIN 
(see, for example, Sec. 301.6109-1(g));
    (vii) Any contract the terms of which provide that all amounts 
payable under the contract by any Federal executive agency will be paid 
on or before the 120th day following the date of the contract action, 
and for which it is reasonable to except that all amounts will be so 
paid.
    (viii) Any contract under which all money (or other property) that 
will be received by the contractor after the 120th day after the date of 
the contract action will come from persons other than a Federal 
executive agency or an agent of such an agency (e.g., a contract under 
which the contractor will collect amounts owed to a Federal executive 
agency by the agency's debtor and will remit to the agency the money 
collected less an amount that serves as the contractor's consideration 
under the contract).
    (ix) Any contract for which the Commissioner determines that the 
information described in paragraph (a) of this section will not 
facilitate the collection of Federal tax liabilities because of the 
manner, method, or timing of payment by the agency under that contract.
    (2) Special rule for certain classified or confidential contracts. 
Contracts described in section 6050M(e)(3), relating to certain 
classified or confidential

[[Page 455]]

contracts, are to be reported only in accordance with section 
6050M(e)(2).
    (d) Filing requirements--(1) Frequency and time for filing. The 
information returns required by this section with respect to contracts 
of a Federal executive agency entered into on or after January 1, 1989, 
must be filed on a quarterly basis for the calendar quarters ending on 
the last day of March, June, September, and December. Except as provided 
in paragraph (d)(5) of this section, the returns for contracts entered 
into during a calendar quarter must be filed on or before the last day 
of the month following that quarter. Notwithstanding the preceding 
sentence, returns filed before May 7, 1990, will be considered timely 
filed.
    (2) Form of reporting--(i) General rule concerning magnetic media. 
The information returns required by this section with respect to 
contracts of a Federal executive agency for each calendar quarter shall 
be made in one submission (or in multiple submissions if permitted by 
paragraph (d)(4) of this section). Except as provided in paragraph 
(d)(2)(ii) of this section, the required returns shall be made on 
magnetic media (within the meaning of Sec. 301.6011-2(a)(1)) in 
accordance with any applicable revenue procedure or other guidance 
promulgated by the Internal Revenue Service for the filing of such 
returns under section 6050M.
    (ii) Magnetic media exception for low-volume filers. Any Federal 
executive agency that on any October 1 has a reasonable expectation of 
entering into, during the one year period beginning on that date, fewer 
than 250 contracts that are subject to the reporting requirements under 
this section may make the information returns required by this section 
for each quarter of that one year period on the prescribed paper Form 
8596 in accordance with the instructions accompanying such form.
    (3) Place of filing--(i) Returns on magnetic media. Information 
returns made under this section on magnetic media shall be filed with 
the Internal Revenue Service at the Martinsburg Computing Center, 
Martinsburg, West Virginia 25401-1359, in accordance with any applicable 
revenue procedure or other guidance promulgated by the Internal Revenue 
Service relating to the filing of returns under section 6050M.
    (ii) Form 8596. Information returns made on Form 8596 shall be filed 
with the Ifternal Revenue Service at the location specified in the 
instructions for that form.
    (4) Special rule concerning multiple returns. To the extent 
permitted in any revenue procedure or other guidance relating to the 
filing of information returns under this section, a Federal executive 
agency which files information returns under this section on magnetic 
media may make more than one magnetic media submission for any quarter, 
if each submission for that quarter contains all of the information 
required by paragraph (a) of this section with respect to contracts 
entered into by one or more departments, branches, bureaus, agencies, or 
other readily identifiable operating functions (such as a geographic 
region) of the Federal executive agency.
    (5) Special rules for agencies reporting to the Federal Procurement 
Data Center--(i) Election to have the Director of the Federal 
Procurement Data Center make returns on behalf of agency. If, in 
complying with the requirements of the Federal Procurement Data System 
(FPDS) (as established under the authority of the Office of Federal 
Procurement Policy Act, as amended, 41 U.S.C. 401 et seq.), a Federal 
executive agency is required to submit to the Federal Procurement Data 
Center (FPDC) all the information with respect to one or more contracts 
required to be reported by paragraph (a) of this section, that Federal 
executive agency may, in lieu of making returns directly to the Internal 
Revenue Service with respect to those contracts, elect to have the 
Director of the FPDC (or his or her delegate) make the required returns 
with respect to all of those contracts on its behalf. In order to make 
this election for such contracts entered into during a calendar quarter, 
the head of a Federal executive agency (or his or her delegate) shall 
attach to its submission to the FPDC for that quarter a signed statement 
to the effect that:
    (A) The Director of the FPDC (or his or her delegate) is authorized, 
in accordance with an election made under

[[Page 456]]

26 CFR 1.6050M-1(d)(5) to make, on the agency's behalf, the required 
returns for such contracts for that quarter, and
    (B) Under the penalties of perjury, such official has examined the 
information to be submitted by the agency to the FPDC for making those 
returns and certifies that information to be, to the best of such 
official's knowledge and belief, a compilation of agency records 
maintained in the normal course of business for the purpose of providing 
the information necessary for making true, correct, and complete returns 
as required by section 6050M.


If the election is made, the Director of the FPDC (or his or her 
delegate) shall, on the electing agency's behalf, make the returns 
required by paragraph (a) of this section with respect to the contracts 
to which the election applies.
    (ii) Time, manner, and place of filing. The Director of the FPDC (or 
his or her delegate) must--
    (A) Make the required returns for a quarter on or before the earlier 
of;
    (1) 45 days following the date that the contract information is 
required to be submitted to the FPDC, or
    (2) 90 days following the end of the calendar quarter for which the 
election is made, except that, if that calendar quarter ends September 
30, 105 days following the end of that quarter, and
    (B) Comply with paragraph (d)(2)(i) and (3)(i) of this section, 
relating to form and place of filing.


Notwithstanding the preceding sentence, returns made before May 7, 1990, 
will be considered timely filed.
    (iii) Contracts reported directly to the Internal Revenue Service. 
Even if the election is made, all information with respect to any 
particular contract required to be reported under paragraph (a) of this 
section must be reported directly to the Internal Revenue Service by the 
electing agency if the FPDS does not require that information to be 
submitted to the FPDC. An electing agency shall not, however, make 
direct returns to the Internal Revenue Service of contract information 
that is subject to the election.
    (6) Certification of return--(i) Returns made directly with the 
Internal Revenue Service. Each return made under this section by a 
Federal executive agency directly with the Internal Revenue Service on 
magnetic media or on Forms 8596 and 8596-A shall be signed by the head 
of the Federal executive agency (or his or her delegate) under the 
penalties of perjury, certifying that such official has examined the 
return, that it is prepared pursuant to the requirements of section 
6050M and that, to the best of such official's knowledge and belief, it 
is compiled from agency records maintained in the normal course of 
business for the purpose of making a true, correct, and complete return 
as required by section 6050M.
    (ii) Returns made by Director of FPDC on agency's behalf. Each 
return made under this section by the Director of the FPDC on behalf of 
a Federal executive agency shall be signed by the Director of the FPDC 
(or his or her delegate) under the penalties of perjury, certifying that 
such official has examined the return, that it is prepared pursuant to 
the requirements of section 6050M and that, to the best of such 
official's knowledge and belief, it is compiled from information 
submitted by the Federal executive agency to the FPDC pursuant to Sec. 
1.6050M-1(d)(5)(i) for the purpose of making a true, correct, and 
complete return as required by section 6050M.
    (e) Special rules relating to increases in amount obligated. If, 
through the exercise of an option contained in a basic or initial 
contract or under any other rule of contract law, express or implied, 
the amount of money or other property obligated under the contract is 
increased by more than $25,000 in one contract action, then that action 
shall be treated as the entering into of a new contract with respect to 
which the information required by paragraph (a) of this section is to be 
reported to the Internal Revenue Service for the calendar quarter in 
which the increase occurs.
    (f) Effective date--(1) Contracts required to be reported. Except as 
otherwise provided in this paragraph (f), this section applies to each 
Federal executive agency with respect to its contracts entered into on 
or after January 1, 1989 (including any increase in amount obligated on 
or after January

[[Page 457]]

1, 1989, that is treated as a new contract under paragraph (e) of this 
section).
    (2) Contracts not required to be reported. A Federal executive 
agency is not required to report--
    (i) Any basic or initial contract entered into before January 1, 
1989,
    (ii) Any increase contract action occurring before January 1, 1989, 
that is treated as a new contract under paragraph (e) of this section, 
or
    (iii) Any increase contract action that is treated as a new contract 
under paragraph (e) of this section if the basic or initial contract to 
which that contract action relates was entered into before January 1, 
1989, and--
    (A) The increase occurs before April 1, 1990, or
    (B) The amount of the increase does not exceed $50,000.
    (3) Illustration--(i) If Federal executive agency enters into an 
initial contract on December 1, 1988, and the amount of money obligated 
under the contract is increased by $55,000 on April 15, 1990, then (A) 
there is no reporting requirement with respect to the contract when 
entered into on December 1, 1988, and (B) the April 15, 1990, increase, 
which is treated as a new contract under paragraph (e) of this section, 
is subject to the reporting requirements of this section because it is 
considered to be a new contract entered into on April 15, 1990.
    (ii) If the $55,000 increase had occurred before April 1, 1990, 
there would have been no reporting requirement with respect to that 
increase.

[T.D. 8275, 54 FR 50369, Dec. 6, 1989; 55 FR 13522, Apr. 11, 1990]



Sec. 1.6050N-1  Statements to recipients of royalties paid after 
December 31, 1986.

    (a) Requirement. A person required to make an information return 
under section 6050N(a) must furnish a statement to each recipient whose 
name is required to be shown on the related information return for 
royalties paid.
    (b) Form, manner, and time for providing statements to recipients. 
The statement required by paragraph (a) of this section must be either 
the official Form 1099 prescribed by the Internal Revenue Service for 
the respective calendar year or an acceptable substitute statement. The 
rules under Sec. 1.6042-4 (relating to statements with respect to 
dividends) apply comparably in determining the form of the acceptable 
substitute statement permitted by this section. Those rules also apply 
for purposes of determining the manner of and time for providing the 
Form 1099 or its acceptable substitute statement to a recipient under 
this section. An IRS truncated taxpayer identifying number (TTIN) may be 
used as the identifying number of the recipient. For provisions relating 
to the use of TTINs, see Sec. 301.6109-4 of this chapter (Procedure and 
Administration Regulations).
    (c) Exempted foreign-related items--(1) In general. No return shall 
be required under paragraph (a) of this section for payments of the 
items described in paragraphs (c)(1)(i) through (iv) of this section.
    (i) Returns of information are not required for payments of 
royalties that a payor can, prior to payment, associate with 
documentation upon which it may rely to treat as made to a foreign 
beneficial owner in accordance with Sec. 1.1441-1(e)(1)(ii) or as made 
to a foreign payee in accordance with Sec. 1.6049-5(d)(1) or presumed 
to be made to a foreign payee under Sec. 1.6049-5(d)(2), (3), (4), or 
(5). However, such payments may be reportable under Sec. 1.1461-1(b) 
and (c).
    For purposes of this paragraph (c)(1)(i), the provisions in Sec. 
1.6049-5(c) (regarding rules applicable to documentation of foreign 
status and definition of U.S. payor and non-U.S. payor) shall apply. See 
Sec. 1.1441-1(b)(3)(iii)(B) and (C) for special payee rules regarding 
scholarships, grants, pensions, annuities, etc. The provisions of Sec. 
1.1441-1 shall apply by substituting the term payor for the term 
withholding agent and without regard to the fact that the provisions 
apply only to amounts subject to withholding under chapter 3 of the 
Internal Revenue Code.
    (ii) Returns of information are not required for payments of 
royalties from sources outside the United States paid by a non-U.S. 
payor or non-U.S. middleman and that are paid and received

[[Page 458]]

outside the United States. For a definition of non-U.S. payor or non-
U.S. middleman, see Sec. 1.6049-5(c)(5). For circumstances in which a 
payment is considered to be paid and received outside the United States, 
see Sec. 1.6049-4(f)(16).
    (iii) Returns of information are not required for payments made by a 
foreign intermediary described in Sec. 1.1441-1(e)(3)(i) that it has 
received in its capacity as an intermediary and that are associated with 
a valid withholding certificate described in Sec. 1.1441-1(e)(3)(ii) or 
(iii) and payments made by a U.S. branch of a foreign bank or of a 
foreign insurance company described in Sec. 1.1441-1(b)(2)(iv) that are 
associated with a valid withholding certificate described in Sec. 
1.1441-1(e)(3)(v), which certificate the intermediary or branch has 
furnished to the payor or middleman from whom it has received the 
payment, unless, and to the extent, the intermediary or branch knows 
that the payments are required to be reported and were not so reported.
    (2) Definitions--(i) Payor. For purposes of this section, the term 
payor shall have the meaning ascribed to it under Sec. 1.6049-4(a).
    (ii) Joint owners. Amounts paid to joint owners for which a 
certificate or documentation is required as a condition for being exempt 
from reporting under this paragraph (c) of this section are presumed 
made to U.S. payees who are not exempt recipients if, prior to payment, 
the payor cannot reliably associate the payment either with a Form W-9 
furnished by one of the joint owners in the manner required in 
Sec. Sec. 31.3406(d)-1 through 31.3406(d)-5 of this chapter, or with 
documentation described in paragraph (c)(1)(i) of this section furnished 
by each joint owner upon which it can rely to treat each joint owner as 
a foreign payee or foreign beneficial owner. For purposes of applying 
this paragraph (c)(2)(ii), the grace period described in Sec. 1.6049-
5(d)(2)(ii) shall apply only if each payee qualifies for such grace 
period.
    (d) Cross-reference to penalties. For provisions relating to the 
penalty provided for failure to file timely a correct information return 
required under section 6050N(a), see Sec. 301.6721-1 of this chapter 
(Procedure and Administration Regulations). For provisions relating to 
the penalty provided for failure to furnish timely a correct payee 
statement required under section 6050N(b) and Sec. 1.6050N-1(a), see 
Sec. 301.6722-1 of this chapter. See Sec. 301.6724-1 of this chapter 
for the waiver of a penalty if the failure is due to reasonable cause 
and is not due to willful neglect.
    (e) Effective/applicability date. This section applies to payee 
statements due after December 31, 2014, without regard to extensions. 
For payee statements due before January 1, 2015, Sec. 1.6050N-1 (as 
contained in 26 CFR part 1, revised April 2013) shall apply.

[T.D. 8637, 60 FR 66111, Dec. 21, 1995, as amended by T.D. 8734, 62 FR 
53492, Oct. 14, 1997; T.D. 8804, 63 FR 72188, Dec. 31, 1998; T.D. 8856, 
64 FR 73412, Dec. 30, 1999; T.D. 9675, 79 FR 41131, July 15, 2014; T.D. 
9808, 82 FR 2120, Jan. 6, 2017]



Sec. 1.6050N-2  Coordination with reporting rules for widely held 
fixed investment trusts under Sec. 1.671-5.

    See Sec. 1.671-5 for the reporting rules for widely held fixed 
investment trusts (as defined under that section).

[T.D. 9241, 71 FR 4025, Jan. 24, 2006]



Sec. 1.6050P-0  Table of contents.

    This section lists the major captions that appear in Sec. Sec. 
1.6050P-1 and 1.6050P-2.

Sec. 1.6050P-1 Information reporting for discharges of indebtedness by 
                            certain entities.

    (a) Reporting requirement.
    (1) In general.
    (2) No aggregation.
    (3) Amounts not includible in income.
    (4) Time and place for reporting.
    (i) In general.
    (ii) Indebtedness discharged in bankruptcy.
    (b) Date of discharge.
    (1) In general.
    (2) Identifiable events.
    (i) In general.
    (ii) Statute of limitations.
    (iii) Decision to discontinue collection activity; creditor's 
defined policy.
    (iv) Expiration of non-payment testing period.
    (v) Special rule for certain entities required to file in a year 
prior to 2008.
    (3) Permitted reporting.
    (c) Indebtedness.
    (d) Exceptions from reporting requirement.
    (1) Certain bankruptcy discharges.
    (i) In general.
    (ii) Business or investment debt.
    (2) Interest.

[[Page 459]]

    (3) Non-principal amounts in lending transactions.
    (4) Indebtedness of foreign persons held by foreign branches of U.S. 
financial institutions.
    (i) Reporting requirements.
    (ii) Definition.
    (5) Acquisition of indebtedness by related party.
    (6) Releases.
    (7) Guarantors and sureties.
    (e) Additional rules.
    (1) Multiple debtors.
    (i) In general.
    (ii) Amount to be reported.
    (2) Multiple creditors.
    (i) In general.
    (ii) Partnerships.
    (iii) Pass-through securitized indebtedness arrangement.
    (A) Reporting requirements.
    (B) Definition.
    (iv) REMICs.
    (v) No double reporting.
    (3) Coordination with reporting under section 6050J.
    (4) Direct or indirect subsidiary.
(5) Entity formed or availed of to hold indebtedness.
    (6) Use of magnetic media.
    (7) TIN solicitation requirement.
    (i) In general.
    (ii) Manner of soliciting TIN.
    (8) Recordkeeping requirements.
    (9) No multiple reporting.
    (f) Requirement to furnish statement.
    (1) In general.
    (2) Furnishing copy of Form 1099-C.
    (3) Time and place for furnishing statement.
    (g) Penalties.
    (h) Effective/applicability date.

Sec. 1.6050P-2 Organization a significant trade or business of which is 
                          the lending of money.

    (a) In general.
    (b) Safe harbors.
    (1) Organizations not subject to section 6050P in the previous 
calendar year.
    (2) Organizations that were subject to section 6050P in the previous 
calendar year.
    (3) No test year.
    (c) Seller financing.
    (d) Gross income from lending of money.
    (e) Acquisition of an indebtedness from a person other than the 
debtor included in lending money.
    (f) Test year.
    (g) Predecessor organization.
    (h) Examples.
    (i) Effective date.

[T.D. 8654, 61 FR 268, Jan. 4, 1996, as amended by T.D. 9160, 69 FR 
62185, Oct. 25, 2004; T.D. 9430, 73 FR 66540, Nov. 10, 2008; T.D. 9461, 
74 FR 47728, Sept. 17, 2009]



Sec. 1.6050P-1  Information reporting for discharges of indebtedness
by certain entities.

    (a) Reporting requirement--(1) In general. Except as provided in 
paragraph (d) of this section, any applicable entity (as defined in 
section 6050P(c)(1)) that discharges an indebtedness of any person 
(within the meaning of section 7701(a)(1)) of at least $600 during a 
calendar year must file an information return on Form 1099-C with the 
Internal Revenue Service. Solely for purposes of the reporting 
requirements of section 6050P and this section, a discharge of 
indebtedness is deemed to have occurred, except as provided in paragraph 
(b)(3) of this section, if and only if there has occurred an 
identifiable event described in paragraph (b)(2) of this section, 
whether or not an actual discharge of indebtedness has occurred on or 
before the date on which the identifiable event has occurred. The return 
must include the following information--
    (i) The name, address, and taxpayer identification number (TIN), as 
defined in section 7701(a)(41), of each person for which there was an 
identifiable event during the calendar year;
    (ii) The date on which the identifiable event occurred, as described 
in paragraph (b) of this section;
    (iii) The amount of indebtedness discharged, as described in 
paragraph (c) of this section;
    (iv) An indication whether the identifiable event was a discharge of 
indebtedness in a bankruptcy, if known; and
    (v) Any other information required by Form 1099-C or its 
instructions, or current revenue procedures.
    (2) No aggregation. For purposes of reporting under this section, 
multiple discharges of indebtedness of less than $600 are not required 
to be aggregated unless such separate discharges are pursuant to a plan 
to evade the reporting requirements of this section.
    (3) Amounts not includible in income. Except as otherwise provided 
in this section, discharged indebtedness must be reported regardless of 
whether the debtor is subject to tax on the discharged debt under 
sections 61 and 108 or otherwise by applicable law.

[[Page 460]]

    (4) Time and place for reporting-- (i) In general. Except as 
provided in paragraph (a)(4)(ii) of this section, returns required by 
this section must be filed with the Internal Revenue Service office 
designated in the instructions for Form 1099-C on or before February 28 
(March 31 if filed electronically) of the year following the calendar 
year in which the identifiable event occurs.
    (ii) Indebtedness discharged in bankruptcy. Indebtedness discharged 
in bankruptcy that is required to be reported under this section must be 
reported for the later of the calendar year in which the amount of 
discharged indebtedness first becomes ascertainable, or the calendar 
year in which the identifiable event occurs.
    (b) Date of discharge--(1) In general. Solely for purposes of this 
section, except as provided in paragraph (b)(3) of this section, 
indebtedness is discharged on the date of the occurrence of an 
identifiable event specified in paragraph (b)(2) of this section.
    (2) Identifiable events--(i) In general. An identifiable event is--
    (A) A discharge of indebtedness under title 11 of the United States 
Code (bankruptcy);
    (B) A cancellation or extinguishment of an indebtedness that renders 
a debt unenforceable in a receivership, foreclosure, or similar 
proceeding in a federal or State court, as described in section 
368(a)(3)(A)(ii) (other than a discharge described in paragraph 
(b)(2)(i)(A) of this section);
    (C) A cancellation or extinguishment of an indebtedness upon the 
expiration of the statute of limitations for collection of an 
indebtedness, subject to the limitations described in paragraph 
(b)(2)(ii) of this section, or upon the expiration of a statutory period 
for filing a claim or commencing a deficiency judgment proceeding;
    (D) A cancellation or extinguishment of an indebtedness pursuant to 
an election of foreclosure remedies by a creditor that statutorily 
extinguishes or bars the creditor's right to pursue collection of the 
indebtedness;
    (E) A cancellation or extinguishment of an indebtedness that renders 
a debt unenforceable pursuant to a probate or similar proceeding;
    (F) A discharge of indebtedness pursuant to an agreement between an 
applicable entity and a debtor to discharge indebtedness at less than 
full consideration; or
    (G) A discharge of indebtedness pursuant to a decision by the 
creditor, or the application of a defined policy of the creditor, to 
discontinue collection activity and discharge debt. or
    (ii) Statute of limitations. In the case of an expiration of the 
statute of limitations for collection of an indebtedness, an 
identifiable event occurs under paragraph (b)(2)(i)(C) of this section 
only if, and at such time as, a debtor's affirmative statute of 
limitations defense is upheld in a final judgment or decision of a 
judicial proceeding, and the period for appealing the judgment or 
decision has expired.
    (iii) Decision to discontinue collection activity; creditor's 
defined policy. For purposes of the identifiable event described in 
paragraph (b)(2)(i)(G) of this section, a creditor's defined policy 
includes both a written policy of the creditor and the creditor's 
established business practice. Thus, for example, a creditor's 
established practice to discontinue collection activity and abandon 
debts upon expiration of a particular non-payment period is considered a 
defined policy for purposes of paragraph (b)(2)(i)(G) of this section.
    (3) Permitted reporting. If a discharge of indebtedness occurs 
before the date on which an identifiable event occurs, the discharge 
may, at the creditor's discretion, be reported under this section.
    (c) Indebtedness. For purposes of this section and Sec. 1.6050P-2, 
indebtedness means any amount owed to an applicable entity, including 
stated principal, fees, stated interest, penalties, administrative costs 
and fines. The amount of indebtedness discharged may represent all, or 
only a part, of the total amount owed to the applicable entity.
    (d) Exceptions from reporting requirement--(1) Certain bankruptcy 
discharges--(i) In general. Reporting is required under this section in 
the case of a discharge of indebtedness in bankruptcy only if the 
creditor knows from information included in the reporting entity's books 
and records pertaining to the indebtedness that the debt was

[[Page 461]]

incurred for business or investment purposes as defined in paragraph 
(d)(1)(ii) of this section.
    (ii) Business or investment debt. Indebtedness is considered 
incurred for business purposes if it is incurred in connection with the 
conduct of any trade or business other than the trade or business of 
performing services as an employee. Indebtedness is considered incurred 
for investment purposes if it is incurred to purchase property held for 
investment, as defined in section 163(d)(5).
    (2) Interest. The discharge of an amount of indebtedness that is 
interest is not required to be reported under this section.
    (3) Non-principal amounts in lending transactions. In the case of a 
lending transaction, the discharge of an amount other than stated 
principal is not required to be reported under this section. For this 
purpose, a lending transaction is any transaction in which a lender 
loans money to, or makes advances on behalf of, a borrower (including 
revolving credits and lines of credit).
    (4) Indebtedness of foreign debtors held by foreign branches of U.S. 
financial institutions--(i) Reporting requirements. [Reserved]
    (ii) Definition. An indebtedness held by a foreign branch of a U.S. 
financial institution is described in this paragraph (d)(4) only if--
    (A) The financial institution is engaged through a branch or office 
in the active conduct of a banking or similar business outside the 
United States;
    (B) The branch or office is a permanent place of business that is 
regularly maintained, occupied, and used to carry on a banking or 
similar financial business;
    (C) The business is conducted by at least one employee of the branch 
or office who is regularly in attendance at such place of business 
during normal working hours;
    (D) The indebtedness is extended outside of the United States by the 
branch or office in connection with that trade or business; and
    (E) The financial institution does not know or have reason to know 
that the debtor is a United States person.
    (5) Acquisition of indebtedness by related party. No reporting is 
required under this section in the case of a deemed discharge of 
indebtedness under section 108(e)(4) (relating to the acquisition of an 
indebtedness by a person related to the debtor), unless the disposition 
of the indebtedness by the creditor was made with a view to avoiding the 
reporting requirements of this section.
    (6) Releases. The release of a co-obligor is not required to be 
reported under this section if the remaining debtors remain liable for 
the full amount of any unpaid indebtedness.
    (7) Guarantors and sureties. Solely for purposes of the reporting 
requirements of this section, a guarantor is not a debtor. Thus, in the 
case of guaranteed indebtedness, reporting under this section is not 
required with respect to a guarantor, whether or not there has been a 
default and demand for payment made upon the guarantor.
    (e) Additional rules--(1) Multiple debtors--(i) In general. In the 
case of indebtedness of $10,000 or more incurred on or after January 1, 
1995, that involves more than one debtor, a reporting entity is subject 
to the requirements of paragraph (a) of this section for each debtor 
discharged from such indebtedness. In the case of indebtedness incurred 
prior to January 1, 1995, and indebtedness of less than $10,000 incurred 
on or after January 1, 1995, involving multiple debtors, reporting under 
this section is required only with respect to the primary (or first-
named) debtor. Additionally, only one return of information is required 
under this section if the reporting entity knows, or has reason to know, 
that co-obligors were husband and wife living at the same address when 
an indebtedness was incurred, and does not know or have reason to know 
that such circumstances have changed at the date of a discharge of the 
indebtedness. This paragraph (e)(1) applies to discharges of 
indebtedness after December 31, 1994.
    (ii) Amount to be reported. In the case of multiple debtors jointly 
and severally liable on an indebtedness, the amount of discharged 
indebtedness required to be reported under this section with respect to 
each debtor is the total amount of indebtedness discharged.

[[Page 462]]

For this purpose, multiple debtors are presumed to be jointly and 
severally liable on an indebtedness in the absence of clear and 
convincing evidence to the contrary.
    (2) Multiple creditors--(i) In general. Except as otherwise provided 
in this paragraph (e)(2), if indebtedness is owned (or treated as owned 
for federal income tax purposes) by more than one creditor, each 
creditor that is an applicable entity must comply with the reporting 
requirements of this section with respect to any discharge of 
indebtedness of $600 or more allocable to such creditor. A creditor will 
be considered to have complied with the requirements of this section if 
a lead bank, fund administrator, or other designee of the creditor 
complies on its behalf in any reasonable manner, such as by filing a 
single return reporting the aggregate amount of indebtedness discharged, 
or by filing a return with respect to the portion of the discharged 
indebtedness allocable to the creditor. For purposes of this paragraph 
(e)(2)(i), any reasonable method may be used to determine the portion of 
discharged indebtedness allocable to each creditor.
    (ii) Partnerships. For purposes of paragraph (e)(2)(i) of this 
section, indebtedness owned by a partnership is treated as owned by the 
partners.
    (iii) Pass-through securitized indebtedness arrangement--(A) 
Reporting requirements. [Reserved]
    (B) Definition. For purposes of this paragraph (e)(2)(iii), a pass-
through securitized indebtedness arrangement is any arrangement whereby 
one or more debt obligations are pooled and held for twenty or more 
persons whose interests in the debt obligations are undivided co-
ownership interests that are freely transferrable. Co-ownership 
interests that are actively traded personal property (as defined in 
Sec. 1.1092(d)-1) are presumed to be freely transferrable and held by 
twenty or more persons.
    (iv) REMICs. [Reserved]
    (v) No double reporting. If multiple creditors are considered to 
hold interests in an indebtedness for purposes of this paragraph (e)(2) 
by virtue of holding ownership interests in an entity, and the entity is 
required to report a discharge of that indebtedness under paragraph 
(e)(5) of this section, then the multiple creditors are not required to 
report the discharge of indebtedness.
    (3) Coordination with reporting under section 6050J. If, in the same 
calendar year, a discharge of indebtedness reportable under section 
6050P occurs in connection with a transaction also reportable under 
section 6050J (relating to foreclosures and abandonments of secured 
property), an applicable entity need not file both a Form 1099-A and a 
Form 1099-C with respect to the same debtor. The filing requirements of 
section 6050J will be satisfied with respect to a borrower if, in lieu 
of filing Form 1099-A, a Form 1099-C is filed in accordance with the 
instructions for the filing of that form. This paragraph (e)(3) applies 
to discharges of indebtedness after December 31, 1994.
    (4) Direct or indirect subsidiary. For purposes of section 
6050P(c)(2)(C), the term direct or indirect subsidiary means a 
corporation in a chain of corporations beginning with an entity 
described in section 6050P(c)(2)(A), if at least 50 percent of the total 
combined voting power of all classes of stock entitled to vote, or at 
least 50 percent of the total value of all classes of stock, of such 
corporation is directly owned by the entity described in section 
6050P(c)(2)(A), or by one or more other corporations in the chain.
    (5) Entity formed or availed of to hold indebtedness. 
Notwithstanding Sec. 1.6050P-2(b)(3), if an entity (the transferee 
entity) is formed or availed of by an applicable entity (within the 
meaning of section 6050P(c)(1)) for the principal purpose of holding 
indebtedness acquired (including originated) by the applicable entity, 
then, for purposes of section 6050P(c)(2)(D), the transferee entity has 
a significant trade or business of lending money.
    (6) Use of magnetic media. Any return required under this section 
must be filed on magnetic media to the extent required by section 
6011(e) and the regulations thereunder. A failure to file on magnetic 
media when required constitutes a failure to file an information return 
under section 6721. Any person not required by section 6011(e) to file

[[Page 463]]

returns on magnetic media may request permission to do so under 
applicable regulations and revenue procedures.
    (7) TIN solicitation requirement--(i) In general. For purposes of 
reporting under this section, a reasonable effort must be made to obtain 
the correct name/taxpayer identification number (TIN) combination of a 
person whose indebtedness is discharged. A TIN obtained at the time an 
indebtedness is incurred satisfies the requirement of this section, 
unless the entity required to file knows that such TIN is incorrect. If 
the TIN is not obtained prior to the occurrence of an identifiable 
event, it must be requested of the debtor for purposes of satisfying the 
requirement of this paragraph (e)(7).
    (ii) Manner of soliciting TIN. Solicitations made in the manner 
described in Sec. 301.6724-1(e)(1)(i) and (2) of this chapter will be 
deemed to have satisfied the reasonable effort requirement set forth in 
paragraph (e)(7)(i) of this section. A TIN solicitation made after the 
occurrence of an identifiable event must clearly notify the debtor that 
the Internal Revenue Service requires the debtor to furnish its TIN, and 
that failure to furnish such TIN may subject the debtor to a $50 penalty 
imposed by the Internal Revenue Service. A TIN provided under this 
section is not required to be certified under penalties of perjury.
    (8) Recordkeeping requirements. Any applicable entity required to 
file a return with the Internal Revenue Service under this section must 
also retain a copy of the return, or have the ability to reconstruct the 
data required to be included on the return under paragraph (a)(1) of 
this section, for at least four years from the date such return is 
required to be filed under paragraph (a)(4) of this section.
    (9) No multiple reporting. If discharged indebtedness is reported 
under this section, no further reporting under this section is required 
for the amount so reported, notwithstanding that a subsequent 
identifiable event occurs with respect to the same amount. Further, no 
additional reporting or Form 1099-C correction is required if a creditor 
receives a payment of all or a portion of a discharged indebtedness 
reported under this section for a prior calendar year.
    (f) Requirement to furnish statement--(1) In general. Any applicable 
entity required to file a return under this section must furnish to each 
person whose name is shown on such return a written statement that 
includes the following information--
    (i) The information required by paragraph (a)(1) of this section. An 
IRS truncated taxpayer identifying number (TTIN) may be used as the TIN 
of the person for whom there was an identifiable event in lieu of the 
identifying number appearing on the information return filed with the 
Internal Revenue Service. For provisions relating to the use of TTINs, 
see Sec. 301.6109-4 of this chapter (Procedure and Administration 
Regulations);
    (ii) The name, address, and TIN of the applicable entity required to 
file a return under paragraph (a) of this section;
    (iii) A legend identifying the statement as important tax 
information that is being furnished to the Internal Revenue Service; and
    (iv) Any other information required by Form 1099-C or its 
instructions, or current revenue procedures.
    (2) Furnishing copy of Form 1099-C. The requirement to provide a 
statement to the debtor will be satisfied if the applicable entity 
furnishes copy B of the Form 1099-C or a substitute statement that 
complies with the requirements of the current revenue procedure for 
substitute Forms 1099.
    (3) Time and place for furnishing statement. The statement required 
by this paragraph (f) must be furnished to the debtor on or before 
January 31 of the year following the calendar year in which the 
identifiable event occurs. The statement will be considered furnished to 
the debtor if it is mailed to the debtor's last known address.
    (g) Penalties. For penalties for failure to comply with the 
requirements of this section, see sections 6721 through 6724.
    (h) Applicability dates. This section applies to information returns 
required to be filed, and payee statements required to be furnished, 
after December 31, 2016. Section 1.6050P-1 (as contained

[[Page 464]]

in 26 CFR part 1, revised April 2016) applies to information returns 
required to be filed, and payee statements required to be furnished, on 
or before December 31, 2016.

[T.D. 8654, 61 FR 268, Jan. 4, 1996, as amended by T.D. 8895, 65 FR 
50408, Aug. 18, 2000; T.D. 9160, 69 FR 62186, Oct. 25, 2004; T.D. 9430, 
73 FR 66540, Nov. 10, 2008; T.D. 9461, 74 FR 47728, Sept. 17, 2009; T.D. 
9675, 79 FR 41131, July 15, 2014; T.D. 9793, 81 FR 78911, Nov. 10, 2016]



Sec. 1.6050P-2  Organization a significant trade or business of which
is the lending of money.

    (a) In general. For purposes of section 6050P(c)(2)(D), the lending 
of money is a significant trade or business of an organization in a 
calendar year if the organization lends money on a regular and 
continuing basis during the calendar year.
    (b) Safe harbors--(1) Organizations not subject to section 6050P in 
the previous calendar year. For an organization that was not required to 
report under section 6050P in the previous calendar year, the lending of 
money is not treated as a significant trade or business for the calendar 
year in which the lending occurs if gross income from lending money (as 
described in paragraph (d) of this section) in the organization's most 
recent test year (as defined in paragraph (f) of this section) is both 
less than $5 million and less than 15 percent of the organization's 
gross income for that test year.
    (2) Organizations that were subject to section 6050P in the previous 
calendar year. For an organization that was required to report under 
section 6050P for the previous calendar year, the lending of money is 
not treated as a significant trade or business for the calendar year in 
which the lending occurs if gross income from lending money (as 
described in paragraph (d) of this section) in each of the 
organization's three most recent test years is both less than $3 million 
and less than 10 percent of the organization's gross income for that 
test year.
    (3) No test year. The lending of money is not treated as a 
significant trade or business for an organization for the calendar year 
in which the lending occurs if the organization does not have a test 
year for that calendar year.
    (c) Seller financing. If the principal trade or business of an 
organization is selling nonfinancial goods or providing nonfinancial 
services and if the organization extends credit to the purchasers of 
those goods or services to finance the purchases, then, for purposes of 
section 6050P(c)(2)(D), these extensions of credit are not a significant 
trade or business of lending money.
    (d) Gross income from lending of money. For purposes of this 
section, gross income from lending of money includes--
    (1) Income from interest, including qualified stated interest, 
original issue discount, and market discount;
    (2) Gains arising from the sale or other disposition of 
indebtedness;
    (3) Penalties with respect to indebtedness (whether or not the 
penalty is interest for Federal tax purposes); and
    (4) Fees with respect to indebtedness, including merchant discount 
or interchange (whether or not the fee is interest for Federal tax 
purposes).
    (e) Acquisition of an indebtedness from a person other than the 
debtor included in lending money. For purposes of this section, lending 
money includes acquiring an indebtedness not only from the debtor at 
origination but also from a prior holder of the indebtedness. Gross 
income arising from indebtedness is gross income from the lending of 
money without regard to who originated the indebtedness. If an 
organization acquires an indebtedness, the organization is required to 
report any cancellation of the indebtedness if the organization is 
engaged in a significant trade or business of lending money.
    (f) Test year. For any calendar year, a test year is a taxable year 
of the organization that ends before July 1 of the previous calendar 
year.
    (g) Predecessor organization. If an organization acquires 
substantially all of the property that was used in a trade or business 
of some other organization (the predecessor) (including when two or more 
corporations are parties to a merger agreement under which the surviving 
corporation becomes the owner of the assets and assumes the liabilities 
of the absorbed corporation(s)) or was used in a separate unit of the 
predecessor, then whether the organization at issue qualifies for one of 
the safe harbors in paragraph (b) of this section

[[Page 465]]

is determined by also taking into account the test years, reporting 
obligations, and gross income of the predecessor.
    (h) Examples. The rules of this section are illustrated by the 
following examples:

    Example 1. (i) Facts. Finance Company A, a calendar year taxpayer, 
was formed in Year 1 as a non-bank subsidiary of Manufacturing Company 
and has no predecessor. A lends money to purchasers of Manufacturing 
Company's products on a regular and continuing basis to finance the 
purchase of those products. A's gross income from stated interest in 
Year 1 is $4.7 million. In Year 1, A's gross income from fees and 
penalties with respect to the indebtedness is $0.5 million, and A has no 
other gross income from lending money within the meaning of paragraph 
(d) of this section.
    (ii) Results. Section 6050P does not require A to report discharges 
of indebtedness occurring in Years 1 or 2, because A has no test year 
for those years. Notwithstanding that A lends money in those years on a 
regular and continuing basis, under paragraph (b)(3) of this section, A 
does not have a significant trade or business of lending money in those 
years for purposes of section 6050P(c)(2)(D). However, for Year 3, A's 
test year is Year 1. A's gross income from lending in Year 1 is not less 
than $5 million for purposes of the applicable safe harbor of paragraph 
(b)(1) of this section. Because A lends money on a regular and 
continuing basis and does not meet the applicable safe harbor, section 
6050P requires A to report discharges of indebtedness occurring in Year 
3.
    Example 2. (i) Facts. The facts are the same as in Example 1, except 
that A is a division of Manufacturing Company, rather than a separate 
subsidiary. Manufacturing Company's principal activity is the 
manufacture and sale of non-financial products, and, other than 
financing the purchase of those products, Manufacturing Company does not 
extend credit or otherwise lend money.
    (ii) Results. Under paragraph (c) of this section, that financing 
activity is not a significant trade or business of lending money for 
purposes of section 6050P(c)(2)(D), and section 6050P does not require 
Manufacturing Company to report discharges of indebtedness.
    Example 3. (i) Facts. Company B, a calendar year taxpayer, is formed 
in Year 1. B has no predecessor and a part of its activities consists of 
the lending of money. B packages and sells part of the indebtedness it 
originates and holds the remainder. B is engaged in these activities on 
a regular and continuing basis. For Year 1, the sum of B's gross income 
from sales of the indebtedness, plus other income described in paragraph 
(d) of this section, is only $4.8 million, but it is 16% of B's gross 
income in Year 1.
    (ii) Results. Because B lends money on a regular and continuing 
basis and does not meet the applicable safe harbor of paragraph (b)(1) 
of this section, section 6050P requires B to report discharges of 
indebtedness occurring in Year 3. B is not required to report discharges 
of indebtedness in Years 1 and 2 because B has no test year for Years 1 
and 2.
    Example 4. (i) Facts. The facts are the same as in Example 3. In 
addition, in each of Years 2, 3, and 4, the sum of B's gross income from 
sales of the indebtedness, plus other income described in paragraph (d) 
of this section, is less than both $3 million and 10% of B's gross 
income.
    (ii) Results. (A) Because B was required to report under section 
6050P for Year 3, the applicable safe harbor for Year 4 is paragraph 
(b)(2) of this section, which is satisfied only if B's gross income from 
lending activities for each of the three most recent test years is less 
than both $3 million and 10% of B's gross income. For Year 4, even 
though B has only two test years, B's gross income in one of those test 
years, Year 1, causes B to fail to meet this safe harbor. Accordingly, B 
is required to report discharges of indebtedness under section 6050P in 
Year 4. For Year 5, B's three most recent test years are Years 1, 2, and 
3. However, B's gross income from lending activities in Year 1 is not 
less than $3 million and 10% of B's gross income. Accordingly, section 
6050P requires B to report discharges of indebtedness in Year 5.
    (B) For Year 6, B satisfies the applicable safe harbor requirements 
of paragraph (b)(2) of this section for each of the three most recent 
test years (Years 2, 3, and 4). Therefore, section 6050P does not 
require B to report discharges of indebtedness in Year 6. Because B is 
not required to report for Year 6, the applicable safe harbor for Year 7 
is the one contained in paragraph (b)(1) of this section, and thus the 
only relevant test year is Year 5.
    Example 5. (i) Facts. (A) Company C, a calendar year taxpayer, was 
formed in Year 1 and, on a regular and continuing basis, enters into the 
following transactions with its clients, all of whom are unrelated 
parties to C. C does not have any other income.
    (B) C's clients sell goods to customers, frequently accepting as 
payment accounts receivable that are due in 30 to 90 days. Under a 
contract with each client, C investigates the creditworthiness of the 
client's customers with respect to the prospective sales, and, for each 
customer, C determines whether, and to what extent, C is willing to 
assume the risk of loss on accounts receivable to be issued by the 
customer. C's decision whether to assume risk of loss may be based on an 
evaluation of the credit quality of particular customers or on the 
aggregate credit quality of all of the client's prospective customers. 
If C is unwilling to assume the risk,

[[Page 466]]

the client either may refuse to extend any credit to the customer or may 
accept the account receivable and bear the risk of loss.
    (C) Pursuant to some contracts between C's clients and C, C's 
clients assign legal title to the accounts receivable to C when the 
accounts receivable are issued by the customers. For these accounts 
receivable, C agrees to undertake collections and to remit the amounts 
collected to the client, less a fee of 0.70 percent of the face value of 
the accounts receivable. Pursuant to other contracts between C's clients 
and C, C's clients retain legal title to the accounts receivable and 
retain the initial collection responsibility. For these accounts 
receivable, C's fee is reduced to 0.35 percent. Both groups of accounts 
receivable include accounts receivable for which C has assumed the risk 
of loss and accounts receivable for which C has not assumed the risk of 
loss.
    (D) Based on all the facts and circumstances, C acquires ownership 
for Federal tax purposes of some, but not all, of the accounts 
receivable that it has agreed to collect and of some, but not all, of 
the accounts receivable for which the client has retained collection 
responsibility.
    (E) In Year 1, C's total fee income with respect to accounts 
receivable of which it acquired tax ownership was $2 million. C's fee 
income in Year 1 from accounts receivable of which it did not acquire 
tax ownership was $700,000. C does not have any other income for Year 1.
    (F) In Year 3, there were discharges of $950,000, representing 
$100,000 of customer defaults on those accounts receivable of which C 
was the owner for Federal tax purposes at the time of the identifiable 
event marking the discharge and $850,000 of customer defaults on the 
accounts receivable of which the clients, and not C, were the owner. 
Whenever C determined the uncollectibility of an account receivable for 
which it had not assumed the risk of loss, C reassigned title to the 
account receivable to the appropriate client. Each defaulting customer 
defaulted on an account receivable with an outstanding balance of at 
least $600.
    (ii) Results. (A) For Year 3, C's test year is Year 1. Under 
paragraph (e) of this section, C's $2 million fee income from the 
accounts receivable of which it acquired tax ownership is ``gross income 
from lending money'' for purposes of paragraph (b) of this section, 
because C was the owner of the accounts for Federal tax purposes. Under 
paragraph (e) of this section, C's $700,000 fee income from the accounts 
receivable of which it did not acquire tax ownership is not ``gross 
income from lending money'' for purposes of paragraph (b) of this 
section, because C was not the owner of the accounts receivable for 
Federal tax purposes. In Year 1, therefore, C's gross income from 
lending money is less than $5 million but is not less than 15% of C's 
gross income. Because C lends money on a regular and continuing basis 
and does not meet the applicable safe harbor, section 6050P requires C 
to report discharges of indebtedness occurring in Year 3.
    (B) In Year 3, section 6050P requires C to report the $100,000 of 
discharges of the accounts receivable of which C was the owner for 
Federal tax purposes at the time of the identifiable event marking the 
discharge. Unless an exception to reporting under paragraph (b) or (c) 
of this section applies, section 6050P requires C's clients to report 
the $850,000 of discharges of the accounts receivable of which C did not 
become the owner.

    (i) Effective date. This section applies to discharges of 
indebtedness occurring on or after January 1, 2005.

[T.D. 9160, 69 FR 62186, Oct. 25, 2004]



Sec. 1.6050S-0  Table of contents.

    This section lists captions contained in Sec. Sec. 1.6050S-1, 
1.6050S-2T, 1.6050S-3, and 1.6050S-4T.

Sec. 1.6050S-1 Information reporting for qualified tuition and related 
                                expenses.

    (a) Information reporting requirement.
    (1) In general.
    (2) Exceptions.
    (i) No reporting by institutions or insurers for nonresident alien 
individuals.
    (ii) No reporting by institutions for noncredit courses.
    (A) In general.
    (B) Academic credit defined.
    (C) Example.
    (iii) No reporting by institutions for individuals whose qualified 
tuition and related expenses are waived or are paid with scholarships.
    (iv) No reporting by institutions for individuals whose qualified 
tuition and related expenses are covered by a formal billing 
arrangement.
    (A) In general.
    (B) Formal billing arrangement defined.
    (b) Requirement to file return.
    (1) In general.
    (2) Information reporting requirements for institutions that elect 
to report payments received for qualified tuition and related expenses.
    (i) In general.
    (ii) Information included on return.
    (iii) Reportable amount of payments received for qualified tuition 
and related expenses during calendar year determined.
    (iv) Separate reporting of reimbursements or refunds of payments of 
qualified tuition and related expenses that were reported for a prior 
calendar year.
    (v) Payments received for qualified tuition and related expenses 
determined.

[[Page 467]]

    (vi) Reimbursements or refunds of payments for qualified tuition and 
related expenses determined.
    (vii) Examples.
    (3) Information reporting requirements for institutions that elect 
to report amounts billed for qualified tuition and related expenses.
    (i) In general.
    (ii) Information included on return.
    (iii) Reportable amounts billed for qualified tuition and related 
expenses during calendar year determined.
    (iv) Separate reporting of reductions made to amounts billed for 
qualified tuition and related expenses that were reported for a prior 
calendar year.
    (v) Examples.
    (4) Requirements for insurers.
    (i) In general.
    (ii) Information included on return.
    (5) Time and place for filing return.
    (i) In general.
    (ii) Return for nonresident alien individual.
    (iii) Extensions of time.
    (6) Use of magnetic media.
    (c) Requirement to furnish statement.
    (1) In general.
    (2) Time and manner for furnishing statement.
    (i) In general.
    (ii) Statement to nonresident alien individual.
    (iii) Extensions of time.
    (3) Copy of Form 1098-T.
    (d) Special rules.
    (1) Enrollment determined.
    (2) Payments of qualified tuition and related expenses received or 
collected by one or more persons.
    (i) In general.
    (ii) Exception.
    (3) Governmental units.
    (e) Penalty provisions.
    (1) Failure to file correct returns.
    (2) Failure to furnish correct information statements.
    (3) Waiver of penalties for failures to include a correct TIN.
    (i) In general.
    (ii) Acting in a responsible manner.
    (iii) Manner of soliciting TIN.
    (4) Failure to furnish TIN.
    (f) Effective date.

  Sec. 1.6050S-2T Electronic furnishing of information statements for 
                 qualified tuition and related expenses.

    (a) Electronic furnishing of statements.
    (1) In general.
    (2) Consent.
    (i) In general.
    (ii) Change in hardware or software requirements.
    (iii) Example.
    (3) Required disclosures.
    (i) In general.
    (ii) Paper statement.
    (iii) Scope and duration of consent.
    (iv) Post-consent request for a paper statement.
    (v) Withdrawal of consent.
    (vi) Notice of termination.
    (vii) Updating information.
    (viii) Hardware and software requirements.
    (4) Format.
    (5) Posting.
    (6) Notice.
    (i) In general.
    (ii) Undeliverable electronic address.
    (iii) Corrected statements.
    (7) Retention.
    (b) Effective date.

   Sec. 1.6050S-3 Information reporting for payments of interest on 
                       qualified education loans.

    (a) Information reporting requirement in general.
    (b) Definitions.
    (1) Interest.
    (2) Payor.
    (c) Requirement to file return.
    (1) Form of return.
    (2) Information included on return.
    (3) Time and place for filing return.
    (i) In general.
    (ii) Extensions of time.
    (4) Use of magnetic media.
    (d) Requirement to furnish statement.
    (1) In general.
    (2) Time and manner for furnishing statement.
    (i) In general.
    (ii) Extensions of time.
    (3) Copy of Form 1098-E.
    (e) Special rules.
    (1) Transitional rule for reporting of loan origination fees and 
capitalized interest.
    (2) Qualified education loan certification.
    (3) Payments of interest received or collected by one or more 
persons.
    (i) In general.
    (ii) Exception.
    (4) Reporting by foreign persons.
    (5) Governmental units.
    (f) Penalty provisions.
    (1) Failure to file correct returns.
    (2) Failure to furnish correct information statements.
    (3) Waiver of penalties for failures to include a correct TIN.
    (i) In general.
    (ii) Acting in a responsible manner.
    (iii) Manner of soliciting TIN.
    (4) Failure to furnish TIN.
    (g) Effective date.

  Sec. 1.6050S-4T Electronic furnishing of information statements for 
           payments of interest on qualified education loans.

    (a) Electronic furnishing of statements.
    (1) In general.

[[Page 468]]

    (2) Consent.
    (i) In general.
    (ii) Change in hardware or software requirements.
    (iii) Example.
    (3) Required disclosures.
    (i) In general.
    (ii) Paper statement.
    (iii) Scope and duration of consent.
    (iv) Post-consent request for a paper statement.
    (v) Withdrawal of consent.
    (vi) Notice of termination.
    (vii) Updating information.
    (viii) Hardware and software requirements.
    (4) Format.
    (5) Posting.
    (6) Notice.
    (i) In general.
    (ii) Undeliverable electronic address.
    (iii) Corrected statements.
    (7) Retention.
    (b) Effective date.

[T.D. 8992, 67 FR 20904, Apr. 29, 2002, as amended by T.D. 9029, 67 FR 
77681, Dec. 19, 2002]



Sec. 1.6050S-1  Information reporting for qualified tuition and 
related expenses.

    (a) Information reporting requirement--(1) In general. Except as 
provided in paragraph (a)(2) of this section, any eligible educational 
institution (as defined in section 25A(f)(2) and the regulations 
thereunder) (an institution) that enrolls (as determined under paragraph 
(d)(1) of this section) any individual for any academic period (as 
defined in the regulations under section 25A), and any person that is 
engaged in a trade or business of making payments under an insurance 
arrangement as reimbursements or refunds (or other similar amounts) of 
qualified tuition and related expenses (as defined in section 25A(f)(1) 
and the regulations thereunder) (an insurer) must--
    (i) File an information return, as described in paragraph (b) of 
this section, with the Internal Revenue Service (IRS) with respect to 
each individual described in paragraph (b) of this section; and
    (ii) Furnish a statement, as described in paragraph (c) of this 
section, to each individual described in paragraph (c) of this section.
    (2) Exceptions--(i) No reporting by institution or insurer for 
nonresident alien individuals. The information reporting requirements of 
this section do not apply with respect to any individual who is a 
nonresident alien (as defined in section 7701(b) and Sec. 301.7701(b)-3 
of this chapter) during the calendar year, unless the individual 
requests the institution or insurer to report. If a nonresident alien 
individual requests an institution or insurer to report, the institution 
or insurer must comply with the requirements of this section for the 
calendar year with respect to which the request is made.
    (ii) No reporting by institutions for noncredit courses--(A) In 
general. The information reporting requirements of this section do not 
apply with respect to any course for which no academic credit is offered 
by the institution.
    (B) Academic credit defined. Academic credit means credit offered by 
an institution for the completion of course work leading toward a post-
secondary degree, certificate, or other recognized post-secondary 
educational credential.
    (C) Example. The following example illustrates the rules of this 
paragraph (a)(2)(ii):

    Example. Student A, a medical doctor, takes a course at University 
X's medical school. Student A takes the course to fulfill State Y's 
licensing requirement that medical doctors attend continuing medical 
education courses each year. Student A is not enrolled in a degree 
program at University X and takes the medical course through University 
X's continuing professional education division. University X does not 
offer credit toward a post-secondary degree on an academic transcript 
for the completion of the course but gives Student A a certificate of 
attendance upon completion. Under this paragraph (a)(2)(ii), University 
X is not subject to the information reporting requirements of section 
6050S and this section for the medical education course taken by Student 
A.

    (iii) No reporting by institutions for individuals whose qualified 
tuition and related expenses are waived or are paid with scholarships. 
The information reporting requirements of this section do not apply with 
respect to any individual whose qualified tuition and related expenses 
are waived in their entirety or are paid entirely with scholarships.
    (iv) No reporting by institutions for individuals whose qualified 
tuition and related expenses are covered by a formal billing 
arrangement--(A) In general. The information reporting requirements of

[[Page 469]]

this section do not apply with respect to any individual whose qualified 
tuition and related expenses are covered by a formal billing arrangement 
as defined in paragraph (a)(2)(iv)(B) of this section.
    (B) Formal billing arrangement defined. A formal billing arrangement 
means--
    (1) An arrangement in which the institution bills only an employer 
for education furnished by the institution to an individual who is the 
employer's employee and does not maintain a separate financial account 
for that individual;
    (2) An arrangement in which the institution bills only a 
governmental entity for education furnished by the institution to an 
individual and does not maintain a separate financial account for that 
individual; or
    (3) Any other similar arrangement in which the institution bills 
only an institutional third party for education furnished to an 
individual and does not maintain a separate financial account for that 
individual, but only if designated as a formal billing arrangement by 
the Commissioner in published guidance of general applicability or in 
guidance directed to participants in specific arrangements.
    (b) Requirement to file return--(1) In general. Institutions may 
elect to report either the information described in paragraph (b)(2) of 
this section, or the information described in paragraph (b)(3) of this 
section. Once an institution elects to report under either paragraph 
(b)(2) or (3) of this section, the institution must use the same 
reporting method for all calendar years in which it is required to file 
returns, unless permission is granted to change reporting methods. 
Paragraph (b)(2) of this section requires institutions to report, among 
other information, the amount of payments received during the calendar 
year for qualified tuition and related expenses. Institutions must 
report separately adjustments made during the calendar year that relate 
to payments received for qualified tuition and related expenses that 
were reported for a prior calendar year. For purposes of paragraph 
(b)(2) of this section, an adjustment made to payments received means a 
reimbursement or refund. Paragraph (b)(3) requires institutions to 
report, among other information, the amounts billed during the calendar 
year for qualified tuition and related expenses. Institutions must 
report separately adjustments made during the calendar year that relate 
to amounts billed for qualified tuition and related expenses that were 
reported for a prior calendar year. For purposes of paragraph (b)(3) of 
this section, an adjustment made to amounts billed means a reduction in 
charges. Insurers must report the information described in paragraph 
(b)(4) of this section.
    (2) Information reporting requirements for institutions that elect 
to report payments received for qualified tuition and related expenses--
(i) In general. Except as provided in paragraph (a)(2) of this section, 
an institution reporting payments received for qualified tuition and 
related expenses must file an information return with the IRS on Form 
1098-T, ``Tuition Statement,'' with respect to each individual enrolled 
(as determined in paragraph (d)(1) of this section) for an academic 
period beginning during the calendar year or during a prior calendar 
year and for whom a transaction described in paragraphs (b)(2)(ii)(C), 
(E), (F) or (G) of this section is made during the calendar year. An 
institution may use a substitute Form 1098-T if the substitute form 
complies with applicable revenue procedures relating to substitute forms 
(see Sec. 601.601(d)(2) of this chapter).
    (ii) Information included on return. An institution reporting 
payments received for qualified tuition and related expenses must 
include on Form 1098-T--
    (A) The name, address, and taxpayer identification number (TIN)(as 
defined in section 7701(a)(41)) of the institution;
    (B) The name, address, and TIN of the individual who is, or has 
been, enrolled by the institution;
    (C) The amount of payments of qualified tuition and related expenses 
that the institution received from any source with respect to the 
individual during the calendar year;
    (D) An indication by the institution whether any payments received 
for qualified tuition and related expenses reported for the calendar 
year relate to an academic period that begins during

[[Page 470]]

the first three months of the next calendar year;
    (E) The amount of any scholarships or grants for the payment of the 
individual's costs of attendance that the institution administered and 
processed during the calendar year;
    (F) The amount of any reimbursements or refunds of qualified tuition 
and related expenses made during the calendar year with respect to the 
individual that relate to payments of qualified tuition and related 
expenses that were reported by the institution for a prior calendar 
year;
    (G) The amount of any reductions to the amount of scholarships or 
grants for the payment of the individual's costs of attendance that were 
reported by the institution with respect to the individual for a prior 
calendar year;
    (H) A statement or other indication showing whether the individual 
was enrolled for at least half of the normal full-time work load for the 
course of study the individual is pursuing for at least one academic 
period that begins during the calendar year (see section 25A and the 
regulations thereunder);
    (I) A statement or other indication showing whether the individual 
was enrolled in a program leading to a graduate-level degree, graduate-
level certificate, or other recognized graduate-level educational 
credential; and
    (J) Any other information required by Form 1098-T and its 
instructions.
    (iii) Reportable amount of payments received for qualified tuition 
and related expenses during calendar year determined. The amount of 
payments received for qualified tuition and related expenses with 
respect to an individual during the calendar year that is reportable on 
Form 1098-T is determined by netting the amount of payments received (as 
defined in paragraph (b)(2)(v) of this section) for qualified tuition 
and related expenses during the calendar year against any reimbursements 
or refunds (as defined in paragraph (b)(2)(vi) of this section) made 
during the calendar year that relate to payments received for qualified 
tuition and related expenses during the same calendar year.
    (iv) Separate reporting of reimbursements or refunds of payments of 
qualified tuition and related expenses that were reported for a prior 
calendar year. An institution must separately report on Form 1098-T any 
reimbursements or refunds (as defined in paragraph (b)(2)(vi) of this 
section) made during the current calendar year that relate to payments 
of qualified tuition and related expenses that were reported by the 
institution for a prior calendar year. Such reimbursements or refunds 
shall not be netted against the payments received for qualified tuition 
and related expenses during the current calendar year.
    (v) Payments received for qualified tuition and related expenses 
determined. For purposes of determining the amount of payments received 
for qualified tuition and related expenses during a calendar year, 
payments received with respect to an individual during the calendar year 
from any source (except for any scholarship or grant that, by its terms, 
must be applied to expenses other than qualified tuition and related 
expenses, such as room and board) are treated as payments of qualified 
tuition and related expenses up to the total amount billed by the 
institution for such expenses. For purposes of this section, a payment 
includes any positive account balance (such as any reimbursement or 
refund credited to an individual's account) that an institution applies 
toward current charges.
    (vi) Reimbursements or refunds of payments for qualified tuition and 
related expenses determined. For purposes of determining the amount of 
reimbursements or refunds made of payments received for qualified 
tuition and related expenses, any reimbursement or refund made with 
respect to an individual during a calendar year (except for any refund 
of a scholarship or grant that, by its terms, was required to be applied 
to expenses other than qualified tuition and related expenses, such as 
room and board) is treated as a reimbursement or refund of payments for 
qualified tuition and related expenses up to the amount of any reduction 
in charges for such expenses. For purposes of this section, a 
reimbursement or refund includes amounts that an institution credits to 
an individual's account, as well as amounts disbursed to, or on behalf 
of, the individual.

[[Page 471]]

    (vii) Examples. The following examples illustrate the rules in this 
paragraph (b)(2):

    Example 1. (i) In early August 2003, University X bills enrolled 
Student A $10,000 for qualified tuition and related expenses and $6,000 
for room and board for the 2003 Fall semester. In late August 2003, 
Student A pays $11,000 to University X. In early September 2003, Student 
A drops to half-time enrollment for the 2003 Fall semester. In late 
September 2003, University X credits $5,000 to Student A's account, 
reflecting a $5,000 reduction in charges for qualified tuition and 
related expenses. In late September 2003, University X applies the 
$5,000 positive account balance toward current charges.
    (ii) Under paragraph (b)(2)(v) of this section, the $11,000 payment 
is treated as a payment of qualified tuition and related expenses up to 
the $10,000 billed for qualified tuition and related expenses. Under 
paragraph (b)(2)(vi) of this section, the $5,000 credited to the 
student's account is treated as a reimbursement or refund of payments 
for qualified tuition and related expenses, because the current year 
charges for qualified tuition and related expenses were reduced by 
$5,000. Under paragraph (b)(2)(iii) of this section, University X is 
required to net the $10,000 payment received for qualified tuition and 
related expenses during 2003 against the $5,000 reimbursement or refund 
of payments received for qualified tuition and related expenses during 
2003. Therefore, Institution X is required to report $5,000 of payments 
received for qualified tuition and related expenses during 2003.
    Example 2. (i) The facts are the same as in Example 1, except that 
Student A pays the full $16,000 in late August 2003. In late September 
2003, University X reduces the tuition charges by $5,000 and issues a 
$5,000 refund to Student A.
    (ii) Under paragraph (b)(2)(v) of this section, the $16,000 payment 
is treated as a payment of qualified tuition and related expenses up to 
the $10,000 billed for qualified tuition and related expenses. Under 
paragraph (b)(2)(vi) of this section, the $5,000 refund is treated as 
reimbursement or refund of payments for qualified tuition and related 
expenses, because the current year charges for qualified tuition and 
related expenses were reduced by $5,000. Under paragraph (b)(2)(iii) of 
this section, University X is required to net the $10,000 payment 
received for qualified tuition and related expenses during 2003 against 
the $5,000 reimbursement or refund of payments received for qualified 
tuition and related expenses during 2003. Therefore, Institution X is 
required to report $5,000 of payments received for qualified tuition and 
related expenses during 2003.
    Example 3. (i) The facts are the same as in Example 1, except that 
Student A is enrolled full-time, and, in early September 2003, Student A 
decides to live at home with her parents. In late September 2003, 
University X adjusts Student A's account to eliminate room and board 
charges and issues a $1,000 refund to Student A.
    (ii) Under paragraph (b)(2)(v) of this section, the $11,000 payment 
is treated as a payment of qualified tuition and related expenses up to 
the $10,000 billed for qualified tuition and related expenses. Under 
paragraph (b)(2)(vi) of this section, the $1,000 refund is not treated 
as reimbursement or refund of payments for qualified tuition and related 
expenses, because there is no reduction in charges for qualified tuition 
and related expenses. Therefore, under paragraph (b)(2)(iii) of this 
section, University X is required to report $10,000 of payments received 
for qualified tuition and related expenses during 2003.
    Example 4. (i) In early December 2003, College Y bills enrolled 
Student B $10,000 for qualified tuition and related expenses and $6,000 
for room and board for the 2004 Spring semester. In late December 2003, 
Student B pays $16,000. In mid-January 2004, after the 2004 Spring 
semester classes begin, Student B drops to half-time enrollment. In mid-
January 2004, College Y credits Student B's account with $5,000, 
reflecting a $5,000 reduction in charges for qualified tuition and 
related expenses, but does not issue a refund to Student B. In early 
August 2004, College Y bills Student B $10,000 for qualified tuition and 
related expenses and $6,000 for room and board for the 2004 Fall 
semester. In early September 2004, College Y applies the $5,000 positive 
account balance toward Student B's $16,000 bill for the 2004 Fall 
semester. In late September 2004, Student B pays $6,000 towards the 
charges.
    (ii) In the reporting for calendar year 2003, under paragraph 
(b)(2)(v) of this section, the $16,000 payment in December 2003 is 
treated as a payment of qualified tuition and related expenses up to the 
$10,000 billed for qualified tuition and related expenses. Under 
paragraph (b)(2)(iii) of this section, College Y is required to report 
$10,000 of payments received for qualified tuition and related expenses 
during 2003. In addition, College Y is required to indicate that the 
payments reported for 2003 relate to an academic period that begins 
during the first three months of the next calendar year.
    (iii) In the reporting for calendar year 2004, under paragraph 
(b)(2)(vi) of this section, the $5,000 credited to Student B's account 
is treated as a reimbursement or refund of qualified tuition and related 
expenses, because the charges for qualified tuition and related expenses 
were reduced by $5,000. Under paragraph (b)(2)(iv) of this section, the 
$5,000 reimbursement or refund of qualified

[[Page 472]]

tuition and related expenses must be separately reported on Form 1098-T 
because it relates to payments of qualified tuition and related expenses 
reported by College Y for 2003. Under paragraph (b)(2)(v) of this 
section, the $5,000 positive account balance that is applied toward 
charges for the 2004 Fall semester is treated as a payment. Therefore, 
College Y received total payments of $11,000 during 2004 (the $5,000 
credit plus the $6,000 payment). Under paragraph (b)(2)(v) of this 
section, the $11,000 of total payments are treated as a payment of 
qualified tuition and related expenses up to the $10,000 billed for such 
expenses. Therefore, for 2004, College Y is required to report $10,000 
of payments received for qualified tuition and related expenses during 
2004 and a $5,000 refund of payments of qualified tuition and related 
expenses reported for 2003.

    (3) Information reporting requirements for institutions that elect 
to report amounts billed for qualified tuition and related expenses--(i) 
In general. Except as provided in paragraph (a)(2) of this section, an 
institution reporting amounts billed for qualified tuition and related 
expenses must file an information return on Form 1098-T with respect to 
each individual enrolled (as determined in paragraph (d)(1) of this 
section) for an academic period beginning during the calendar year or 
during a prior calendar year and for whom a transaction described in 
paragraphs (b)(3)(ii)(C), (E), (F) or (G) of this section is made during 
the calendar year. An institution may use a substitute Form 1098-T if 
the substitute form complies with applicable revenue procedures relating 
to substitute forms (see Sec. 601.601(d)(2) of this chapter).
    (ii) Information included on return. An institution reporting 
amounts billed for qualified tuition and related expenses must include 
on Form 1098-T--
    (A) The name, address, and taxpayer identification number (TIN)(as 
defined in section 7701(a)(41)) of the institution;
    (B) The name, address, and TIN of the individual who is, or has 
been, enrolled by the institution;
    (C) The amount billed for qualified tuition and related expenses 
with respect to the individual during the calendar year;
    (D) An indication by the institution whether any amounts billed for 
qualified tuition and related expenses reported for the calendar year 
relate to an academic period that begins during the first three months 
of the next calendar year;
    (E) The amount of any scholarships or grants for the payment of the 
individual's costs of attendance that the institution administered and 
processed during the calendar year;
    (F) The amount of any reductions in charges made during the calendar 
year with respect to the individual that relate to amounts billed for 
qualified tuition and related expenses that were reported by the 
institution for a prior calendar year;
    (G) The amount of any reductions to the amount of scholarships or 
grants for the payment of the individual's costs of attendance that were 
reported by the institution with respect to the individual for a prior 
calendar year;
    (H) A statement or other indication showing whether the individual 
was enrolled for at least half of the normal full-time work load for the 
course of study the individual is pursuing for at least one academic 
period that begins during the calendar year (see section 25A and the 
regulations thereunder);
    (I) A statement or other indication showing whether the individual 
was enrolled in a program leading to a graduate-level degree, graduate-
level certificate, or other recognized graduate-level educational 
credential; and
    (J) Any other information required by Form 1098-T and its 
instructions.
    (iii) Reportable amounts billed for qualified tuition and related 
expenses during calendar year determined. The amount billed for 
qualified tuition and related expenses with respect to an individual 
during the calendar year that is reportable on Form 1098-T is determined 
by netting the amounts billed for qualified tuition and related expenses 
during the calendar year against any reductions in charges for qualified 
tuition and related expenses made during the calendar year that relate 
to amounts billed for qualified tuition and related expenses during the 
same calendar year.
    (iv) Separate reporting of reductions made to amounts billed for 
qualified tuition and related expenses that were reported for a prior 
calendar year. An institution must separately report on Form 1098-T any 
reductions in charges made during the current calendar year

[[Page 473]]

that relate to amounts billed for qualified tuition and related expenses 
that were reported by the institution for a prior calendar year. Such 
reductions shall not be netted against amounts billed for qualified 
tuition and related expenses during the current calendar year.
    (v) Examples. The following examples illustrate the rules in this 
paragraph (b)(3):

    Example 1. (i) In early August 2003, University X bills enrolled 
Student A $10,000 for qualified tuition and related expenses and $6,000 
for room and board for the 2003 Fall semester. In late August 2003, 
Student A pays $11,000 to University X. In early September 2003, Student 
A drops to half-time enrollment for the 2003 Fall semester. In late 
September 2003, University X adjusts Student A's account and reduces the 
charges for qualified tuition and related expenses by $5,000 to reflect 
half-time enrollment. In late September 2003, University X applies the 
$5,000 account balance toward current charges.
    (ii) Under paragraph (b)(3)(iii) of this section, University X is 
required to net the $10,000 amount of qualified tuition and related 
expenses billed during 2003 against the $5,000 reduction in charges for 
qualified tuition and related expenses during 2003. Therefore, 
Institution X is required to report $5,000 in amounts billed for 
qualified tuition and related expenses during 2003.
    Example 2. (i) The facts are the same as in Example 1, except that, 
in addition, in early December 2003, College X bills Student A $10,000 
for qualified tuition and related expenses and $6,000 for room and board 
for the 2004 Spring semester. In early January 2004, Student A pays 
$16,000. In mid-January 2004, after the 2004 Spring semester classes 
begin, Student A drops to half-time enrollment. In mid-January 2004, 
College X credits $5,000 to Student A's account, reflecting a $5,000 
reduction in charges for qualified tuition and related expenses, but 
does not issue a refund check to Student A. In early August 2004, 
College X bills Student A $10,000 for qualified tuition and related 
expenses and $6,000 for room and board for the 2004 Fall semester. In 
early September 2004, College X applies the $5,000 positive account 
balance toward Student A's $16,000 bill for the 2004 Fall semester. In 
late September 2004, Student A pays $6,000 toward the charges.
    (ii) In the reporting for calendar year 2003, under paragraph 
(b)(3)(iii) of this section, College X is required to report $15,000 
amounts billed for qualified tuition and related expenses during 2003 
($5,000 for the 2003 Fall semester and $10,000 for the 2004 Spring 
semester). In addition, College X is required to indicate that some of 
the amounts billed for qualified tuition and related expenses reported 
for 2003 relate to an academic period that begins during the first three 
months of the next calendar year.
    (iii) In the reporting for calendar year 2004, under paragraph 
(b)(3)(iv) of this section, the $5,000 reduction in charges for 
qualified tuition and related expenses must be separately reported on 
Form 1098-T because it relates to amounts billed for qualified tuition 
and related expenses that were reported by College X for 2003. Under 
paragraph (b)(3)(iii) of this section, College X is required to report 
$10,000 in amounts billed for qualified tuition and related expenses 
during 2004.

    (4) Requirements for insurers--(i) In general. Except as otherwise 
provided in this section, an insurer must file an information return for 
each individual with respect to whom reimbursements or refunds of 
qualified tuition and related expenses are made during the calendar year 
on Form 1098-T. An insurer may use a substitute Form 1098-T if the 
substitute form complies with applicable revenue procedures relating to 
substitute forms (see Sec. 601.601(d)(2) of this chapter).
    (ii) Information included on return. An insurer must include on Form 
1098-T--
    (A) The name, address, and taxpayer identification number (TIN) (as 
defined in section 7701(a)(41)) of the insurer;
    (B) The name, address, and TIN of the individual with respect to 
whom reimbursements or refunds of qualified tuition and related expenses 
were made;
    (C) The aggregate amount of reimbursements or refunds of qualified 
tuition and related expenses that the insurer made with respect to the 
individual during the calendar year; and
    (D) Any other information required by Form 1098-T and its 
instructions.
    (5) Time and place for filing return--(i) In general. Except as 
provided in paragraphs (b)(5)(ii) and (iii) of this section, Form 1098-T 
must be filed on or before February 28 (March 31 if filed 
electronically) of the year following the calendar year in which 
payments were received, or amounts were billed, for qualified tuition or 
related expenses, or reimbursements, refunds, or reductions of such 
amounts were made. An institution or insurer must file Form 1098-T with 
the IRS according to the instructions to Form 1098-T.

[[Page 474]]

    (ii) Return for nonresident alien individual. In general, an 
institution or insurer is not required to file a return on behalf of a 
nonresident alien individual. However, if a nonresident alien individual 
requests an institution or insurer to report, the institution or insurer 
must file a return described in paragraph (b) of this section with the 
IRS on or before the date prescribed in paragraph (b)(5)(i) of this 
section, or on or before the thirtieth day after the request, whichever 
is later.
    (iii) Extensions of time. The IRS may grant an institution or 
insurer an extension of time to file returns required in this section 
upon a showing of good cause. See General Instructions for Forms 1099 
series, 1098 series, 5498 series, and W-2G, ``Certain Gambling 
Winnings,'' and applicable revenue procedures for rules relating to 
extensions of time to file (see Sec. 601.601(d)(2) of this chapter).
    (6) Use of magnetic media. See section 6011(e) and Sec. 301.6011-2 
of this chapter for rules relating to the requirement to file Forms 
1098-T on magnetic media.
    (c) Requirement to furnish statement--(1) In general. An institution 
or insurer must furnish a statement to each individual for whom it is 
required to file a Form 1098-T. The statement must include--
    (i) The information required under paragraph (b) of this section. An 
IRS truncated taxpayer identifying number (TTIN) may be used as the TIN 
of the individual in lieu of the identifying number appearing on the 
information return filed with the Internal Revenue Service. For 
provisions relating to the use of TTINs, see Sec. 301.6109-4 of this 
chapter (Procedure and Administration Regulations);
    (ii) A legend that identifies the statement as important tax 
information that is being furnished to the IRS;
    (iii) Instructions that--
    (A) State that the statement reports either total payments received 
by the institution for qualified tuition and related expenses during the 
calendar year, or total amounts billed by the institution for qualified 
tuition and related expenses during the calendar year, or the total 
reimbursements or refunds made by the insurer;
    (B) State that, under section 25A and the regulations thereunder, 
the taxpayer may claim an education tax credit only with respect to 
qualified tuition and related expenses actually paid during the calendar 
year; and that the taxpayer may not be able to claim an education tax 
credit with respect to the entire amount of payments received, or 
amounts billed, for qualified tuition and related expenses reported for 
the calendar year;
    (C) State that the amount of any scholarships or grants reported for 
the calendar year and other similar amounts not reported (because they 
are not administered and processed by the institution) may reduce the 
amount of any allowable education tax credit for the taxable year;
    (D) State that the amount of any reimbursements or refunds of 
payments received, or reductions in charges, for qualified tuition and 
related expenses, or any reductions to the amount of scholarships or 
grants, reported by the institution with respect to the individual for a 
prior calendar year may affect the amount of any allowable education tax 
credit for the prior calendar year (and may result in an increase in tax 
liability for the year of the refund);
    (E) State that the amount of any reimbursements or refunds of 
qualified tuition and related expenses reported by an insurer may reduce 
the amount of an allowable education tax credit for a taxable year (and 
may result in an increase in tax liability for the year of the refund);
    (F) State that the taxpayer should refer to relevant IRS forms and 
publications, and should not refer to the institution or the insurer, 
for explanations relating to the eligibility requirements for, and 
calculation of, any allowable education tax credit; and
    (G) Include the name, address, and phone number of the information 
contact of the institution or insurer that filed the Form 1098-T.
    (2) Time and manner for furnishing statement--(i) In general. Except 
as provided in paragraphs (c)(2)(ii) and (iii) of this section, an 
institution or insurer must furnish the statement described in paragraph 
(c)(1) of this section to each individual for whom it is required to 
file a return, on or before January 31

[[Page 475]]

of the year following the calendar year in which payments were received, 
or amounts were billed, for qualified tuition and related expenses, or 
reimbursements, refunds, or reductions of such amounts were made. If 
mailed, the statement must be sent to the individual's permanent 
address, or the individual's temporary address if the institution or 
insurer does not know the individual's permanent address. If furnished 
electronically, the statement must be furnished in accordance with the 
applicable regulations.
    (ii) Statement to nonresident alien individual. If an information 
return is filed for a nonresident alien individual, the institution or 
insurer must furnish a statement described in paragraph (c)(1) of this 
section to the individual in the manner prescribed in paragraph 
(c)(2)(i) of this section. The statement must be furnished on or before 
the later of the date prescribed in paragraph (c)(2)(i) of this section 
or the thirtieth day after the nonresident alien's request to report.
    (iii) Extensions of time. The IRS may grant an institution or 
insurer an extension of time to furnish the statements required in this 
section upon a showing of good cause. See General Instructions for Forms 
1099 series, 1098 series, 5498 series, and W-2G, ``Certain Gambling 
Winnings,'' and applicable revenue procedures for rules relating to 
extensions of time to furnish statements (see Sec. 601.601(d)(2) of 
this chapter).
    (3) Copy of Form 1098-T. An institution or insurer may satisfy the 
requirement of this paragraph (c) by furnishing either a copy of Form 
1098-T and its instructions or another document that contains all of the 
information filed with the IRS and the information required by paragraph 
(c)(1) of this section if the document complies with applicable revenue 
procedures relating to substitute statements (see Sec. 601.601(d)(2) of 
this chapter).
    (d) Special rules--(1) Enrollment determined. An institution may 
determine its enrollment for each academic period under its own rules 
and policies for determining enrollment or as of any of the following 
dates--
    (i) 30 days after the first day of the academic period;
    (ii) A date during the academic period on which enrollment data must 
be collected for purposes of the Integrated Post Secondary Education 
Data System administered by the Department of Education; or
    (iii) A date during the academic period on which the institution 
must report enrollment data to the State, the institution's governing 
body, or some other external governing body.
    (2) Payments of qualified tuition and related expenses received or 
collected by one or more persons--(i) In general. Except as otherwise 
provided in paragraph (d)(2)(ii) of this section, if a person collects 
or receives payments of qualified tuition and related expenses on behalf 
of another person (e.g., an institution), the person collecting or 
receiving payments must satisfy the requirements of paragraphs (b) and 
(c) of this section. In this case, those requirements do not apply to 
the transfer of the payments to the institution.
    (ii) Exception. If the person collecting or receiving payments of 
qualified tuition and related expenses on behalf of another person 
(e.g., an institution) does not possess the information needed to comply 
with the requirements of paragraphs (b) and (c) of this section, the 
other person must satisfy those requirements.
    (3) Governmental units. An institution or insurer that is a 
governmental unit, or an agency or instrumentality of a governmental 
unit, is subject to the requirements of paragraphs (b) and (c) of this 
section and an appropriately designated officer or employee of the 
governmental entity must satisfy those requirements.
    (e) Penalty provisions--(1) Failure to file correct returns. The 
section 6721 penalty may apply to an institution or insurer that fails 
to file information returns required by section 6050S and this section 
on or before the required filing date; that fails to include all of the 
required information on the return; or that includes incorrect 
information on the return. See section 6721, and the regulations 
thereunder, for rules relating to penalties for failure to file correct 
returns. See section 6724, and the regulations thereunder, for rules 
relating to waivers of penalties for certain failures due to reasonable 
cause.

[[Page 476]]

    (2) Failure to furnish correct information statements. The section 
6722 penalty may apply to an institution or insurer that fails to 
furnish statements required by section 6050S and this section on or 
before the prescribed date; that fails to include all the required 
information on the statement; or that includes incorrect information on 
the statement. See section 6722, and the regulations thereunder, for 
rules relating to penalties for failure to furnish correct statements. 
See section 6724, and the regulations thereunder, for rules relating to 
waivers of penalties for certain failures due to reasonable cause.
    (3) Waiver of penalties for failures to include a correct TIN--(i) 
In general. In the case of a failure to include a correct TIN on Form 
1098-T or a related information statement, penalties may be waived if 
the failure is due to reasonable cause. Reasonable cause may be 
established if the failure arose from events beyond the institution's or 
insurer's control, such as a failure of the individual to furnish a 
correct TIN. However, the institution or insurer must establish that it 
acted in a responsible manner both before and after the failure.
    (ii) Acting in a responsible manner. An institution or insurer must 
request the TIN of each individual for whom it is required to file a 
return if it does not already have a record of the individual's correct 
TIN. If the institution or insurer does not have a record of the 
individual's correct TIN, then it must solicit the TIN in the manner 
described in paragraph (e)(3)(iii) of this section on or before December 
31 of each year during which it receives payments, or bills amounts, for 
qualified tuition and related expenses or makes reimbursements, refunds, 
or reductions of such amounts with respect to the individual. If an 
individual refuses to provide his or her TIN upon request, the 
institution or insurer must file the return and furnish the statement 
required by this section without the individual's TIN, but with all 
other required information. The specific solicitation requirements of 
paragraph (e)(3)(iii) of this section apply in lieu of the solicitation 
requirements of Sec. 301.6724-1(e) and (f) of this chapter for the 
purpose of determining whether an institution or insurer acted in a 
responsible manner in attempting to obtain a correct TIN. An institution 
or insurer that complies with the requirements of this paragraph (e)(3) 
will be considered to have acted in a responsible manner within the 
meaning of Sec. 301.6724-1(d) of this chapter with respect to any 
failure to include the correct TIN of an individual on a return or 
statement required by section 6050S and this section.
    (iii) Manner of soliciting TIN. An institution or insurer must 
request the individual's TIN in writing and must clearly notify the 
individual that the law requires the individual to furnish a TIN so that 
it may be included on an information return filed by the institution or 
insurer. A request for a TIN made on Form W-9S, ``Request for Student's 
or Borrower's Taxpayer Identification Number and Certification,'' 
satisfies the requirements of this paragraph (e)(3)(iii). An institution 
or insurer may establish a system for individuals to submit Forms W-9S 
electronically as described in applicable forms and instructions. An 
institution or insurer may also develop a separate form to request the 
individual's TIN or incorporate the request into other forms customarily 
used by the institution or insurer, such as admission or enrollment 
forms or financial aid applications.
    (4) Failure to furnish TIN. The section 6723 penalty may apply to 
any individual who is required (but fails) to furnish his or her TIN to 
an institution or insurer. See section 6723, and the regulations 
thereunder, for rules relating to the penalty for failure to furnish a 
TIN.
    (f) Effective/applicability date. The rules in this section apply to 
information returns required to be filed, and information statements 
required to be furnished, after December 31, 2003. Paragraph (c)(1)(i) 
applies to payee statements due after December 31, 2014. For payee 
statements due before January 1, 2015, Sec. 1.6050S-1 (as contained in 
26 CFR part 1, revised April 2013) shall apply.

[T.D. 9029, 67 FR 77682, Dec. 19, 2002; 68 FR 6350, Feb. 7, 2003; T.D. 
9675, 79 FR 41131, July 15, 2014]

[[Page 477]]



Sec. 1.6050S-2  Information reporting for payments and reimbursements
or refunds of qualified tuition and related expenses.

    (a) Electronic furnishing of statements--(1) In general. A person 
required by section 6050S(d) to furnish a written statement regarding 
payments and reimbursements or refunds of qualified tuition and related 
expenses (furnisher) to the individual to whom it is required to be 
furnished (recipient) may furnish the statement in an electronic format 
in lieu of a paper format. A furnisher who meets the requirements of 
paragraphs (a)(2) through (6) of this section is treated as furnishing 
the required statement.
    (2) Consent--(i) In general. The recipient must have affirmatively 
consented to receive the statement in an electronic format. The consent 
may be made electronically in any manner that reasonably demonstrates 
that the recipient can access the statement in the electronic format in 
which it will be furnished to the recipient. Alternatively, the consent 
may be made in a paper document if it is confirmed electronically.
    (ii) Withdrawal of consent. The consent requirement of this 
paragraph (a)(2) is not satisfied if the recipient withdraws the consent 
and the withdrawal takes effect before the statement is furnished. The 
furnisher may provide that a withdrawal of consent takes effect either 
on the date it is received by the furnisher or on a subsequent date. The 
furnisher may also provide that a request for a paper statement will be 
treated as a withdrawal of consent.
    (iii) Change in hardware or software requirements. If a change in 
the hardware or software required to access the statement creates a 
material risk that the recipient will not be able to access the 
statement, the furnisher must, prior to changing the hardware or 
software, provide the recipient with a notice. The notice must describe 
the revised hardware and software required to access the statement and 
inform the recipient that a new consent to receive the statement in the 
revised electronic format must be provided to the furnisher. After 
implementing the revised hardware and software, the furnisher must 
obtain from the recipient, in the manner described in paragraph 
(a)(2)(i) of this section, a new consent or confirmation of consent to 
receive the statement electronically.
    (iv) Examples. The following examples illustrate the rules of this 
paragraph (a)(2):

    Example 1. Furnisher F sends Recipient R a letter stating that R may 
consent to receive statements required by section 6050S(d) 
electronically on a Web site instead of in a paper format. The letter 
contains instructions explaining how to consent to receive the 
statements electronically by accessing the Web site, downloading the 
consent document, completing the consent document and e-mailing the 
completed consent back to F. The consent document posted on the Web site 
uses the same electronic format that F will use for the electronically 
furnished statements. R reads the instructions and submits the consent 
in the manner provided in the instructions. R has consented to receive 
the statements electronically in the manner described in paragraph 
(a)(2)(i) of this section.
    Example 2. Furnisher F sends Recipient R an e-mail stating that R 
may consent to receive statements required by section 6050S(d) 
electronically instead of in a paper format. The e-mail contains an 
attachment instructing R how to consent to receive the statements 
electronically. The e-mail attachment uses the same electronic format 
that F will use for the electronically furnished statements. R opens the 
attachment, reads the instructions, and submits the consent in the 
manner provided in the instructions. R has consented to receive the 
statements electronically in the manner described in paragraph (a)(2)(i) 
of this section.
    Example 3. Furnisher F posts a notice on its Web site stating that 
Recipient R may receive statements required by section 6050S(d) 
electronically instead of in a paper format. The Web site contains 
instructions on how R may access a secure Web page and consent to 
receive the statements electronically. By accessing the secure Web page 
and giving consent, R has consented to receive the statements 
electronically in the manner described in paragraph (a)(2)(i) of this 
section.

    (3) Required disclosures--(i) In general. Prior to, or at the time 
of, a recipient's consent, the furnisher must provide to the recipient a 
clear and conspicuous disclosure statement containing each of the 
disclosures described in paragraphs (a)(3)(ii) through (viii) of this 
section.
    (ii) Paper statement. The recipient must be informed that the 
statement

[[Page 478]]

will be furnished on paper if the recipient does not consent to receive 
it electronically.
    (iii) Scope and duration of consent. The recipient must be informed 
of the scope and duration of the consent. For example, the recipient 
must be informed whether the consent applies to statements furnished 
every year after the consent is given until it is withdrawn in the 
manner described in paragraph (a)(3)(v)(A) of this section or only to 
the statement required to be furnished on or before the January 31 
immediately following the date on which the consent is given.
    (iv) Post-consent request for a paper statement. The recipient must 
be informed of any procedure for obtaining a paper copy of the 
recipient's statement after giving the consent described in paragraph 
(a)(2)(i) of this section and whether a request for a paper statement 
will be treated as a withdrawal of consent.
    (v) Withdrawal of consent. The recipient must be informed that--
    (A) The recipient may withdraw a consent by writing (electronically 
or on paper) to the person or department whose name, mailing address, 
telephone number, and e-mail address is provided in the disclosure 
statement;
    (B) The furnisher will confirm the withdrawal and the date on which 
it takes effect in writing (either electronically or on paper); and
    (C) A withdrawal of consent does not apply to a statement that was 
furnished electronically in the manner described in this paragraph (a) 
before the date on which the withdrawal of consent takes effect.
    (vi) Notice of termination. The recipient must be informed of the 
conditions under which a furnisher will cease furnishing statements 
electronically to the recipient.
    (vii) Updating information. The recipient must be informed of the 
procedures for updating the information needed by the furnisher to 
contact the recipient. The furnisher must inform the recipient of any 
change in the furnisher's contact information.
    (viii) Hardware and software requirements. The recipient must be 
provided with a description of the hardware and software required to 
access, print, and retain the statement, and the date when the statement 
will no longer be available on the Web site.
    (4) Format. The electronic version of the statement must contain all 
required information and comply with applicable revenue procedures 
relating to substitute statements to recipients.
    (5) Notice--(i) In general. If the statement is furnished on a Web 
site, the furnisher must notify the recipient that the statement is 
posted on a Web site. The notice may be delivered by mail, electronic 
mail, or in person. The notice must provide instructions on how to 
access and print the statement. The notice must include the following 
statement in capital letters, ``IMPORTANT TAX RETURN DOCUMENT 
AVAILABLE.'' If the notice is provided by electronic mail, the foregoing 
statement must be on the subject line of the electronic mail.
    (ii) Undeliverable electronic address. If an electronic notice 
described in paragraph (a)(5)(i) of this section is returned as 
undeliverable, and the correct electronic address cannot be obtained 
from the furnisher's records or from the recipient, then the furnisher 
must furnish the notice by mail or in person within 30 days after the 
electronic notice is returned.
    (iii) Corrected statements. If the furnisher has corrected a 
recipient's statement that was furnished electronically, the furnisher 
must furnish the corrected statement to the recipient electronically. If 
the recipient's statement was furnished through a Web site posting and 
the furnisher has corrected the statement, the furnisher must notify the 
recipient that it has posted the corrected statement on the Web site 
within 30 days of such posting in the manner described in paragraph 
(a)(5)(i) of this section. The corrected statement or the notice must be 
furnished by mail or in person if--
    (A) An electronic notice of the Web site posting of an original 
statement was returned as undeliverable; and
    (B) The recipient has not provided a new e-mail address.
    (6) Access period. Statements furnished on a Web site must be 
retained on the Web site through October 15 of the year following the 
calendar year to which the statements relate (or the

[[Page 479]]

first business day after such October 15, if October 15 falls on a 
Saturday, Sunday, or legal holiday). The furnisher must maintain access 
to corrected statements that are posted on the Web site through October 
15 of the year following the calendar year to which the statements 
relate (or the first business day after such October 15, if October 15 
falls on a Saturday, Sunday, or legal holiday) or the date 90 days after 
the corrected statements are posted, whichever is later.
    (b) Paper statements after withdrawal of consent. If a recipient 
withdraws consent to receive a statement electronically and the 
withdrawal takes effect before the statement is furnished 
electronically, a paper statement must be furnished. A paper statement 
furnished after the statement due date under this paragraph (b) will be 
considered timely if furnished within 30 days after the date the 
withdrawal of consent is received by the furnisher.
    (c) Effective date. This section applies to statements required to 
be furnished after February 13, 2004. Paragraph (a)(6) of this section 
also applies to statements required to be furnished after December 31, 
2004.

[T.D. 9114, 69 FR 7570, Feb. 18, 2004]



Sec. 1.6050S-3  Information reporting for payments of interest 
on qualified education loans.

    (a) Information reporting requirement in general. Except as 
otherwise provided in this section, any person engaged in a trade or 
business that, in the course of that trade or business, receives from 
any payor (as defined in paragraph (b)(2) of this section) interest 
payments that aggregate $600 or more for any calendar year on one or 
more qualified education loans (as defined in section 221(e)(1) and the 
regulations thereunder) (a payee) must--
    (1) File an information return, as described in paragraph (c) of 
this section, with the Internal Revenue Service with respect to the 
payor; and
    (2) Furnish a statement, as described in paragraph (d) of this 
section, to the payor.
    (b) Definitions. The following definitions apply for purposes of 
this section:
    (1) Interest. Interest includes stated interest, loan origination 
fees (other than fees for services), and capitalized interest as 
described in the regulations under section 221. See paragraph (e)(1) of 
this section for a special transitional rule relating to reporting of 
loan origination fees and capitalized interest.
    (2) Payor. Payor means the individual who is carried on the books 
and records of the payee as the borrower on a qualified education loan. 
If there are multiple borrowers, the principal borrower on the payee's 
books and records is treated as the payor for purposes of section 6050S 
and this section.
    (c) Requirement to file return--(1) Form of return. A payee must 
file an information return for the payor on Form 1098-E, ``Student Loan 
Interest Statement.'' A payee may use a substitute for Form 1098-E if 
the substitute form complies with the applicable revenue procedures 
relating to substitute forms.
    (2) Information included on return. A payee must include on Form 
1098-E--
    (i) The name, address, and taxpayer identification number (TIN) (as 
defined in section 7701(a)(41)) of the payee;
    (ii) The name, address, and TIN of the payor;
    (iii) The aggregate amount of interest payments received during the 
calendar year from the payor; and
    (iv) Any other information required by Form 1098-E and its 
instructions.
    (3) Time and place for filing return--(i) In general. Except as 
provided in paragraph (c)(3)(ii) of this section, the Form 1098-E must 
be filed on or before February 28 (March 31 if filed electronically) of 
the year following the calendar year in which interest payments were 
received. A payee must file Form 1098-E with the Internal Revenue 
Service according to the instructions to Form 1098-E.
    (ii) Extensions of time. The Internal Revenue Service may grant a 
payee an extension of time to file returns required in this section upon 
a showing of good cause. See the instructions to Form 1098-E and 
applicable revenue procedures for rules relating to extensions of time 
to file.
    (4) Use of magnetic media. See section 6011(e) and Sec. 301.6011-2 
of this chapter for rules relating to the requirement to file Forms 
1098-E on magnetic media.
    (d) Requirement to furnish statement--(1) In general. A payee must 
furnish a

[[Page 480]]

statement to each payor for whom it is required to file a Form 1098-E. 
The statement must include--
    (i) The information required under paragraph (c)(2) of this section. 
An IRS truncated taxpayer identifying number (TTIN) may be used as the 
TIN of the payor in lieu of the identifying number appearing on the 
information return filed with the Internal Revenue Service. For 
provisions relating to the use of TTINs, see Sec. 301.6109-4 of this 
chapter (Procedure and Administration Regulations).
    (ii) A legend that identifies the statement as important tax 
information that is being furnished to the Internal Revenue Service;
    (iii) Instructions that--
    (A) State that, under section 221 and the regulations thereunder, 
the payor may not be able to deduct the full amount of interest reported 
on the statement;
    (B) In the case of qualified education loans made before September 
1, 2004, for which the payee does not report payments of interest other 
than stated interest, state that the payor may be able to deduct 
additional amounts (such as certain loan origination fees and 
capitalized interest) not reported on the statement;
    (C) State that the payor should refer to relevant Internal Revenue 
Service forms and publications, and should not refer to the payee, for 
explanations relating to the eligibility requirements for, and 
calculation of, any allowable deduction for interest paid on a qualified 
education loan; and
    (D) Include the name, address, and phone number of the office or 
department of the payee that is the information contact for the payee 
that filed the Form 1098-E.
    (2) Time and manner for furnishing statement--(i) In general. Except 
as provided in paragraph (d)(2)(ii) of this section, a payee must 
furnish the statement described in paragraph (d)(1) of this section to 
the payor on or before January 31 of the year following the calendar 
year in which payments of interest on a qualified education loan were 
received. If mailed, the statement must be sent to the payor's last 
known address. If furnished electronically, the statement must be 
furnished in accordance with the applicable regulations.
    (ii) Extensions of time. The Internal Revenue Service may grant a 
payee an extension of time to furnish statements required in this 
section upon a showing of good cause. See the instructions to Form 1098-
E and applicable revenue procedures for rules relating to extensions of 
time to furnish statements.
    (3) Copy of Form 1098-E. A payee may satisfy the requirement of this 
paragraph (d) by furnishing either a copy of Form 1098-E and its 
instructions or another document that contains all the information filed 
with the Internal Revenue Service and the information required by 
paragraph (d)(1) of this section if the document complies with 
applicable revenue procedures relating to substitute statements.
    (e) Special rules--(1) Transitional rule for reporting of loan 
origination fees and capitalized interest--(i) Loans made before 
September 1, 2004. For qualified education loans made before September 
1, 2004, a payee is not required to report payments of loan origination 
fees or capitalized interest or to take such payments into account in 
determining the $600 amount for purposes of paragraph (a)(1) of this 
section.
    (ii) Loans made on or after September 1, 2004. For qualified 
education loans made on or after September 1, 2004, a payee is required 
to report payments of interest as described in Sec. 1.221-1(f). Under 
Sec. 1.221-1(f), interest includes loan origination fees that represent 
charges for the use or forbearance of money and capitalized interest. 
Under this paragraph (e)(1)(ii), a payee shall take such payments of 
interest into account in determining the $600 amount for purposes of 
paragraph (a)(1) of this section. For purposes of this section and 
section 6050S, interest (including capitalized interest and loan 
origination fees) is treated as received, and is reportable, in the year 
the interest is treated as paid under the allocation rules in Sec. 
1.221-1(f)(3). See Sec. 1.221-1(f) for rules relating to capitalized 
interest, and Sec. 1.221-1(f)(2)(ii) for rules relating to loan 
origination fees, on qualified education loans.

[[Page 481]]

    (2) Qualified education loan certification. If a loan is not 
subsidized, guaranteed, financed, or is not otherwise treated as a 
student loan under a program of the Federal, state, or local government 
or an eligible educational institution, a payee must request a 
certification from the payor that the loan will be used solely to pay 
for qualified higher education expenses. A payee may use Form W-9S, 
``Request for Student's or Borrower's Social Security Number and 
Certification,'' to obtain the certification. A payee may establish an 
electronic system for payors to submit Forms W-9S electronically as 
described in applicable forms and instructions. A payee may also develop 
a separate form to obtain the payor certification or may incorporate the 
certification into other forms customarily used by the payee, such as 
loan applications, provided the certification is clearly set forth. If 
the certification is not received, the loan is not a qualified education 
loan for purposes of section 6050S and this section.
    (3) Payments of interest received or collected by one or more 
persons--(i) In general. Except as otherwise provided in paragraph 
(e)(3)(ii) of this section, if a person collects or receives payments of 
interest on a qualified education loan on behalf of another person 
(e.g., a lender), the person collecting or receiving the interest must 
satisfy the information reporting requirements of this section. In this 
case, the reporting requirements do not apply to the transfer of 
interest to the other person.
    (ii) Exception. If the person collecting or receiving payments of 
interest on a qualified education loan on behalf of another person 
(e.g., a lender) does not possess the information needed to comply with 
the information reporting requirements of this section, the other person 
must satisfy the information reporting requirements of this section.
    (4) Reporting by foreign persons. A payee that is not a United 
States person (as defined in section 7701(a)(30)) must report payments 
of interest it receives on a qualified education loan only if it 
receives the payment--
    (i) At a location in the United States; or
    (ii) At a location outside the United States if the payee is--
    (A) A controlled foreign corporation (within the meaning of section 
957(a)); or
    (B) A person 50 percent or more of the gross income of which, from 
all sources for the three-year period ending with the close of the 
taxable year preceding the taxable year in which interest payments were 
received (or for such part of the period as the person was in 
existence), was effectively connected with the conduct of a trade or 
business within the United States.
    (5) Governmental units. A governmental unit, or an agency or 
instrumentality of a governmental unit, that receives from any payor 
interest payments that aggregate $600 or more for any calendar year on 
one or more qualified education loans is a payee, without regard to the 
requirement of paragraph (a) of this section that the interest be 
received in the course of a trade or business.
    (f) Penalty provisions--(1) Failure to file correct returns. The 
section 6721 penalty may apply to a payee that fails to file information 
returns required by section 6050S and this section on or before the 
required filing date; that fails to include all of the required 
information on the return; or that includes incorrect information on the 
return. See section 6721, and the regulations thereunder, for rules 
relating to penalties for failure to file correct returns. See section 
6724, and the regulations thereunder, for rules relating to waivers of 
penalties for certain failures due to reasonable cause.
    (2) Failure to furnish correct information statements. The section 
6722 penalty may apply to a payee that fails to furnish statements 
required by section 6050S and this section on or before the prescribed 
date; that fails to include all the required information on the 
statement; or that includes incorrect information on the statement. See 
section 6722, and the regulations thereunder, for rules relating to 
penalties for failure to furnish correct statements. See section 6724, 
and the regulations thereunder, for rules relating to waivers of 
penalties for certain failures due to reasonable cause.
    (3) Waiver of penalties for failures to include a correct TIN--(i) 
In general. In the case of a failure to include a correct

[[Page 482]]

TIN on Form 1098-E or a related information statement, penalties may be 
waived if the failure is due to reasonable cause. Reasonable cause may 
be established if the failure arose from events beyond the payee's 
control, such as a failure of the payor to furnish a correct TIN. 
However, the payee must establish that it acted in a responsible manner 
both before and after the failure.
    (ii) Acting in a responsible manner. A payee must request the TIN of 
each payor if it does not already have a record of the payor's correct 
TIN. If the payee does not have a record of the payor's correct TIN, 
then it must solicit the TIN in the manner described in paragraph 
(f)(3)(iii) of this section on or before December 31 of each year during 
which it receives payments of interest. If a payor refuses to provide 
his or her TIN upon request, the payee must file the return and furnish 
the statement required by this section without the payor's TIN, but with 
all other required information. The specific solicitation requirements 
of paragraph (f)(3)(iii) of this section apply in lieu of the 
solicitation requirements of Sec. 301.6724-1(e) and (f) of this chapter 
for the purpose of determining whether a payee acted in a responsible 
manner in attempting to obtain a correct TIN. A payee that complies with 
the requirements of this paragraph (f)(3) will be considered to have 
acted in a responsible manner within the meaning of Sec. 301.6724-1(d) 
of this chapter with respect to any failure to include the correct TIN 
of a payor on a return or statement required by section 6050S and this 
section.
    (iii) Manner of soliciting TIN. A payee must request the payor's TIN 
in writing and must clearly notify the payor that the law requires the 
payor to furnish a TIN so that it may be included on an information 
return filed by the payee. A request for a TIN made on Form W-9S, 
``Request for Student's or Borrower's Social Security Number and 
Certification,'' satisfies the requirements of this paragraph 
(f)(3)(iii). A payee may establish a system for payors to submit Forms 
W-9S electronically as described in applicable forms and instructions. A 
payee may also develop a separate form to request the payor's TIN or 
incorporate the request into other forms customarily used by the payee, 
such as loan applications.
    (4) Failure to furnish TIN. The section 6723 penalty may apply to 
any payor who is required (but fails) to furnish his or her TIN to a 
payee. See section 6723, and the regulations thereunder, for rules 
relating to the penalty for failure to furnish a TIN.
    (g) Effective/applicability date. The rules of this section apply to 
information returns required to be filed, and payee statements required 
to be furnished after December 31, 2014. For information returns 
required to be filed, and payee statements required to be furnished 
before January 1, 2015, Sec. 1.6050S-3 (as contained in 26 CFR part 1, 
revised April 2013) shall apply.

[T.D. 8992, 67 FR 20904, Apr. 29, 2002, as amended by T.D. 9125, 69 FR 
25499, May 7, 2004; T.D. 9675, 79 FR 41131, July 15, 2014]



Sec. 1.6050S-4  Information reporting for payments of interest 
on qualified education loans.

    (a) Electronic furnishing of statements--(1) In general. A person 
required by section 6050S(d) to furnish a written statement regarding 
payments of interest on qualified education loans (furnisher) to the 
individual to whom it is required to be furnished (recipient) may 
furnish the statement in an electronic format in lieu of a paper format. 
A furnisher who meets the requirements of paragraphs (a)(2) through (6) 
of this section is treated as furnishing the required statement.
    (2) Consent--(i) In general. The recipient must have affirmatively 
consented to receive the statement in an electronic format. The consent 
may be made electronically in any manner that reasonably demonstrates 
that the recipient can access the statement in the electronic format in 
which it will be furnished to the recipient. Alternatively, the consent 
may be made in a paper document if it is confirmed electronically.
    (ii) Withdrawal of consent. The consent requirement of this 
paragraph (a)(2) is not satisfied if the recipient withdraws the consent 
and the withdrawal takes effect before the statement is furnished. The 
furnisher may

[[Page 483]]

provide that a withdrawal of consent takes effect either on the date it 
is received by the furnisher or on a subsequent date. The furnisher may 
also provide that a request for a paper statement will be treated as a 
withdrawal of consent.
    (iii) Change in hardware or software requirements. If a change in 
the hardware or software required to access the statement creates a 
material risk that the recipient will not be able to access the 
statement, the furnisher must, prior to changing the hardware or 
software, provide the recipient with a notice. The notice must describe 
the revised hardware and software required to access the statement and 
inform the recipient that a new consent to receive the statement in the 
revised electronic format must be provided to the furnisher. After 
implementing the revised hardware and software, the furnisher must 
obtain from the recipient, in the manner described in paragraph 
(a)(2)(i) of this section, a new consent or confirmation of consent to 
receive the statement electronically.
    (iv) Examples. The following examples illustrate the rules of this 
paragraph (a)(2):

    Example 1. Furnisher F sends Recipient R a letter stating that R may 
consent to receive statements required by section 6050S(d) 
electronically on a Web site instead of in a paper format. The letter 
contains instructions explaining how to consent to receive the 
statements electronically by accessing the Web site, downloading the 
consent document, completing the consent document and e-mailing the 
completed consent back to F. The consent document posted on the Web site 
uses the same electronic format that F will use for the electronically 
furnished statements. R reads the instructions and submits the consent 
in the manner provided in the instructions. R has consented to receive 
the statements electronically in the manner described in paragraph 
(a)(2)(i) of this section.
    Example 2. Furnisher F sends Recipient R an e-mail stating that R 
may consent to receive statements required by section 6050S(d) 
electronically instead of in a paper format. The e-mail contains an 
attachment instructing R how to consent to receive the statements 
electronically. The e-mail attachment uses the same electronic format 
that F will use for the electronically furnished statements. R opens the 
attachment, reads the instructions, and submits the consent in the 
manner provided in the instructions. R has consented to receive the 
statements electronically in the manner described in paragraph (a)(2)(i) 
of this section.
    Example 3. Furnisher F posts a notice on its Web site stating that 
Recipient R may receive statements required by section 6050S(d) 
electronically instead of in a paper format. The Web site contains 
instructions on how R may access a secure Web page and consent to 
receive the statements electronically. By accessing the secure Web page 
and giving consent, R has consented to receive the statements 
electronically in the manner described in paragraph (a)(2)(i) of this 
section.

    (3) Required disclosures--(i) In general. Prior to, or at the time 
of, a recipient's consent, the furnisher must provide to the recipient a 
clear and conspicuous disclosure statement containing each of the 
disclosures described in paragraphs (a)(3)(ii) through (viii) of this 
section.
    (ii) Paper statement. The recipient must be informed that the 
statement will be furnished on paper if the recipient does not consent 
to receive it electronically.
    (iii) Scope and duration of consent. The recipient must be informed 
of the scope and duration of the consent. For example, the recipient 
must be informed whether the consent applies to statements furnished 
every year after the consent is given until it is withdrawn in the 
manner described in paragraph (a)(3)(v)(A) of this section or only to 
the statement required to be furnished on or before the January 31 
immediately following the date on which the consent is given.
    (iv) Post-consent request for a paper statement. The recipient must 
be informed of any procedure for obtaining a paper copy of the 
recipient's statement after giving the consent described in paragraph 
(a)(2)(i) of this section and whether a request for a paper statement 
will be treated as a withdrawal of consent.
    (v) Withdrawal of consent. The recipient must be informed that--
    (A) The recipient may withdraw a consent by writing (electronically 
or on paper) to the person or department whose name, mailing address, 
telephone number, and e-mail address is provided in the disclosure 
statement;
    (B) The furnisher will confirm the withdrawal and the date on which 
it

[[Page 484]]

takes effect in writing (either electronically or on paper); and
    (C) A withdrawal of consent does not apply to a statement that was 
furnished electronically in the manner described in this paragraph (a) 
before the date on which the withdrawal of consent takes effect.
    (vi) Notice of termination. The recipient must be informed of the 
conditions under which a furnisher will cease furnishing statements 
electronically to the recipient.
    (vii) Updating information. The recipient must be informed of the 
procedures for updating the information needed by the furnisher to 
contact the recipient. The furnisher must inform the recipient of any 
change in the furnisher's contact information.
    (viii) Hardware and software requirements. The recipient must be 
provided with a description of the hardware and software required to 
access, print, and retain the statement, and the date when the statement 
will no longer be available on the Web site.
    (4) Format. The electronic version of the statement must contain all 
required information and comply with applicable revenue procedures 
relating to substitute statements to recipients.
    (5) Notice--(i) In general. If the statement is furnished on a Web 
site, the furnisher must notify the recipient that the statement is 
posted on a Web site. The notice may be delivered by mail, electronic 
mail, or in person. The notice must provide instructions on how to 
access and print the statement. The notice must include the following 
statement in capital letters, ``IMPORTANT TAX RETURN DOCUMENT 
AVAILABLE.'' If the notice is provided by electronic mail, the foregoing 
statement must be on the subject line of the electronic mail.
    (ii) Undeliverable electronic address. If an electronic notice 
described in paragraph (a)(5)(i) of this section is returned as 
undeliverable, and the correct electronic address cannot be obtained 
from the furnisher's records or from the recipient, then the furnisher 
must furnish the notice by mail or in person within 30 days after the 
electronic notice is returned.
    (iii) Corrected statements. If the furnisher has corrected a 
recipient's statement that was furnished electronically, the furnisher 
must furnish the corrected statement to the recipient electronically. If 
the recipient's statement was furnished though a Web site posting and 
the furnisher has corrected the statement, the furnisher must notify the 
recipient that it has posted the corrected statement on the Web site 
within 30 days of such posting in the manner described in paragraph 
(a)(5)(i) of this section. The corrected statement or the notice must be 
furnished by mail or in person if--
    (A) An electronic notice of the Web site posting of an original 
statement or the corrected statement was returned as undeliverable; and
    (B) The recipient has not provided a new e-mail address.
    (6) Access period. Statements furnished on a Web site must be 
retained on the Web site through October 15 of the year following the 
calendar year to which the statements relate (or the first business day 
after such October 15, if October 15 falls on a Saturday, Sunday, or 
legal holiday). The furnisher must maintain access to corrected 
statements that are posted on the Web site through October 15 of the 
year following the calendar year to which the statements relate (or the 
first business day after such October 15, if October 15 falls on a 
Saturday, Sunday, or legal holiday) or the date 90 days after the 
corrected statements are posted, whichever is later.
    (b) Effective date. This section applies to statements required to 
be furnished after February 13, 2004. Paragraph (a)(6) of this section 
also applies to statements required to be furnished after December 31, 
2003.

[T.D. 9114, 69 FR 7570, Feb. 18, 2004]



Sec. 1.6050W-1  Information reporting for payments made in settlement
of payment card and third party network transactions.

    (a) In general--(1) General rule. Every payment settlement entity, 
as defined in paragraph (a)(4) of this section, must file an information 
return for each calendar year with respect to payments made in 
settlement of reportable payment transactions, as defined in paragraph 
(a)(3) of this section, setting forth the following information:

[[Page 485]]

    (i) The name, address, and taxpayer identification number (TIN) of 
each participating payee, as defined in paragraph (a)(5) of this 
section, to whom one or more payments in settlement of reportable 
payment transactions are made.
    (ii) With respect to each participating payee, the gross amount, as 
defined in paragraph (a)(6) of this section, of--
    (A) The aggregate reportable payment transactions for the calendar 
year; and
    (B) The aggregate reportable payment transactions for each month of 
the calendar year.
    (iii) Any other information required by the form, instructions or 
current revenue procedures.
    (2) Payments in settlement of reportable payment transactions. A 
payment settlement entity, as defined in paragraph (a)(4) of this 
section (or an electronic payment facilitator, as defined in paragraph 
(d)(2) of this section), makes a payment in settlement of a reportable 
payment transaction if the payment settlement entity (or electronic 
payment facilitator) submits the instruction to transfer funds to the 
account of the participating payee for purposes of settling the 
reportable payment transaction.
    (3) Reportable payment transaction. The term reportable payment 
transaction means any payment card transaction (as defined in paragraph 
(b)(1) of this section) and any third party network transaction (as 
defined in paragraph (c)(1) of this section).
    (4) Payment settlement entity--(i) Definition. The term payment 
settlement entity means a domestic or foreign entity that is--
    (A) In the case of a payment card transaction, a merchant acquiring 
entity (as defined in paragraph (b)(2) of this section); and
    (B) In the case of a third party network transaction, a third party 
settlement organization (as defined in paragraph (c)(2) of this 
section).
    (ii) Multiple payment settlement entities. If two or more persons 
qualify as payment settlement entities (as defined in paragraph 
(a)(4)(i) of this section) with respect to a reportable payment 
transaction, then only the payment settlement entity that in fact makes 
payment in settlement of the reportable payment transaction must file 
the information return required by paragraph (a)(1) of this section.
    (5) Participating payee--(i) Definition. In general, the term 
participating payee means any person, including any governmental unit 
(and any agency or instrumentality thereof), who:
    (A) In the case of a payment card transaction, accepts a payment 
card (as defined in paragraph (b)(3) of this section) as payment; and
    (B) In the case of a third party network transaction, accepts 
payment from a third party settlement organization (as defined in 
paragraph (c)(2) of this section) in settlement of such transaction.
    (ii) Foreign payees--(A) In general. For payments pursuant to 
contractual obligations entered into after December 31, 2010, a payment 
settlement entity that is a person described as a U.S. payor or U.S. 
middleman in Sec. 1.6049-5(c)(5) is not required to make a return of 
information for payments to a participating payee with a foreign address 
as long as, prior to payment, the payment settlement entity has in its 
files documentation upon which the payment settlement entity may rely to 
treat the payment as made to a foreign person in accordance with Sec. 
1.1441-1(e)(1)(ii). For purposes of this paragraph (a)(5)(ii), the 
provisions of Sec. 1.1441-1 shall apply by substituting the term payor 
for the term withholding agent and without regard to the limitation to 
amounts subject to withholding under chapter 3 of the Internal Revenue 
Code and the regulations under that chapter. Such a payment settlement 
entity need not make a return of information for payments made outside 
the United States (within the meaning of Sec. 1.6049-5(e)) to an 
offshore account (as defined in Sec. 1.6049-5(c)(1)) to a participating 
payee with only a foreign address if the name of the participating payee 
indicates that it is an entity listed as a per se corporation under 
Sec. 301.7701-2(b)(8)(i) and the payment settlement entity does not 
know or have reason to know that the participating payee is a United 
States person. A payment settlement entity may apply the grace period 
rules of Sec. 1.6049-5(d)(2)(ii) of the

[[Page 486]]

regulations for payments to a participating payee with only a foreign 
address, without regard to whether the amounts paid are described in 
Sec. 1.1441-6(c)(2) or are reportable under section 6042, 6045, 6049, 
or 6050N. For payments pursuant to contractual obligations entered into 
before January 1, 2011, a payment settlement entity that is a person 
described as a U.S. payor or U.S. middleman in Sec. 1.6049-5(c)(5) is 
not required to make a return of information for payments to a 
participating payee with a foreign address as long as the payment 
settlement entity neither knows nor has reason to know that the 
participating payee is a United States person. For this purpose, a 
renewal of such a contractual obligation will not result in a new 
contractual obligation unless there is a material modification to the 
contractual obligation.
    (B) Non-U.S. payor or middleman. A payment settlement entity that is 
not a person described as a U.S. payor or U.S middleman in Sec. 1.6049-
5(c)(5) is not required to make a return of information for a payment to 
a participating payee that does not have a United States address as long 
as the payment settlement entity neither knows nor has reason to know 
that the participating payee is a United States person. If the 
participating payee has any United States address, the payment 
settlement entity may treat the participating payee as a foreign person 
only if the payment settlement entity has in its files documentation 
upon which the payment settlement entity may rely to treat the payment 
as made to a foreign person in accordance with Sec. 1.1441-1(e)(1)(ii).
    (C) Foreign address; United States address. For purposes of this 
section, foreign address means any address that is not within the United 
States, as defined in section 7701(a)(9) of the Internal Revenue Code 
(the States and the District of Columbia). United States address means 
any address that is within the United States.
    (6) Gross amount. For purposes of this section, gross amount means 
the total dollar amount of aggregate reportable payment transactions for 
each participating payee without regard to any adjustments for credits, 
cash equivalents, discount amounts, fees, refunded amounts or any other 
amounts. The dollar amount of each transaction is determined on the date 
of the transaction.
    (b) Payment card transactions--(1) Definition. The term payment card 
transaction means any transaction in which a payment card, or any 
account number or other indicia associated with a payment card, is 
accepted as payment.
    (2) Merchant acquiring entity. The term merchant acquiring entity 
means the bank or other organization that has the contractual obligation 
to make payment to participating payees (as defined in paragraph 
(a)(5)(i)(A) of this section) in settlement of payment card 
transactions.
    (3) Payment card--(i) The term payment card means any card, 
including any stored-value card as defined in paragraph (b)(4) of this 
section, issued pursuant to an agreement or arrangement that provides 
for--
    (A) One or more issuers of such cards;
    (B) A network of persons unrelated to each other, and to the issuer, 
who agree to accept such cards as payment; and
    (C) Standards and mechanisms for settling the transactions between 
the merchant acquiring entities and the persons who agree to accept the 
cards as payment.
    (ii) Persons who agree to accept such cards as payment as described 
in this paragraph (b)(3) are participating payees within the meaning of 
paragraph (a)(5)(i)(A) of this section.
    (4) Stored-value cards. The term stored-value card means any card 
with a prepaid value, including any gift card.
    (5) Transactions for which no return of information is required 
under section 6050W--(i) Withdrawals and cash advances. The use of a 
``payment card'' as defined in paragraph (b)(3) of this section by a 
cardholder to withdraw funds at an automated teller machine, or to 
obtain a cash advance or loan against the cardholder's account, is not a 
payment card transaction under paragraph (b)(1) of this section because 
the card is not being accepted as payment by a merchant or other payee.
    (ii) Convenience checks. The acceptance of a check issued in 
connection with a payment card account by a merchant or other payee is 
not a payment

[[Page 487]]

card transaction under paragraph (b)(1) of this section because the 
check is accepted and processed through the banking system in the same 
manner as a traditional check, not as a payment card.
    (iii) Payee related to issuer. No return of information is required 
under this section for any transaction in which a payment card within 
the meaning of paragraph (b)(3) is accepted as payment by a merchant or 
other payee who is related to the issuer of the payment card.
    (c) Third party network transactions--(1) Definition. The term third 
party network transaction means any transaction that is settled through 
a third party payment network.
    (2) Third party settlement organization. The term third party 
settlement organization means the central organization that has the 
contractual obligation to make payments to participating payees (as 
defined in paragraph (a)(5)(i)(B) of this section) of third party 
network transactions. A central organization is a third party settlement 
organization if it provides a third party payment network (as defined in 
paragraph (c)(3)(i) of this section) that enables purchasers to transfer 
funds to providers of goods and services.
    (3) Third party payment network. (i) The term third party payment 
network means any agreement or arrangement that--
    (A) Involves the establishment of accounts with a central 
organization by a substantial number of providers of goods or services 
who are unrelated to the organization and who have agreed to settle 
transactions for the provision of the goods or services to purchasers 
according to the terms of the agreement or arrangement;
    (B) Provides standards and mechanisms for settling the transactions; 
and
    (C) Guarantees payment to the persons providing goods or services in 
settlement of transactions with purchasers pursuant to the agreement or 
arrangement.
    (ii) A third party payment network does not include any agreement or 
arrangement that provides for the issuance of payment cards.
    (iii) Persons who are providers of goods and services as described 
in this paragraph (c)(3) are participating payees within the meaning of 
paragraph (a)(5)(i)(B) of this section.
    (4) Exception for de minimis payments. A third party settlement 
organization is required to report any information under paragraph 
(a)(1) of this section with respect to third party network transactions 
of any participating payee only if--
    (i) The amount that would otherwise be reported under paragraph 
(a)(1)(ii) of this section with respect to such transactions exceeds 
$20,000; and
    (ii) The aggregate number of such transactions exceeds 200.
    (d) Special rules--(1) Aggregated payees. If a person receives 
payments from a payment settlement entity (as defined in paragraph 
(a)(4) of this section) on behalf of one or more participating payees 
and distributes such payments to one or more participating payees (as 
defined in paragraph (a)(5) of this section), the person is treated as:
    (i) The participating payee with respect to the payment settlement 
entity; and
    (ii) The payment settlement entity with respect to the participating 
payees to whom the person distributes payments.
    (2) Electronic payment facilitator. If a payment settlement entity 
(as defined in paragraph (a)(4) of this section) contracts with an 
electronic payment facilitator or other third party to make payments in 
settlement of reportable payment transactions on behalf of the payment 
settlement entity, the facilitator must file the annual information 
return under this section in lieu of the payment settlement entity. The 
facilitator need not have any agreement or arrangement with the 
participating payee. Also, the payment need not come from the 
facilitator's account. The facilitator need only submit instructions to 
transfer funds to the account of the participating payee in settlement 
of the reportable payment transaction. The facilitator is liable for any 
applicable penalties for failure to comply with the information 
reporting requirements of section 6050W.

[[Page 488]]

    (3) Designations. The party with the obligation to file the annual 
information return under this section may designate by written agreement 
any other person to satisfy the requirements of this section. Thus, 
notwithstanding the rule in paragraph (d)(2) of this section imposing 
the obligation to file the annual information return on the electronic 
payment facilitator in lieu of the payment settlement entity, the 
payment settlement entity may file the information return by designation 
if the parties agree in writing. However, a designation does not relieve 
the party with the reporting obligation from liability for any reporting 
failures. The party with the obligation to file the annual information 
return under this section remains liable for any applicable penalties 
under sections 6721 and 6722 if the requirements of this section are not 
satisfied.
    (4) Conversion into United States dollars of amounts paid in foreign 
currency. When a payment is made or received in a foreign currency, the 
U.S. dollar amount shall be determined by converting such foreign 
currency into U.S. dollars on the date of the transaction at the spot 
rate (as defined in Sec. 1.988-1(d)(1)) or pursuant to a reasonable 
spot rate convention. For example, a payor may use a month-end spot rate 
or a monthly average spot rate. A spot rate convention must be used 
consistently with respect to all non-dollar amounts reported and from 
year to year. Such convention cannot be changed without the consent of 
the Commissioner or his or her delegate.
    (5) Unrelated persons. For purposes of this section, unrelated means 
any person who is not related to another person within the meaning of 
section 267(b) (providing a list of relationships), including the 
application of section 267(c) and (e)(3) (providing rules relating to 
constructive ownership), and section 707(b)(1) (relationships with 
partnerships).
    (e) Examples. The following examples illustrate the provisions of 
this section:

    Example 1. Merchant acquiring entity. Customer A purchases goods 
from merchant B using a credit card issued by Bank X. B is one of a 
network of unrelated persons that has agreed to accept credit cards 
issued by X as payment under an agreement that provides standards and 
mechanisms for settling the transaction between a merchant acquiring 
bank and the persons who accept the cards. Bank Z is the merchant 
acquiring bank with the contractual obligation to make payment to B for 
goods provided to A in this transaction. As defined in paragraph (b)(2) 
of this section, Z is the merchant acquiring entity that must file the 
annual information return required under paragraph (a)(1) of this 
section to report the payment made to settle the transaction for the 
sale of goods from B to A.
    Example 2. Third party settlement organization. (i) Merchant B is 
one of a substantial number of persons selling goods or services over 
the Internet that have an account with X, an Internet payment service 
provider. None of these persons, including B, are related to X, and all 
have agreed to settle transactions for the sale of goods or services to 
customers according to the terms of their contracts with X. X has 
guaranteed payment to all of these persons, including B, for the sale of 
goods or services to customers. Customer A purchases goods from B. A 
pays X for the goods purchased from B. X, in turn, makes payment to B in 
settlement of the transaction for the sale of goods from B to A.
    (ii) X's arrangement constitutes a third party payment network as 
defined in paragraph (c)(3) of this section because a substantial number 
of persons that are unrelated to X, including B, have established 
accounts with X, and X is contractually obligated to settle transactions 
for the provision of goods or services by these persons to purchasers. 
Thus, under paragraph (c)(2) of this section, X is a third party 
settlement organization and the transaction discussed in this Example is 
a third party network transaction under paragraph (c)(1) of this 
section. Therefore, X must file the annual information return required 
under paragraph (a)(1) of this section to report the payment made to B 
in settlement of the transaction with A provided that X's aggregate 
payments to B from third party network transactions exceed $20,000 and 
the aggregate number of X's transactions with B exceeds 200 (as provided 
in paragraph (c)(4) of this section).
    Example 3. Automated clearinghouse network. A operates an automated 
clearinghouse (``ACH'') network that merely processes electronic 
payments (such as wire transfers, electronic checks, and direct deposit 
payments) between buyers and sellers. There are no contractual 
agreements between A and the sellers for the purpose of permitting the 
sellers to use the ACH network. Thus, A is not a third party settlement 
organization under paragraph (c)(2) of this section, the ACH network is 
not a third party payment

[[Page 489]]

network under paragraph (c)(3) of this section, and the electronic 
payment transactions are not third party network transactions under 
paragraph (c)(1) of this section. A is not required to file the annual 
information return required under paragraph (a)(1) of this section.
    Example 4. ACH processor. B provides a variety of ACH payment 
processing services to a large number of merchants, such as converting 
checks received in payment of bills into ACH transactions. B groups 
payment transactions into an ACH file and transmits the ACH file into 
the ACH network on behalf of merchants in order to initiate payment to 
merchants through the ACH network. B makes payments to the merchants 
after the ACH network verifies that the customers' accounts have 
sufficient funds. Because the ACH network is not a third party payment 
network under paragraph (c)(3) of this section, B cannot be a third 
party settlement organization with respect to the ACH network. 
Similarly, because the ACH itself is not a third party settlement 
organization under paragraph (c)(2) of this section, B cannot be an 
electronic payment facilitator because B is not acting on behalf of a 
payment settlement entity. However, B may itself be operating third 
party payment network under paragraph (c)(3) of this section if B has a 
separate agreement or arrangement that: involves the establishment of 
accounts with B by a substantial number of unrelated merchants who 
provide goods or services and have agreed to settle transactions for the 
provision of the goods or services pursuant to the agreement or 
arrangement; provides for standards and mechanisms for settling the 
transactions; and guarantees persons providing goods or services 
pursuant to such agreement or arrangement that these persons will be 
paid for providing such goods or services.
    Example 5. Gross amount. On Day 1, Customer A uses a payment card to 
purchase $100 worth of goods from merchant B. Bank X, the merchant 
acquiring entity for B, is the party with the contractual obligation to 
make payment to B in settlement of the transaction. On Day 2, X, after 
deducting fees of $2, makes payment of $98 to settle the transaction for 
the sale of goods from B to A. Under paragraph (a)(6) of this section, X 
must report the amount of $100, the amount of the transaction on Day 1, 
without any reduction for fees or any other amount, as the gross amount 
of this reportable payment transaction on the annual information return 
filed under paragraph (a)(1) of this section.
    Example 6. Gift card. (i) Customer A purchases a gift card from 
Merchant X that may be used only at X and its related network of stores. 
A purchases the gift card using cash. A gives the gift card to B. B uses 
the gift card to purchase goods at one of X's stores. The purchase of 
the gift card by A using cash is not a payment card transaction 
described in paragraph (b)(1) of this section and, thus, is not required 
to be reported in a return of information required under paragraph 
(a)(1) of this section. Under paragraph (b)(3) of this section, the gift 
card is not a payment card because the gift card is only accepted as 
payment by persons who are related to the issuer of the gift card and to 
each other. Therefore, the use of the gift card by B is not required to 
be reported in a return of information required under paragraph (a)(1) 
of this section.
    (ii) The facts are the same as in paragraph (i), except that B adds 
value to the gift card using a credit card. The use of the credit card 
to add value to the gift card is a reportable payment transaction (as 
defined in paragraph (a)(3) of this section) and must be reported in a 
return of information under this section by the bank or other 
organization that has the contractual obligation to make payment to X in 
settlement of the transaction.
    Example 7. Private label card. Bank B issues a card imprinted with 
Retailer C's logo to cardholder A. The ``C-card'' is accepted as payment 
only at C or at stores related (within the meaning of section 267(b), 
(c) and (e)(3) and, section 707(b)(1)) to C. A uses the card at C to 
purchase electronics equipment. Under paragraph (b)(3) of this section, 
the C-card is not a payment card because the card is accepted as payment 
only within a network of persons who are related to each other. 
Therefore, the use of the card by A at C is not required to be reported 
in a return of information required under paragraph (a)(1) of this 
section.
    Example 8. Quasi-private label card. Bank B issues a card to 
cardholder A. The card, known as an ``E-card,'' is issued by B pursuant 
to an agreement that provides that the E-card is accepted as payment 
only within a limited network of merchants that carry electronics 
equipment. The agreement provides for standards and mechanisms for 
settling the transactions between the merchants and the merchant 
acquiring entities. The merchants accepting the E-card as payment are 
not related (within the meaning of section 267(b), (c) and (e)(3) and 
section 707(b)(1)) to each other or to B. A uses the card to purchase 
electronics equipment at F Store, one of the stores within the network 
of merchants accepting the E-card. Under paragraph (b)(3) of this 
section, the E-card is a payment card because the card is issued 
pursuant to an agreement that provides for a network of persons 
unrelated to each other, and to the issuer, who agree to accept the card 
as payment. Therefore, the use of the E-card by A to purchase 
electronics equipment at F Store must be reported in a return of 
information required under paragraph (a)(1) of this section.

[[Page 490]]

    Example 9. Campus card. (i) University Y issues Student A a card 
that may be used on campus at various university-owned merchants and at 
various local merchants unrelated to Y. A uses the card in the 
university-owned cafeteria to purchase lunch. Under paragraph 
(b)(5)(iii) of this section, no return of information is required 
because the card is being accepted as payment by a person who is related 
to the issuer of the card.
    (ii) The facts are the same as in paragraph (i), except that A uses 
the campus card to purchase lunch at a local restaurant, unrelated to Y, 
that has agreed to accept the campus card as payment. Under paragraph 
(b)(3) of this section, the campus card is a payment card in this 
transaction because the card is accepted as payment by a person that is 
unrelated to this issuer of the card pursuant to an agreement. 
Therefore, the use of the card by A in the local restaurant for the 
purchase of lunch must be reported in a return of information required 
under paragraph (a)(1) of this section by the bank or other organization 
that has the contractual obligation to make payment to the restaurant in 
settlement of the transaction.
    Example 10. Mall card. Customer B purchases a card that is issued by 
shopping mall A. Pursuant to an agreement or arrangement, the card is 
accepted as payment by various merchants located within the mall, who 
are unrelated to the issuer of the card and to each other. B uses the 
card in the mall to purchase goods from merchant C. Under paragraph 
(b)(3) of this section, the mall card is a payment card because the card 
is accepted as payment by a network of persons who are unrelated to the 
issuer of the card and to the other merchants who have agreed to accept 
the card as payment. Therefore, the use of the mall card by B to 
purchase goods from merchant C is required to be reported in a return of 
information required under paragraph (a)(1) of this section.
    Example 11. Electronic benefit transactions card. Government Agency 
A issues benefits electronically to recipients by loading these benefits 
onto a payment card. Pursuant to an agreement, a network of merchants 
unrelated to A, and to each other, has agreed to accept the benefits 
card as payment. A issues a card to B, who uses the card to purchase 
goods from Merchant C. The card issued by A is a payment card (as 
defined in paragraph (b)(3) of this section) because the card is 
accepted as payment by a network of persons that are unrelated to the 
issuer of the card, and to each other.
    The use of the card by B to purchase goods from C must be reported 
in a return of information required under paragraph (a)(1) of this 
section.
    Example 12. Prepaid telephone card. A purchases a prepaid telephone 
card from Company X that may be used to make telephone calls using 
various long-distance providers unrelated to X that have agreed to 
accept the card as payment. A places a telephone call using the prepaid 
card as payment for the telephone call. Under paragraph (b)(3) of this 
section, the prepaid telephone card is a payment card because the card 
is accepted as payment by a person that is unrelated to the issuer of 
the card pursuant to an agreement. Therefore, the use of the prepaid 
card to make payment for the telephone call must be reported in a return 
of information required under paragraph (a)(1) of this section by the 
bank or other organization that has the contractual obligation to make 
payment to the long distance provider in settlement of the transaction.
    Example 13. Transit card. City Z accepts a transit card as payment 
for use of its mass transit system. The transit card is issued by B, an 
organization unrelated to Z. A network of persons, including Z, who are 
unrelated to each other and to B, have agreed to accept the transit card 
issued by B as payment for transit and for other goods and services. 
Transit rider X purchases a transit card and uses the card to pay for 
travel on Z's mass transit system. Under paragraph (b)(3) of this 
section, the transit card is a payment card because the card is accepted 
as payment by a person who is one of a network of persons that are 
unrelated to the issuer of the card, and to each other, and that have 
agreed to accept the card as payment. Therefore, the use of the transit 
card by X to pay for transit on Z's mass transit system is a payment 
card transaction described in paragraph (b)(1) of this section that must 
be reported in a return of information required under paragraph (a)(1) 
of this section by the bank or other organization that has the 
contractual obligation to make payment to Z. Z is the participating 
payee, described in paragraph (a)(5)(i)(A) of this section, of the 
payment card transaction.
    Example 14. Cash advance. Bank A issues Cardholder B a credit card 
that is a payment card under paragraph (b)(3) of this section. B uses 
the card at a local bank to obtain a cash advance. Under paragraph 
(b)(5)(i) of this section, B's use of the payment card to obtain a cash 
advance is not a payment card transaction (as defined in paragraph 
(b)(1) of this section) because the card is not being accepted as 
payment by a merchant.
    Example 15. Withdrawals from automated teller machines. Bank A 
issues Cardholder B a credit card that is a payment card under paragraph 
(b)(3) of this section. B uses the card at an automated teller machine 
to obtain cash. Under paragraph (b)(5)(i) of this section, B's use of 
the payment card to obtain cash is not a payment card transaction (as 
defined in paragraph (b)(1) of this section) because the card is not 
being accepted as payment by a merchant.
    Example 16. Convenience checks. Bank A issues Cardholder B a credit 
card that is a

[[Page 491]]

payment card under paragraph (b)(3) of this section. A sends B paper 
checks imprinted with the account number associated with the credit 
card. B uses one of the checks to purchase goods from Merchant S. The 
check is accepted by S and processed through the bank system in the same 
manner as a traditional check. Under paragraph (b)(5)(ii) of this 
section, B's use of the convenience check to purchase goods is not a 
payment card transaction (as defined in paragraph (b)(1) of this 
section) because the check is accepted and processed as a traditional 
check, not as a payment card.
    Example 17. Healthcare network. Health carrier A operates healthcare 
network Y. A collects premiums from covered persons pursuant to a plan 
agreement between A and the covered persons for the cost of membership 
in Y. Separately, A pays healthcare providers pursuant to provider 
agreements to compensate these providers for services rendered to 
covered persons who are members of Y. A is not a third party settlement 
organization under paragraph (c)(2) of this section because A does not 
operate a third party payment network that enables purchasers to 
transfer funds to providers of goods and services. Therefore, A is not 
required to file the annual information return required under paragraph 
(a)(1) of this section.
    Example 18. Third party accounts payable. X is a ``shared-service'' 
organization that performs accounts payable services for numerous 
purchasers that are unrelated to X. A substantial number of providers of 
goods and services have established accounts with X and have agreed to 
accept payment from X in settlement of their transactions with 
purchasers. The provider agreement with X includes standards and 
mechanisms for settling the transactions and guarantees payment to the 
providers, and the arrangement enables purchasers to transfer funds to 
providers. Under paragraph (c)(3) of this section, X's accounts payable 
services constitute a third party payment network, of which X is the 
third party settlement organization (as defined in paragraph (c)(2) of 
this section). For each payee, X must file the annual information return 
required under paragraph (a)(1) of this section to report payments made 
by X in settlement of accounts payable to that payee if X's aggregate 
payments to that payee exceed $20,000 and the aggregate number of 
transactions with that payee exceeds 200 (as provided in paragraph 
(c)(4) of this section).
    Example 19. Toll collection network. State A charges a toll to 
vehicles that travel its state highways. The tolling agency for A 
contracted with organization X to perform its toll collection. X 
provides an electronic toll collection system that allows the toll 
facility to record the passage of a vehicle with a transponder affixed 
to the vehicle. The customer account associated with the transponder is 
automatically debited for the amount of the toll. The customer funds a 
balance in the account, which is then depleted as the toll transactions 
occur. X periodically bills the customer to replenish the account. X 
then makes payment to A to settle the toll transactions that are 
recorded by the transponder. X also contracts with a substantial number 
of other entities unrelated to X that have established accounts with X 
and have agreed to accept payment using the electronic toll collection 
system provided by X. X guarantees payment to the entities for all toll 
transactions that are recorded by the transponders, and the arrangement 
enables customers to transfer funds to State A and other entities that 
charge tolls. Under paragraph (c)(3) of this section, X's electronic 
toll collection system constitutes a third party payment network, of 
which X is the third party settlement organization (as defined in 
paragraph (c)(2) of this section). For each payee, including A, X must 
file the annual information return required under paragraph (a)(1) of 
this section to report payments made by X in settlement of toll 
transactions if X's aggregate payments to that payee exceed $20,000 and 
the aggregate number of transactions with that payee exceeds 200 (as 
provided in paragraph (c)(4) of this section).
    Example 20. Hotel kiosk. Under a ``hotel kiosk'' arrangement, Hotel 
B permits its customers to charge, to their room account, transactions 
for goods and services at a substantial number of sellers unrelated to B 
that operate on B's premises, or on the premises of hotels related to B, 
and that have established accounts in B's hotel kiosk system. Customers 
settle their room account with B when they check out, and B in turn 
settles the hotel kiosk transactions with the unrelated sellers. B 
guarantees payment to the sellers for these transactions and the 
arrangement enables customers to transfer funds to the sellers by means 
of one payment made to the hotel. Under paragraph (c)(3) of this 
section, B's hotel kiosk system constitutes a third party payment 
network, of which B is the third party settlement organization (as 
defined in paragraph (c)(2) of this section). For each payee, B must 
file the annual information return required under paragraph (a)(1) of 
this section to report payments made by B in settlement of the hotel 
kiosk transactions if B's aggregate payments to that payee exceed 
$20,000 and the aggregate number of transactions with that payee exceeds 
200 (as provided in paragraph (c)(4) of this section).
    Example 21. Aggregated payee. Corporation A, acting on behalf of A's 
independently-owned franchise stores, receives payment from Bank X for 
credit card sales effectuated at these franchise stores. X, the payment 
settlement entity (as defined in paragraph (a)(4)(i) of this section), 
is required under

[[Page 492]]

paragraph (d)(1)(i) of this section to report the gross amount of the 
reportable payment transactions distributed to A (notwithstanding the 
fact that A does not accept payment cards and would not otherwise be 
treated as a participating payee). In turn, under paragraph (d)(1)(ii) 
of this section, A is required to report the gross amount of the 
reportable payment transactions allocable to each franchise store. X has 
no reporting obligation under this section with respect to payments made 
by A to its franchise stores.
    Example 22. Electronic payment facilitator. (i) Bank A is a merchant 
acquiring entity (as defined in paragraph (b)(2) of this section) with 
the contractual obligation to make payments to participating merchants 
to settle certain credit card transactions. A enters into a contract 
with Processor X. Pursuant to this contract, X prepares and submits 
instructions to move funds from A's account to the accounts of 
participating merchants to settle credit card transactions. X is making 
payment on A's behalf in settlement of payment card transactions 
pursuant to a contract between X and A. Therefore, under paragraph 
(d)(2) of this section, X is an electronic payment facilitator and must 
file the information return required under paragraph (a)(1) of this 
section with respect to credit card transactions settled by X. A has no 
reporting obligation with respect to payments made by X on A's behalf.
    (ii) The facts are the same as in paragraph (i) except that A and X 
state in their contract that A will file the information return required 
under paragraph (a)(1) of this section. A may file the information 
return pursuant to this designation. However, X is liable for any 
applicable penalties under sections 6721 and 6722 if the reporting 
requirements of this section are not satisfied.
    (iii) The facts are the same as in paragraph (i) except that X 
merely prepares the instructions to move the funds to the accounts of 
participating merchants, and the instructions are actually submitted by 
A. A, not X, is making payment in settlement of payment card 
transactions. Therefore, A retains the obligation to file the 
information return required under paragraph (a)(1) of this section with 
respect to credit card transactions settled by A.

    (f) Prescribed form. The return required by paragraph (a)(1) of this 
section must be made according to the forms and instructions published 
by the Internal Revenue Service.
    (g) Time and place for filing. Returns made under this section for 
any calendar year must be filed on or before February 28th (March 31st 
if filing electronically) of the following year at the Internal Revenue 
Service Center location designated in the instructions to the relevant 
form.
    (h) Time and place for furnishing statement--(1) In general. Every 
payment settlement entity required to file a return under this section 
must also furnish to each participating payee a written statement with 
the same information (as described in paragraph (h)(2) of this section). 
The statement must be furnished to the payee on or before January 31st 
of the year following the calendar year in which the reportable payment 
is made. If the return of information is not made on magnetic media, 
this requirement may be satisfied by furnishing to such person a copy of 
all Forms 1099-K, ``Merchant card and third-party payments,'' or any 
successor form with respect to such person filed with the Internal 
Revenue Service Center. The statement will be considered furnished to 
the payee if it is mailed to the payee's last known address. The payment 
settlement entity may furnish the statement electronically in accordance 
with the rules provided in Sec. 1.6050W-2.
    (2) Information to be shown on statement furnished to payee. Each 
written statement furnished under paragraph (h)(1) of this section must 
include the following information--
    (i) The name, address, and phone number (or email address if the 
statement is furnished electronically) of the information contact of the 
payment settlement entity.
    (ii) With respect to the participating payee, the gross amount of--
    (A) The aggregate reportable payment transactions for the calendar 
year; and
    (B) The aggregate reportable payment transactions for each month of 
the calendar year.
    (iii) Any other information required by the form, instructions, or 
current revenue procedures.
    (i) Cross-reference to penalties. For provisions relating to the 
penalty for failure to file timely a correct information return required 
under section 6050W, see section 6721 and the associated regulations. 
For provisions relating to the penalty for failure to furnish

[[Page 493]]

timely a correct payee statement required under section 6050W(f), see 
section 6722 and the associated regulations. See section 6724 and the 
associated regulations for the waiver of a penalty if failure is due to 
reasonable cause and is not due to willful neglect.
    (j) Effective/applicability date. The rules in this section apply to 
returns for calendar years beginning after December 31, 2010.

[T.D. 9496, 75 FR 49828, Aug. 16, 2010]



Sec. 1.6050W-2  Electronic furnishing of information statements for
payments made in settlement of payment card and third party network 
transactions.

    (a) Electronic furnishing of statements--(1) In general. A person 
required by section 6050W to furnish a written statement (furnisher) 
regarding payments made in settlement of payment card and third party 
network transactions to the person to whom it is required to be 
furnished (recipient) may furnish the statement in an electronic format 
in lieu of a paper format. A furnisher who meets the requirements of 
paragraphs (a)(2) through (a)(5) of this section is treated as 
furnishing the required statement.
    (2) Consent--(i) In general. The recipient must have affirmatively 
consented to receive the statement required under section 6050W in an 
electronic format or, in the alternative, have previously consented to 
receive other federal tax statements in an electronic format from the 
furnisher. The consent may be made electronically in any manner that 
reasonably demonstrates that the recipient can access the statement in 
the electronic format in which it will be furnished to the recipient. 
Alternatively, the consent may be made in a paper document if it is 
confirmed electronically. Consents must be kept at all times available 
for inspection by the Internal Revenue Service. Recipients currently 
receiving electronic communications from the furnisher may elect to 
receive the statement required under section 6050W in a paper document 
in lieu of an electronic format. The election to receive a paper 
document may be made by notifying the furnisher electronically or in a 
paper document.
    (ii) Withdrawal of consent. The consent requirement of paragraph 
(a)(2)(i) of this section is not satisfied if the recipient withdraws 
the consent to receive electronic statements and the withdrawal takes 
effect before the statement is furnished. The furnisher may provide that 
a withdrawal of consent takes effect either on the date it is received 
by the furnisher or on a subsequent date. The furnisher may also provide 
that a request for a paper statement will be treated as a withdrawal of 
consent.
    (iii) Change in hardware or software requirements. If a change in 
the hardware or software required to access the statement creates a 
material risk that the recipient will not be able to access the 
statement, the furnisher must, prior to changing the hardware or 
software, provide notice to the recipient. The notice must describe the 
revised hardware and software required to access the statement and 
inform the recipient that a new consent to receive the statement in the 
revised electronic format must be provided to the furnisher. After 
implementing the revised hardware and software, the furnisher must 
obtain from the recipient, in the manner described in paragraph 
(a)(2)(i) of this section, a new consent or confirmation of consent to 
receive the statement electronically.
    (iv) Examples. The following examples illustrate the rules of this 
paragraph (a)(2):

    Example 1. Recipient R has consented to receive the statements 
required under section 6041 in electronic format from Furnisher F. F has 
retained R's consent and keeps it available for inspection by the IRS. F 
may furnish to R the statement required under section 6050W in 
electronic format without securing an affirmative consent from R with 
respect to the statements required under section 6050W.
    Example 2. Recipient R has not consented to receive any electronic 
federal income tax statements from Furnisher F. F may not furnish to R 
the statements required under section 6050W unless F first secures from 
R a consent to receive those statements in electronic format in 
accordance with the requirements of paragraphs (a)(2) through (a)(5) of 
this section.
    Example 3. Furnisher F sends Recipient R a letter stating that R may 
consent to receive statements required by section 6050W(f) 
electronically on a website instead of in a paper

[[Page 494]]

format. The letter contains instructions explaining how to consent to 
receive the statements electronically by accessing the website, 
downloading the consent document, completing the consent document, and 
e-mailing the completed consent back to F. The consent document posted 
on the website uses the same electronic format that F uses to furnish 
statements electronically. R reads the instructions and submits the 
consent in the manner provided in the instructions. R has consented to 
receive the statements electronically in the manner described in 
paragraph (a)(2)(i) of this section.
    Example 4. Furnisher F sends Recipient R an e-mail stating that R 
may consent to receive statements required by section 6050W(f) 
electronically instead of in a paper format. The e-mail contains an 
attachment instructing R how to consent to receive the statements 
electronically. The e-mail attachment uses the same electronic format 
that F uses to furnish statements electronically. R opens the 
attachment, reads the instructions, and submits the consent in the 
manner provided in the instructions. R has consented to receive the 
statements electronically in the manner described in paragraph (a)(2)(i) 
of this section.
    Example 5. Furnisher F posts a notice on its website stating that 
Recipient R may receive statements required by section 6050W(f) 
electronically instead of in a paper format. The website contains 
instructions on how R may access a secure web page and consent to 
receive the statements electronically. By accessing the secure web page 
and giving consent, R has consented to receive the statements 
electronically in the manner described in paragraph (a)(2)(i) of this 
section.

    (3) Required disclosures--(i) In general. Prior to, or at the time 
of, a recipient's consent, the furnisher must provide to the recipient a 
clear and conspicuous disclosure statement containing each of the 
disclosures described in paragraphs (a)(3)(ii) through (a)(3)(viii) of 
this section.
    (ii) Paper statement. The recipient must be informed that the 
statement will be furnished on paper if the recipient does not consent 
to receive it electronically.
    (iii) Scope and duration of consent. The recipient must be informed 
of the scope and duration of the consent. For example, the recipient 
must be informed whether the consent applies to statements furnished 
every year after the consent is given until it is withdrawn in the 
manner described in paragraph (a)(3)(v)(A) of this section or only to 
the statement required to be furnished on or before the January 31st 
immediately following the date on which the consent is given.
    (iv) Post-consent request for a paper statement. The recipient must 
be informed of any procedure for obtaining a paper copy of the 
recipient's statement after giving the consent described in paragraph 
(a)(2)(i) of this section and whether a request for a paper statement 
will be treated as a withdrawal of consent.
    (v) Withdrawal of consent. The recipient must be informed that--
    (A) The recipient may withdraw a consent by writing (electronically 
or on paper) to the person or department whose name, mailing address, 
telephone number, and e-mail address is provided in the disclosure 
statement;
    (B) The furnisher will confirm the withdrawal and the date on which 
it takes effect in writing (either electronically or on paper); and
    (C) A withdrawal of consent does not apply to a statement that was 
furnished electronically in the manner described in this paragraph (a) 
before the date on which the withdrawal of consent takes effect.
    (vi) Notice of termination. The recipient must be informed of the 
conditions under which a furnisher will cease furnishing statements 
electronically to the recipient.
    (vii) Updating information. The recipient must be informed of the 
procedures for updating the information needed by the furnisher to 
contact the recipient. The furnisher must inform the recipient of any 
change in the furnisher's contact information.
    (viii) Hardware and software requirements. The recipient must be 
provided with a description of the hardware and software required to 
access, print, and retain the statement, and the date when the statement 
will no longer be available on the Web site.
    (4) Format. The electronic version of the statement must contain all 
required information and comply with applicable revenue procedures 
relating to substitute statements to recipients.
    (5) Notice--(i) In general. If the statement is furnished on a 
website, the furnisher must notify the recipient that the statement is 
posted on a website. The notice may be delivered by mail,

[[Page 495]]

electronic mail, or in person. The notice must provide instructions on 
how to access and print the statement. The notice must include the 
following statement in capital letters, ``IMPORTANT TAX RETURN DOCUMENT 
AVAILABLE.'' If the notice is provided by electronic mail, the foregoing 
statement must be on the subject line of the electronic mail.
    (ii) Undeliverable electronic address. If an electronic notice 
described in paragraph (a)(5)(i) of this section is returned as 
undeliverable, and the correct electronic address cannot be obtained 
from the furnisher's records or from the recipient, then the furnisher 
must furnish the notice by mail or in person within 30 days after the 
electronic notice is returned.
    (b) Effective/applicability date. The rules in this section apply to 
returns for calendar years beginning after December 31, 2010.

[T.D. 9496, 75 FR 49833, Aug. 16, 2010]



Sec. 1.6050Y-1  Information reporting for reportable policy sales,
transfers of life insurance contracts to foreign persons, and 
reportable death benefits.

    (a) Definitions. The following definitions apply for purposes of 
this section and Sec. Sec. 1.6050Y-2 through 1.6050Y-4:
    (1) Acquirer. The term acquirer means any person that acquires an 
interest in a life insurance contract (through a direct acquisition or 
indirect acquisition of the interest) in a reportable policy sale.
    (2) Buyer. The term buyer means, with respect to any interest in a 
life insurance contract that has been transferred in a reportable policy 
sale, the person that was the most recent acquirer of that interest in a 
reportable policy sale as of the date reportable death benefits are paid 
under the contract.
    (3) Direct acquisition of an interest in a life insurance contract. 
The term direct acquisition of an interest in a life insurance contract 
has the meaning given to it in Sec. 1.101-1(e)(3)(i).
    (4) Foreign person. The term foreign person means a person that is 
not a United States person, as defined in section 7701(a)(30).
    (5) Indirect acquisition of an interest in a life insurance 
contract. The term indirect acquisition of an interest in a life 
insurance contract has the meaning given to it in Sec. 1.101-
1(e)(3)(ii).
    (6) Interest in a life insurance contract. The term interest in a 
life insurance contract has the meaning given to it in Sec. 1.101-
1(e)(1).
    (7) Investment in the contract--(i) Definition of investment in the 
contract. With respect to the original policyholder of a life insurance 
contract, the term investment in the contract on any date means that 
person's investment in the contract under section 72(e)(6) on that date. 
With respect to any other person, the term investment in the contract on 
any date means the estimate of investment in the contract on that date.
    (ii) Definition of estimate of investment in the contract. The term 
estimate of investment in the contract with respect to any person, other 
than the original policyholder, means, on any date, the aggregate amount 
of premiums paid for the contract by that person before that date, less 
the aggregate amount received under the contract by that person before 
that date to the extent such information is known to or can reasonably 
be estimated by the issuer or payor.
    (8) Issuer--(i) In general. Except as provided in paragraph 
(a)(8)(ii) or (iii) of this section, the term issuer generally means, on 
any date, with respect to any interest in a life insurance contract, any 
person that bears any part of the risk with respect to the contract on 
that date and any person responsible on that date for administering the 
contract, including collecting premiums and paying death benefits. For 
instance, if a reinsurer reinsures on an indemnity basis all or a 
portion of the risks that the original issuer (and continuing contract 
administrator) of the contract might otherwise have incurred with 
respect to the contract, both the reinsurer and the original issuer of 
the contract are issuers of the contract for purposes of this paragraph 
(a)(8)(i). Any designee of an issuer of a contract is also considered an 
issuer of the contract for purposes of this paragraph (a)(8)(i).
    (ii) 6050Y(a) issuer. For purposes of information reporting under 
section

[[Page 496]]

6050Y(a) and Sec. 1.6050Y-2, the 6050Y(a) issuer is the issuer that is 
responsible for administering the life insurance contract, including 
collecting premiums and paying death benefits under the contract, on the 
date of the reportable policy sale. In the case of the issuance of a 
life insurance contract to a policyholder in an exchange pursuant to 
section 1035, the 6050Y(a) issuer is the issuer that issues the new 
contract.
    (iii) 6050Y(b) issuer. For purposes of information reporting under 
section 6050Y(b) and Sec. 1.6050Y-3, a 6050Y(b) issuer is:
    (A) Any person that receives an RPSS with respect to a life 
insurance contract or interest therein (or, in the case of a designee, 
receives notice that the issuer for whom it serves as designee received 
an RPSS), and is or was, on or before the date of receipt of the RPSS, 
an issuer with respect to the contract; or
    (B) Any person that receives notice of a transfer to a foreign 
person of a life insurance contract, provided that the person is or was, 
on the date of transfer or on the date of receipt of the notice, an 
issuer with respect to the contract, and provided that the information 
is not received from the issuer responsible for administering the 
contract (or its designee), unless:
    (1) That person (or, in the case of a designee, the issuer for whom 
it serves as designee) is not responsible for administering the 
contract, including collecting premiums and paying death benefits under 
the contract, on the date the notice of a transfer to a foreign person 
is received; and
    (2) That person, or its designee, provides the issuer that is 
responsible on that date for administering the contract, including 
collecting premiums and paying death benefits under the contract, with 
such notice and with any available information necessary to accomplish 
reporting under section 6050Y(b) and Sec. 1.6050Y-3.
    (iv) Designee. A person is treated as the designee of an issuer for 
purposes of this paragraph (a)(8) only if so designated in writing, 
including electronically. The designation must be signed and 
acknowledged, in writing or electronically, by the person named as 
designee, or that person's representative, and by the issuer making the 
designation, or its representative.
    (9) Life insurance contract. The term life insurance contract has 
the meaning given to it in section 7702(a). A life insurance contract 
may also be referred to as a life insurance policy.
    (10) Notice of a transfer to a foreign person. The term notice of a 
transfer to a foreign person means any notice of a transfer of title to, 
possession of, or legal ownership of a life insurance contract received 
by a 6050Y(b) issuer that includes foreign indicia, including 
information provided for nontax purposes such as a change of address 
notice for purposes of sending statements or for other purposes, and 
information relating to loans, premiums, or death benefits with respect 
to the contract, unless the 6050Y(b) issuer knows that no transfer of 
the contract has occurred or knows that the transferee is a United 
States person. For this purpose, a 6050Y(b) issuer may rely on a Form W-
9, Request for Taxpayer Identification Number and Certification, or a 
valid substitute form that meets the requirements of Sec. 1.1441-
1(d)(2) (substituting ``6050Y(b) issuer'' for ``withholding agent''), 
that indicates the transferee is a United States person. For instance, a 
change of address notice that changes the address to a foreign address 
or other updates to the information relating to the payment of premiums 
that includes foreign banking or other foreign financial institution 
information is notice of a transfer to a foreign person unless the 
6050Y(b) issuer knows that no transfer has occurred or the transferee is 
a United States person.
    (11) Payor. The term payor means any person making a payment of 
reportable death benefits.
    (12) Reportable death benefits. The term reportable death benefits 
means amounts paid by reason of the death of the insured under a life 
insurance contract that are attributable to an interest in the contract 
that was transferred in a reportable policy sale.
    (13) Reportable death benefits payment recipient. The term 
reportable death benefits payment recipient means any person that 
receives reportable death benefits as a beneficiary under a life 
insurance contract or as the holder of an interest in a life insurance 
contract.

[[Page 497]]

    (14) Reportable policy sale. The term reportable policy sale has the 
meaning given to it in Sec. 1.101-1(c).
    (15) Reportable policy sale payment. The term reportable policy sale 
payment generally means the total amount of cash and the fair market 
value of any other consideration reducible to a money value transferred, 
or to be transferred, in a reportable policy sale, including any amount 
of a reportable policy sale payment recipient's debt assumed by the 
acquirer in a reportable policy sale. In the case of an indirect 
acquisition of an interest in a life insurance contract that is a 
reportable policy sale, the reportable policy sale payment is the total 
amount of cash and the fair market value of any other consideration 
reducible to a money value transferred, or to be transferred, for the 
ownership interest in the entity, including the amount of any debt 
assumed by the acquirer, that is appropriately allocable to the interest 
in the life insurance contract held by the entity.
    (16) Reportable policy sale payment recipient--(i) Except as 
provided in paragraph (a)(16)(ii) of this section, the term reportable 
policy sale payment recipient means any person that receives a 
reportable policy sale payment in a reportable policy sale. A broker or 
other intermediary that retains a portion of the cash or other 
consideration transferred in a reportable policy sale is also a 
reportable policy sale payment recipient.
    (ii) A person other than the seller is not a reportable policy sale 
payment recipient with respect to a reportable policy sale if that 
person receives aggregate payments of less than $600 with respect to 
that reportable policy sale.
    (17) Reportable policy sale statement. The term reportable policy 
sale statement (RPSS) means a statement furnished by an acquirer to an 
issuer under section 6050Y(a)(2) and Sec. 1.6050Y-2(d)(2)(i).
    (18) Seller. The term seller means any person that--
    (i) Holds an interest in a life insurance contract and transfers 
that interest, or any part of that interest, to an acquirer in a 
reportable policy sale; or
    (ii) Owns a life insurance contract and transfers title to, 
possession of, or legal ownership of that contract to a foreign person.
    (19) Transfer of an interest in a life insurance contract. The term 
transfer of an interest in a life insurance contract has the meaning 
given to it in Sec. 1.101-1(e)(2).
    (20) United States person. The term United States person has the 
meaning given to it in section 7701(a)(30).
    (b) Applicability date. This section and Sec. Sec. 1.6050Y-2 
through 1.6050Y-3 apply to reportable policy sales made after December 
31, 2018. This section and Sec. 1.6050Y-4 apply to reportable death 
benefits paid after December 31, 2018. This section and Sec. 1.6050Y-3 
apply to any notice of a transfer to a foreign person received after 
December 31, 2018. However, for reportable policy sales and payments of 
reportable death benefits occurring after December 31, 2018, and on or 
before December 31, 2019, and any notice of a transfer to a foreign 
person received after December 31, 2018, and on or before December 31, 
2019, transition relief is provided as follows:
    (1) Statements required to be furnished to issuers under section 
6050Y(a)(2) and Sec. 1.6050Y-2(d)(2)(i) must be furnished by the later 
of the applicable deadline set forth in Sec. 1.6050Y-2(d)(2)(ii) or 
December 30, 2019.
    (2) Statements required to be furnished to reportable policy sale 
payment recipients under section 6050Y(a)(2) and Sec. 1.6050Y-
2(d)(1)(i) must be furnished by the later of the applicable deadline set 
forth in Sec. 1.6050Y-2(d)(1)(ii) or February 28, 2020.
    (3) Statements required to be furnished to sellers under section 
6050Y(b)(2) and Sec. 1.6050Y-3(d)(1) must be furnished by the later of 
the applicable deadline set forth in Sec. 1.6050Y-3(d)(2) or February 
28, 2020.
    (4) Statements required to be furnished to reportable death benefits 
payment recipients under section 6050Y(c)(2) and Sec. 1.6050Y-4(c)(1) 
must be furnished by the later of the applicable deadline set forth in 
Sec. 1.6050Y-4(c)(2) or February 28, 2020.
    (5) Returns required to be filed under section 6050Y(a)(1) and Sec. 
1.6050Y-2(a), section 6050Y(b)(1) and Sec. 1.6050Y-3(a), and section 
6050Y(c)(1) and Sec. 1.6050Y-4 must be filed by the later of the 
applicable deadline set forth in Sec. 1.6050Y-

[[Page 498]]

2(c), Sec. 1.6050Y-3(c), and Sec. 1.6050Y-4(b) or February 28, 2020.

[T.D. 9879, 84 FR 58484, Oct. 31, 2019, as amended by T.D. 9879, 84 FR 
68043, Dec. 13, 2019]



Sec. 1.6050Y-2  Information reporting by acquirers for reportable
policy sale payments.

    (a) Requirement of reporting. Except as provided in paragraph (f) of 
this section, every person that is an acquirer in a reportable policy 
sale during any calendar year must file a separate information return 
with the Internal Revenue Service (IRS) in the form and manner as 
required by the IRS for each reportable policy sale payment recipient, 
including any seller that is a reportable policy sale payment recipient. 
Each return must include the following information with respect to the 
seller or other reportable policy sale payment recipient to which the 
return relates:
    (1) The name, address, and taxpayer identification number (TIN) of 
the acquirer;
    (2) The name, address, and TIN of the seller or other reportable 
policy sale payment recipient to which the return relates;
    (3) The date of the reportable policy sale;
    (4) The name of the 6050Y(a) issuer of the life insurance contract 
acquired and the policy number of the life insurance contract;
    (5) The aggregate amount of reportable policy sale payments made, or 
to be made, to the seller or other reportable policy sale payment 
recipient to which the return relates with respect to the reportable 
policy sale; and
    (6) Any other information that is required by the form or its 
instructions.
    (b) Unified reporting. The information reporting requirement of 
paragraph (a) of this section applies to each acquirer in a series of 
prearranged transfers of an interest in a life insurance contract, as 
well as each acquirer in a simultaneous transfer of different interests 
in a single life insurance contract. In either case, an acquirer's 
reporting obligation is deemed satisfied if the information required by 
paragraph (a) of this section with respect to that acquirer is timely 
reported on behalf of that acquirer in a manner that is consistent with 
forms, instructions, and other IRS guidance by one or more other 
acquirers or by a third party information reporting contractor.
    (c) Time and place for filing. Returns required to be made under 
paragraph (a) of this section must be filed with the Internal Revenue 
Service Center designated on the prescribed form or in its instructions 
on or before February 28 (March 31 if filed electronically) of the year 
following the calendar year in which the reportable policy sale 
occurred. However, see Sec. 1.6050Y-1(b)(5) for transition rules.
    (d) Requirement of and time for furnishing statements--(1) 
Statements to reportable policy sale payment recipients--(i) Requirement 
of furnishing statement. Every person required to file an information 
return under paragraph (a) of this section with respect to a reportable 
policy sale payment recipient must furnish in the form and manner 
prescribed by the IRS to the reportable policy sale payment recipient 
whose name is set forth in that return a written statement showing the 
information required by paragraph (a) of this section with respect to 
the reportable policy sale payment recipient and the name, address, and 
phone number of the information contact of the person furnishing the 
written statement. The contact information of the person furnishing the 
written statement must provide direct access to a person that can answer 
questions about the statement. The statement is not required to include 
information with respect to any other reportable policy sale payment 
recipient in the reportable policy sale or information about reportable 
policy sale payments to any other reportable policy sale payment 
recipient.
    (ii) Time for furnishing statement. Each statement required by 
paragraph (d)(1)(i) of this section to be furnished to any reportable 
policy sale payment recipient must be furnished on or before February 15 
of the year following the calendar year in which the reportable policy 
sale occurred. However, see Sec. 1.6050Y-1(b)(2) for transition rules.
    (2) Statements to 6050Y(a) issuers--(i) Requirement of furnishing 
RPSS--(A) In general. Except as provided in paragraph (d)(2)(i)(B) of 
this section, every

[[Page 499]]

person required to file a return under paragraph (a) of this section 
must furnish in the form and manner prescribed by the IRS to the 
6050Y(a) issuer whose name is required to be set forth in the return an 
RPSS with respect to each reportable policy sale payment recipient that 
is also a seller. Each RPSS must show the information required by 
paragraph (a) of this section with respect to the seller named therein, 
except that the RPSS is not required to set forth the amount of any 
reportable policy sale payment. Each RPSS must also show the name, 
address, and phone number of the information contact of the person 
furnishing the RPSS. This contact information must provide direct access 
to a person that can answer questions about the RPSS.
    (B) Exception from reporting. An RPSS is not required to be 
furnished to the 6050Y(a) issuer by an acquirer acquiring an interest in 
a life insurance contract in an indirect acquisition.
    (ii) Time for furnishing RPSS. Except as provided in this paragraph 
(d)(2)(ii), each RPSS required by paragraph (d)(2)(i) of this section to 
be furnished to a 6050Y(a) issuer must be furnished by the later of 20 
calendar days after the reportable policy sale, or 5 calendar days after 
the end of the applicable state law rescission period. However, if the 
later date is after January 15 of the year following the calendar year 
in which the reportable policy sale occurred, the RPSS must be furnished 
by January 15 of the year following the calendar year in which the 
reportable policy sale occurred. However, see Sec. 1.6050Y-1(b)(1) for 
transition rules.
    (3) Unified reporting. The information reporting requirements of 
paragraphs (d)(1)(i) and (d)(2)(i) of this section apply to each 
acquirer in a series of prearranged transfers of an interest in a life 
insurance contract, as well as each acquirer in a simultaneous transfer 
of different interests in a single life insurance contract, as described 
in paragraph (b) of this section. In either case, an acquirer's 
obligation to furnish statements is deemed satisfied if the information 
required by paragraphs (d)(1)(i) and (d)(2)(i) of this section with 
respect to that acquirer is timely reported on behalf of that acquirer 
consistent with forms, instructions, and other IRS guidance by one or 
more other acquirers or by a third party information reporting 
contractor.
    (e) Notice of rescission of a reportable policy sale. Any person 
that has filed a return required by section 6050Y(a)(1) and this section 
with respect to a reportable policy sale must file a corrected return 
within 15 calendar days of the receipt of notice of the rescission of 
the reportable policy sale. Any person that has furnished a written 
statement under section 6050Y(a)(2) and this section with respect to the 
reportable policy sale must furnish the recipient of that statement with 
a corrected statement within 15 calendar days of the receipt of notice 
of the rescission of the reportable policy sale.
    (f) Exceptions to requirement to file--(1) An acquirer that is a 
foreign person is not required to file an information return under 
paragraph (a) of this section with respect to a reportable policy sale 
unless--
    (i) The life insurance contract (or interest therein) transferred in 
the sale is on the life of an insured who is a United States person at 
the time of the sale; or
    (ii) The sale is subject to the laws of one or more States of the 
United States that pertain to acquisitions or sales of life insurance 
contracts (or interests therein).
    (2) An acquirer is not required to file an information return under 
paragraph (a) of this section with respect to a reportable policy sale 
payment to a reportable policy sale payment recipient other than the 
seller if the reportable policy sale payment is reported by the acquirer 
under section 6041 or 6041A.
    (3) An acquirer is not required to file an information return under 
paragraph (a) of this section with respect to the issuance of a life 
insurance contract in an exchange pursuant to section 1035. However, the 
acquirer is required to furnish the 6050Y(a) issuer with the statement 
required under paragraph (d)(2) of this section as if the acquirer were 
required to file an information return under paragraph (a) of this 
section.
    (g) Cross-reference to penalty provisions--(1) Failure to file 
correct information return. For provisions relating to the penalty 
provided for failure to file

[[Page 500]]

timely a correct information return required under section 6050Y(a)(1) 
and this section, see section 6721 and Sec. 301.6721-1 of this chapter. 
See section 6724(a) and Sec. 301.6724-1 of this chapter for the waiver 
of a penalty if the failure is due to reasonable cause and is not due to 
willful neglect.
    (2) Failure to furnish correct statement. For provisions relating to 
the penalty provided for failure to furnish timely a correct statement 
to identified persons under section 6050Y(a)(2) and this section, see 
section 6722 and Sec. 301.6722-1 of this chapter. See section 6724(a) 
and Sec. 301.6724-1 of this chapter for the waiver of a penalty if the 
failure is due to reasonable cause and is not due to willful neglect.

[T.D. 9879, 84 FR 58486, Oct. 31, 2019]



Sec. 1.6050Y-3  Information reporting by 6050Y(b) issuers for 
reportable policy sales and transfers of life insurance contracts
to foreign persons.

    (a) Requirement of reporting. Except as provided in paragraph (f) of 
this section, each 6050Y(b) issuer that receives an RPSS or any notice 
of a transfer to a foreign person must file an information return with 
the Internal Revenue Service (IRS) with respect to each seller in the 
form and manner prescribed by the IRS. The return must include the 
following information with respect to the seller:
    (1) The name, address, and taxpayer identification number (TIN) of 
the seller;
    (2) The investment in the contract with respect to the seller;
    (3) The amount the seller would have received if the seller had 
surrendered the life insurance contract on the date of the reportable 
policy sale or the transfer of the contract to a foreign person, or if 
the date of the transfer to a foreign person is not known to the 
6050Y(b) issuer, the date the 6050Y(b) issuer received notice of the 
transfer; and
    (4) Any other information that is required by the form or its 
instructions.
    (b) Unified reporting. Each 6050Y(b) issuer subject to the 
information reporting requirement of paragraph (a) of this section must 
satisfy that requirement, but a 6050Y(b) issuer's reporting obligation 
is deemed satisfied if the information required by paragraph (a) of this 
section with respect to that 6050Y(b) issuer is timely reported on 
behalf of that 6050Y(b) issuer in a manner that is consistent with 
forms, instructions, and other IRS guidance by one or more other 
6050Y(b) issuers or by a third party information reporting contractor.
    (c) Time and place for filing. Except as provided in this paragraph 
(c), returns required to be made under paragraph (a) of this section 
must be filed with the Internal Revenue Service Center designated on the 
prescribed form or in its instructions on or before February 28 (March 
31 if filed electronically) of the year following the calendar year in 
which the reportable policy sale or the transfer to a foreign person 
occurred. If the 6050Y(b) issuer does not receive notice of a transfer 
to a foreign person until after January 31 of the calendar year 
following the year in which the transfer occurred, returns required to 
be made under paragraph (a) of this section must be filed by the later 
of February 28 (March 31 if filed electronically) of the calendar year 
following the year in which the transfer occurred or thirty days after 
the date notice is received. However, see Sec. 1.6050Y-1(b)(5) for 
transition rules.
    (d) Requirement of and time for furnishing statements--(1) 
Requirement of furnishing statement. Every 6050Y(b) issuer filing a 
return required by paragraph (a) of this section must furnish to each 
seller that is a reportable policy sale payment recipient or makes a 
transfer to a foreign person and whose name is required to be set forth 
in the return a written statement showing the information required by 
paragraph (a) of this section with respect to that seller and the name, 
address, and phone number of the information contact of the person 
filing the return. This contact information must provide direct access 
to a person that can answer questions about the statement.
    (2) Time for furnishing statement. Except as provided in this 
paragraph (d)(2), each statement required by paragraph (d)(1) of this 
section to be furnished to any seller must be furnished on or before 
February 15 of the year following the calendar year in which the 
reportable policy sale or transfer to

[[Page 501]]

a foreign person occurred. If a 6050Y(b) issuer does not receive notice 
of a transfer to a foreign person until after January 31 of the calendar 
year following the year in which the transfer occurred, each statement 
required to be made under paragraph (d) of this section must be 
furnished by the date thirty days after the date notice is received. 
However, see Sec. 1.6050Y-1(b)(3) for transition rules.
    (3) Unified reporting. Each 6050Y(b) issuer subject to the 
information reporting requirement of paragraph (d)(1) of this section 
must satisfy that requirement, but a 6050Y(b) issuer's reporting 
obligation is deemed satisfied if the information required by paragraph 
(d)(1) of this section with respect to that 6050Y(b) issuer is timely 
reported on behalf of that 6050Y(b) issuer consistent with forms, 
instructions, and other IRS guidance by one or more other 6050Y(b) 
issuers or by a third party information reporting contractor.
    (e) Notice of rescission of a reportable policy sale or transfer of 
an insurance contract to a foreign person. Any 6050Y(b) issuer that has 
filed a return required by section 6050Y(b)(1) and this section with 
respect to a reportable policy sale or transfer of an insurance contract 
to a foreign person must file a corrected return within 15 calendar days 
of the receipt of notice of the rescission of the reportable policy sale 
or transfer of the insurance contract to a foreign person. Any 6050Y(b) 
issuer that has furnished a written statement under section 6050Y(b)(2) 
and this section with respect to the reportable policy sale or transfer 
of the insurance contract to a foreign person must furnish the recipient 
of that statement with a corrected statement within 15 calendar days of 
the receipt of notice of the rescission of the reportable policy sale or 
transfer of the insurance contract to a foreign person.
    (f) Exceptions to requirement to file. A 6050Y(b) issuer is not 
required to file an information return under paragraph (a) of this 
section if paragraph (f)(1), (2), or (3) of this section applies.
    (1) Except as provided in this paragraph (f)(1), the 6050Y(b) issuer 
obtains documentation upon which it may rely to treat a seller of a life 
insurance contract or interest therein as a foreign beneficial owner in 
accordance with Sec. 1.1441-1(e)(1)(ii), applying in such case the 
provisions of Sec. 1.1441-1 by substituting the term ``6050Y(b) 
issuer'' for the term ``withholding agent'' and without regard to the 
fact that that these provisions apply only to amounts subject to 
withholding under chapter 3 of subtitle A of the Internal Revenue Code. 
A 6050Y(b) issuer may also obtain from a seller that is a partnership or 
trust, in addition to documentation establishing the entity's foreign 
status, a written certification from the entity that no beneficial owner 
of any portion of the proceeds of the sale is a United States person. In 
such a case, the issuer may rely upon the written certification to treat 
the partnership or trust as a foreign beneficial owner for purposes of 
this paragraph (f)(1) provided that the seller does not have actual 
knowledge that a United States person is the beneficial owner of all or 
a portion of the proceeds of the sale. See Sec. 1.1441-1(c)(6)(ii) for 
the definition of beneficial owner that applies for purposes of this 
paragraph (f)(1). Additionally, for certifying its status as a foreign 
beneficial owner (as applicable) for purposes of this paragraph (f)(1), 
a seller that is required to report any of the income from the sale as 
effectively connected with the conduct of a trade or business in the 
United States under section 864(b) is required to provide to the 
6050Y(b) issuer a Form W-8ECI, Certificate of Foreign Person's Claim 
that Income is Effectively Connected with the Conduct of a Trade or 
Business in the United States. If a 6050Y(b) issuer obtains a Form W-
8ECI from a seller with respect to the sale or has reason to know that 
income from the sale is effectively connected with the conduct of a 
trade or business in the United States under section 864(b), the 
exception to reporting described in this paragraph (f)(1) does not 
apply.
    (2) The 6050Y(b) issuer receives notice of a transfer to a foreign 
person, but does not receive an RPSS with respect to the transfer, 
provided that, at the time the notice is received--
    (i) The 6050Y(b) issuer is not a United States person;

[[Page 502]]

    (ii) The life insurance contract (or interest therein) transferred 
is not on the life of a United States person; and
    (iii) The 6050Y(b) issuer has not classified the seller as a United 
States person in its books and records.
    (3) The RPSS received by the 6050Y(b) issuer is with respect to the 
6050Y(b) issuer's issuance of a life insurance contract to a 
policyholder in an exchange pursuant to section 1035.
    (g) Cross-reference to penalty provisions--(1) Failure to file 
correct information return. For provisions relating to the penalty 
provided for failure to file timely a correct information return 
required under section 6050Y(b)(1) and this section, see section 6721 
and Sec. 301.6721-1 of this chapter. See section 6724(a) and Sec. 
301.6724-1 of this chapter for the waiver of a penalty if the failure is 
due to reasonable cause and is not due to willful neglect.
    (2) Failure to furnish correct statement. For provisions relating to 
the penalty provided for failure to furnish timely a correct statement 
to identified persons under section 6050Y(b)(2) and this section, see 
section 6722 and Sec. 301.6722-1 of this chapter. See section 6724(a) 
and Sec. 301.6724-1 of this chapter for the waiver of a penalty if the 
failure is due to reasonable cause and is not due to willful neglect.

[T.D. 9879, 84 FR 58487, Oct. 31, 2019]



Sec. 1.6050Y-4  Information reporting by payors for reportable death
benefits.

    (a) Requirement of reporting. Except as provided in paragraph (e) of 
this section, every person that is a payor of reportable death benefits 
during any calendar year must file a separate information return for 
such calendar year with the Internal Revenue Service (IRS) for each 
reportable death benefits payment recipient in the form and manner 
prescribed by the IRS. The return must include the following information 
with respect to the reportable death benefits payment recipient to which 
the return relates:
    (1) The name, address, and taxpayer identification number (TIN) of 
the payor;
    (2) The name, address, and TIN of the reportable death benefits 
payment recipient;
    (3) The date of the payment;
    (4) The gross amount of reportable death benefits paid to the 
reportable death benefits payment recipient during the taxable year;
    (5) The payor's estimate of investment in the contract with respect 
to the buyer, limited to the payor's estimate of the buyer's investment 
in the contract with respect to the interest for which the reportable 
death benefits payment recipient was paid; and
    (6) Any other information that is required by the form or its 
instructions.
    (b) Time and place for filing. Returns required to be made under 
this section must be filed with the Internal Revenue Service Center 
designated in the instructions for the form on or before February 28 
(March 31 if filed electronically) of the year following the calendar 
year in which the payment of reportable death benefits was made. 
However, see Sec. 1.6050Y-1(b)(5) for transition rules.
    (c) Requirement of and time for furnishing statements--(1) 
Requirement of furnishing statement. Every person required to file an 
information return under paragraph (a) of this section must furnish to 
each reportable death benefits payment recipient whose name is required 
to be set forth in that return a written statement showing the 
information required by paragraph (a) of this section with respect to 
that reportable death benefits payment recipient and the name, address, 
and phone number of the information contact of the payor. This contact 
information must provide direct access to a person that can answer 
questions about the statement.
    (2) Time for furnishing statement. Each statement required by 
paragraph (c)(1) of this section to be furnished to any reportable death 
benefits payment recipient must be furnished on or before January 31 of 
the year following the calendar year in which the payment of reportable 
death benefits was made. However, see Sec. 1.6050Y-1(b)(4) for 
transition rules.
    (d) Notice of rescission of a reportable policy sale. Any person 
that has filed a return required by section 6050Y(c) and this section 
with respect to a payment of reportable death benefits must file a 
corrected return within 15 calendar

[[Page 503]]

days of recovering any portion of the reportable death benefits payment 
from the reportable death benefits payment recipient as a result of the 
rescission of the reportable policy sale. Any person that has furnished 
a written statement under section 6050Y(c)(2) and this section with 
respect to a payment of reportable death benefits must furnish the 
recipient of that statement with a corrected statement within 15 
calendar days of recovering any portion of the reportable death benefits 
payment from the reportable death benefits payment recipient as a result 
of the rescission of the reportable policy sale.
    (e) Exceptions to requirement to file. A payor is not required to 
file an information return under paragraph (a) of this section with 
respect to a payment of reportable death benefits if paragraph (e)(1), 
(2), or (3) of this section applies.
    (1) Except as provided in this paragraph (e)(1), the payor obtains 
documentation in accordance with Sec. 1.1441-1(e)(1)(ii) upon which it 
may rely to treat the reportable death benefits payment recipient as a 
foreign beneficial owner of the reportable death benefits, applying in 
such case the provisions of Sec. 1.1441-1 by substituting the term 
``payor'' for the term ``withholding agent'' and without regard to the 
fact that the provisions apply only to amounts subject to withholding 
under chapter 3 of subtitle A of the Internal Revenue Code. A payor may 
also obtain from a partnership or trust that is a reportable death 
benefits recipient, in addition to documentation establishing the 
entity's foreign status, a written certification from the entity that no 
beneficial owner of any portion of the reportable death benefits payment 
is a United States person. In such a case, a payor may rely upon the 
written certification to treat the partnership or trust as a foreign 
beneficial owner for purposes of this paragraph (e)(1) provided that the 
payor does not have actual knowledge that a United States person is the 
beneficial owner of all or a portion of the reportable death benefits 
payment. See Sec. 1.1441-1(c)(6)(ii) for the definition of beneficial 
owner that applies for purposes of this paragraph (e)(1). Other due 
diligence or reporting requirements may, however, apply to a payor that 
relies on the exception set forth in this paragraph (e)(1). See Sec. 
1.1441-5(c) and (e) (determination of payees of foreign partnerships and 
certain foreign trusts for amounts subject to withholding under Sec. 
1.1441-2(a)) and Sec. 1.1461-1(b) and (c) (amounts subject to reporting 
for chapter 3 purposes).
    (2) The buyer obtained the life insurance contract (or interest 
therein) under which reportable death benefits are paid in a reportable 
policy sale to which the exception to reporting described in Sec. 
1.6050Y-3(f)(2) applies.
    (3) The payor never received, and has no knowledge of any issuer 
having received, an RPSS with respect to the interest in a life 
insurance contract with respect to which the reportable death benefits 
are paid.
    (f) Cross-reference to penalty provisions--(1) Failure to file 
correct information return. For provisions relating to the penalty 
provided for failure to file timely a correct information return 
required under section 6050Y(c)(1) and this section, see section 6721 
and Sec. 301.6721-1 of this chapter. See section 6724(a) and Sec. 
301.6724-1 of this chapter for the waiver of a penalty if the failure is 
due to reasonable cause and is not due to willful neglect.
    (2) Failure to furnish correct statement. For provisions relating to 
the penalty provided for failure to furnish timely a correct statement 
to identified persons under section 6050Y(c)(2) and this section, see 
section 6722 and Sec. 301.6722-1 of this chapter. See section 6724(a) 
and Sec. 301.6724-1 of this chapter for the waiver of a penalty if the 
failure is due to reasonable cause and is not due to willful neglect.

[T.D. 9879, 84 FR 58488, Oct. 31, 2019]



Sec. 1.6052-1  Information returns regarding payment of wages in the 
form of group-term life insurance.

    (a) Requirement of reporting--(1) In general. Every employer, who 
during any calendar year provides any one of his employees remuneration 
for services in the form of group-term life insurance on the life of 
such employee any part of the cost of which is to be included in such 
employee's gross income as provided in section 79(a), shall make a 
separate return on Form W-2

[[Page 504]]

with respect to each such employee for such year which includes the 
following information:
    (i) Name, address, and identifying number of the employer;
    (ii) Name, address, and social security number of the employee; and
    (iii) Total amount includible in the employee's gross income by 
reason of the provisions of section 79(a), computed as if each employee 
reported his income on the basis of a calendar year (determined as if 
the employer making such return is the only employer paying the employee 
remuneration in the form of group-term life insurance on his life which 
is includible in his gross income under section 79(a)).


Returns on Form W-2 required to be filed pursuant to the provisions of 
this section shall be transmitted by Form W-3. In a case where, with 
respect to the same employee, an employer must make a return on Form W-2 
under this section and also under Sec. 31.6011(a)-4 or Sec. 
31.6011(a)-5 of this chapter (Employment Tax Regulations), or under 
Sec. 1.6041-2 (relating to return of information as to payments to 
employees), such employer may make such returns on the same Form W-2 or 
on separate Forms W-2. In a case where an employer must file a Form W-3 
under this section and also under Sec. 31.6011(a)-4 or Sec. 
31.6011(a)-5 of this chapter (Employment Tax Regulations), the Form W-3 
filed under such Sec. 31.6011(a)-4 or Sec. 31.6011(a)-5 shall also be 
used as the transmittal form for a return on Form W-2 made pursuant to 
the provisions of this section.
    (2) Definitions. Terms used in subparagraph (a)(1) of this section 
and in section 79 and the regulations thereunder have the meaning 
ascribed to them in section 79 and the regulations thereunder.
    (b) Time and place for filing--(1) Time for filing--(i) General 
rule. In a case where an employer must file Forms W-3 and W-2 under this 
section and also under Sec. 31.6011(a)-4 or Sec. 31.6011(a)-5 of this 
chapter (Employment Tax Regulations), the time for filing such forms 
under this section shall be the same as the time (including extensions 
thereof) for filing such forms under Sec. 31.6011(a)-4 or Sec. 
31.6011(a)-5.
    (ii) Exception. In a case where an employer is not required to file 
Forms W-3 and W-2 under Sec. 31.6011(a)-4 or Sec. 31.6011(a)-5 of this 
chapter, returns on Forms W-3 and W-2 required under paragraph (a) of 
this section for any calendar year shall be filed on or before February 
28 (March 31 if filed electronically) of the following year.
    (iii) Cross reference. For extensions of time for filing returns, 
see section 6081 and the regulations thereunder.
    (2) Place for filing. The returns on Forms W-3 and W-2 required 
under paragraph (a) of this section shall be filed pursuant to the rules 
contained in Sec. 31.6091-1 of this chapter (Employment Tax 
Regulations), relating to the place for filing certain returns.
    (c) Special rule for calendar years before 1972. For calendar years 
before 1972, the provisions of this section will be deemed to have been 
complied with if the returns for such years were filed in accordance 
with the provisions of this section in effect prior to August 3, 1973, 
or with the instructions applicable to the appropriate forms.
    (d) Last day for filing return. For provisions relating to the time 
for performance of an act when the last day prescribed for performance 
falls on Saturday, Sunday, or a legal holiday, see Sec. 301.7503-1 of 
this chapter (Regulations on Procedure and Administration).
    (e) Penalty. For provisions relating to the penalty provided for 
failure to file the information returns required by this section, see 
section 6652 and the regulations thereunder.

[T.D. 6888, 31 FR 9205, July 6, 1966, as amended by T.D. 7284, 38 FR 
20828, Aug. 3, 1973; T.D. 7580, 43 FR 60160, Dec. 26, 1978; T.D. 7623, 
44 FR 28800, May 17, 1979; T.D. 8895, 65 FR 50408, Aug. 18, 2000]



Sec. 1.6052-2  Statements to be furnished employees with respect to 
wages paid in the form of group-term life insurance.

    (a) Requirement. Every employer filing a return under section 
6052(a) and Sec. 1.6052-1, with respect to group-term life insurance on 
the life of an employee, shall furnish to the employee whose name is set 
forth in such return the tax return copy and the employee's copy of Form 
W-2. Each copy of Form

[[Page 505]]

W-2 must show the information required to be shown on the Form W-2 filed 
under Sec. 1.6052-1. An employer may truncate an employee's social 
security number to appear in the form of an IRS truncated taxpayer 
identification number (TTIN) on copies of Forms W-2 furnished to the 
employee. For provisions relating to the use of TTINs, see Sec. 
301.6109-4 of this chapter (Procedure and Administration Regulations). 
The rules in Sec. 31.6051-1 of this chapter (Employment Taxes and 
Collection of Income Tax at Source Regulations) shall apply with respect 
to the means and time (including extensions thereof) for furnishing the 
employee's copy of Form W-2 required by this section to the employee and 
making corrections to such form.
    (b) Definitions. Terms used in this section and in section 79 and 
the regulations thereunder have the meaning ascribed to them in section 
79 and the regulations thereunder.
    (c) Penalty. For provisions relating to the penalty provided for 
failure to furnish a statement under this section, see section 6722 and 
the regulations in part 301 under section 6722.
    (d) Applicability date. This section is applicable for statements 
required to be furnished under section 6052 after December 31, 2020.

[T.D. 6888, 31 FR 9205, July 6, 1966, as amended by T.D. 7284, 38 FR 
20828, Aug. 3, 1973; T.D. 7580, 43 FR 60160, Dec. 26, 1978; T.D. 7623, 
44 FR 28800, May 17, 1979; T.D. 9861, 84 FR 31719, July 3, 2019]



Sec. 1.6055-1  Information reporting for minimum essential coverage.

    (a) Information reporting requirement. Every person that provides 
minimum essential coverage to an individual during a calendar year must 
file an information return and transmittal and furnish statements to 
responsible individuals on forms prescribed by the Internal Revenue 
Service.
    (b) Definitions--(1) In general. The definitions in this paragraph 
(b) apply for purposes of this section.
    (2) Affordable Care Act. The term Affordable Care Act refers to the 
Patient Protection and Affordable Care Act, Public Law 111-148 (124 
Stat. 119 (2010)), and the Health Care and Education Reconciliation Act 
of 2010, Public Law 111-152 (124 Stat. 1029 (2010)), and amendments to 
those acts.
    (3) ERISA. The term ERISA means the Employee Retirement Income 
Security Act of 1974, as amended (29 U.S.C. 1001 et seq.).
    (4) Exchange. Exchange has the same meaning as in 45 CFR 155.20.
    (5) Government employer. The term government employer means an 
employer that is a governmental unit or an agency or instrumentality of 
a governmental unit.
    (6) Governmental unit. The term governmental unit refers to the 
government of the United States, any State or political subdivision of a 
State, or any Indian tribal government (as defined in section 
7701(a)(40)) or subdivision of an Indian tribal government (as defined 
in section 7871(d)).
    (7) Agency or instrumentality of a governmental unit. [Reserved]
    (8) Minimum essential coverage. Minimum essential coverage is 
defined in section 5000A(f) and regulations issued under that section.
    (9) Qualified health plan. The term qualified health plan has the 
same meaning as in section 1301(a) of the Affordable Care Act (42 U.S.C. 
18021(a)).
    (10) Reporting entity. A reporting entity is any person that must 
report, under section 6055 and this section, minimum essential coverage 
provided to an individual.
    (11) Responsible individual. The term responsible individual 
includes a primary insured, employee, former employee, uniformed 
services sponsor, parent, or other related person named on an 
application who enrolls one or more individuals, including him or 
herself, in minimum essential coverage.
    (12) Taxpayer identification number. The term taxpayer 
identification number (TIN) has the same meaning as in section 
7701(a)(41).
    (c) Persons required to report--(1) In general. The following 
persons must file the information return and transmittal form required 
under paragraph (a) of this section to report minimum essential 
coverage--
    (i) Health insurance issuers, or carriers (as used in 5 U.S.C. 
8901), for all insured coverage, except as provided in paragraph 
(c)(3)(ii) of this section;

[[Page 506]]

    (ii) Plan sponsors of self-insured group health plan coverage;
    (iii) The executive department or agency of a governmental unit that 
provides coverage under a government-sponsored program (within the 
meaning of section 5000A(f)(1)(A)); and
    (iv) Any other person that provides minimum essential coverage to an 
individual.
    (2) Plan sponsors of self-insured group health plan coverage--(i) In 
general. For purposes of this section, a plan sponsor of self-insured 
group health plan coverage is--
    (A) The employer for a self-insured group health plan or arrangement 
established or maintained by a single employer (determined without 
application of section 414(b), (c), (m) or (o) in the case of an 
employer described in paragraph (f)(2)(i) of this section), including 
each participating employer with respect to a self-insured group health 
plan or arrangement established or maintained by more than one employer 
(and not including a multiemployer plan as defined in section 3(37) of 
ERISA or a Multiple Employer Welfare Arrangement as defined in section 
3(40) of ERISA);
    (B) The association, committee, joint board of trustees, or other 
similar group of representatives of the parties who establish or 
maintain the plan for a self-insured group health plan or arrangement 
that is a multiemployer plan (as defined in section 3(37) of ERISA).
    (C) The employee organization for a self-insured group health plan 
or arrangement maintained solely by an employee organization;
    (D) Each participating employer for a self-insured group health plan 
or arrangement maintained by a Multiple Employer Welfare Arrangement (as 
defined in section 3(40) of ERISA) with respect to the participating 
employer's own employees; and
    (E) For a self-insured group health plan or arrangement for which a 
plan sponsor is not otherwise identified in paragraphs (c)(2)(i)(A) 
through (c)(2)(i)(D) of this section, the person designated by plan 
terms as the plan sponsor or plan administrator or, if no person is 
designated as the administrator and a plan sponsor cannot be identified, 
each entity that maintains the plan or arrangement.
    (ii) Government employers. Unless otherwise provided by statute or 
regulation, a government employer that maintains a self-insured group 
health plan or arrangement may enter into a written agreement with 
another governmental unit, or an agency or instrumentality of a 
governmental unit, that designates the other governmental unit, agency, 
or instrumentality as the person required to file the returns and to 
furnish the statements required by this section for some or all of the 
individuals receiving minimum essential coverage under that plan or 
arrangement. The designated governmental unit, agency, or 
instrumentality must be part of or related to the same governmental unit 
as the government employer (for example, a political subdivision of a 
State may designate the State or another political subdivision of the 
state) and agree to the designation. The government employer must make 
or revoke the designation before the earlier of the deadline for filing 
the returns or furnishing the statements required by this section and 
must retain a copy of the designation in its books and records. If the 
requirements of this paragraph (c)(2)(ii) are met, the designated 
governmental unit, agency, or instrumentality is the sponsor under 
paragraph (c)(2)(i) of this section. If no entity is designated, the 
government employer that maintains the self-insured group health plan or 
arrangement is the sponsor under paragraph (c)(2)(i) of this section.
    (3) Special rules for government-sponsored programs--(i) Medicaid 
and Children's Health Insurance Program (CHIP) coverage. The State 
agency that administers the Medicaid program under title XIX of the 
Social Security Act (42 U.S.C. 1396 and following sections) or the CHIP 
program under title XXI of the Social Security Act (42 U.S.C. 1396 and 
following sections) must file the returns and furnish the statements 
required by this section for those programs.
    (ii) Government-sponsored coverage provided through health insurance 
issuers. An executive department or agency of a governmental unit that 
provides coverage under a government-

[[Page 507]]

sponsored program through a health insurance issuer (such as Medicaid, 
CHIP, or Medicare, including Medicare Advantage) must file the returns 
and furnish the statements required by this section.
    (iii) Nonappropriated Fund Health Benefits Program. The Secretary of 
Defense may designate the Department of Defense components (as used in 
DoD Directive 5100.01, Functions of the Department of Defense and Its 
Major Components (December 21, 2010)) that must file the returns and 
furnish the statements required by this section for the Nonappropriated 
Fund Health Benefits Program.
    (4) Other arrangements recognized as minimum essential coverage. The 
Commissioner may designate in published guidance, see Sec. 601.601(d) 
of this chapter, the reporting entity for arrangements the Secretary of 
Health and Human Services, in coordination with the Secretary of the 
Treasury, recognizes under section 5000A(f)(1)(E) as minimum essential 
coverage.
    (d) Reporting not required--(1) Qualified health plans. A health 
insurance issuer is not required to file a return or furnish a report 
under this section for coverage in a qualified health plan in the 
individual market enrolled in through an Exchange.
    (2) Additional health benefits. No reporting is required under 
paragraph (a) of this section for minimum essential coverage that 
provides benefits in addition or as a supplement to a health plan or 
arrangement that constitutes minimum essential coverage if--
    (i) The primary and supplemental coverages have the same plan 
sponsor; or
    (ii) The coverage supplements government-sponsored coverage (as 
defined in section 5000A(f)(1)(A) and the regulations under that 
section) such as Medicare.
    (3) Individuals not enrolled in coverage. No reporting is required 
under this section for coverage offered to individuals who do not 
enroll.
    (e) Information required to be reported to the Internal Revenue 
Service--(1) In general. All information returns required by this 
section must report the following information for the calendar year of 
coverage--
    (i) The name, address, and employer identification number (EIN) of 
the reporting entity required to file the return;
    (ii) The name, address, and TIN, or date of birth if a TIN is not 
available, of the responsible individual, except that reporting entities 
may but are not required to report the TIN of a responsible individual 
not enrolled in the coverage;
    (iii) The name and TIN, or date of birth if a TIN is not available, 
of each individual who is covered under the policy or program;
    (iv) For each covered individual, the months for which, for at least 
one day, the individual was enrolled in coverage and entitled to receive 
benefits; and
    (v) Any other information specified in forms, instructions, or 
published guidance, see Sec. Sec. 601.601(d) and 601.602 of this 
chapter.
    (2) Information relating to employer-provided coverage. In addition 
to the information described in paragraph (e)(1) of this section, 
information returns reporting minimum essential coverage provided to an 
individual that is coverage provided by a health insurance issuer 
through a group health plan must report--
    (i) The name, address, and EIN of the employer sponsoring the plan;
    (ii) Whether the coverage is a qualified health plan enrolled in 
through the Small Business Health Options Program (SHOP) and the SHOP's 
unique identifier; and
    (iii) Other information specified in forms, instructions, or 
published guidance, see Sec. Sec. 601.601(d) and 601.602 of this 
chapter.
    (f) Time and manner for filing return--(1) In general. A reporting 
entity must file the return and transmittal form required under 
paragraph (a) of this section on or before February 28 (March 31 if 
filed electronically) of the year following the calendar year in which 
it provided minimum essential coverage to an individual. A reporting 
entity must file the return and transmittal form as specified in forms 
or instructions. For extensions of time for filing returns under this 
section see Sec. Sec. 1.6081-1 and 1.6081-8. See Sec. 301.6011-2 of 
this chapter for rules relating to electronic filing.

[[Page 508]]

    (2) Form of return--(i) Applicable large employer members. A 
reporting entity that is reporting under section 6055 as an applicable 
large employer member (as defined in Sec. 54.4980H-1(a)(5) of this 
chapter) makes the return required under this paragraph (f) on Form 
1094-C and Form 1095-C or other form designated by the Internal Revenue 
Service.
    (ii) Reporting entities not reporting as applicable large employer 
members. Entities reporting as health insurance issuers or carriers, 
sponsors of self-insured group health plans that are not reporting as 
applicable large employer members, sponsors of multiemployer plans, and 
providers of government-sponsored coverage, will report under section 
6055 on Form 1094-B and Form 1095-B or other form designated by the 
Internal Revenue Service.
    (iii) Substitute forms. Reporting entities may make the return 
required under this paragraph (f) on a substitute form. A substitute 
form must comply with revenue procedures or other published guidance 
(see Sec. 601.601(d)(2) of this chapter) that apply to substitute 
forms.
    (g) Statements to be furnished to responsible individuals--(1) In 
general. Every person required to file a return under this section must 
furnish to the responsible individual identified on the return a written 
statement. For purposes of the penalty under section 6722, furnishing a 
statement to the responsible individual is treated as furnishing a 
statement to the payee. The statement must show--
    (i) The phone number for a person designated as the reporting 
entity's contact person and policy number, if any; and
    (ii) Information described in paragraph (e) of this section required 
to be shown on the section 6055 return for the responsible individual 
and each covered individual listed on the return.
    (2) Statements for individuals other than the responsible 
individual. A reporting entity is not required to provide a statement 
described in paragraph (g)(1) of this section to an individual who is 
not the responsible individual.
    (3) Form of the statement. A statement required under this paragraph 
(g) may be made either by furnishing to the responsible individual a 
copy of the return filed with the Internal Revenue Service or on a 
substitute statement. A substitute statement must include the 
information required to be shown on the return filed with the Internal 
Revenue Service and must comply with requirements in published guidance 
(see Sec. 601.601(d)(2) of this chapter) relating to substitute 
statements. An Internal Revenue Service truncated taxpayer 
identification number may be used as the identification number for an 
individual in lieu of the identification number appearing on the 
corresponding information return filed with the Internal Revenue 
Service.
    (4) Time and manner for furnishing statements--(i) Time for 
furnishing--(A) In general. A reporting entity must furnish the 
statements required under this paragraph (g) on or before January 31 of 
the year following the calendar year in which minimum essential coverage 
is provided.
    (B) Extensions of time--(1) In general. For good cause upon written 
application of the person required to furnish statements under this 
section, the Internal Revenue Service may grant an extension of time not 
exceeding 30 days in which to furnish these statements. The application 
must be addressed to the Internal Revenue Service, and must contain a 
full recital of the reasons for requesting the extension to aid the 
Internal Revenue Service in determining the period of the extension, if 
any, that will be granted. A request in the form of a letter to the 
Internal Revenue Service, signed by the applicant, suffices as an 
application. The application must be filed on or before the date 
prescribed in paragraph (g)(4)(i)(A) of this section.
    (2) Automatic extension of time. The Commissioner may, in 
appropriate cases, prescribe additional guidance or procedures, 
published in the Internal Revenue Bulletin (see Sec. 601.601(d)(2) of 
this chapter), for automatic extensions of time to furnish to one or 
more individuals the statement required under section 6055.

[[Page 509]]

    (ii) Manner of furnishing. If mailed, the statement must be sent to 
the responsible individual's last known permanent address or, if no 
permanent address is known, to the individual's temporary address. For 
purposes of this paragraph (g)(4), a reporting entity's first class 
mailing to the last known permanent address, or if no permanent address 
is known, the temporary address, discharges the requirement to furnish 
the statement. A reporting entity may furnish the statement 
electronically if the requirements of Sec. 1.6055-2 are satisfied.
    (h) Penalties--(1) In general. For provisions relating to the 
penalty for failure to file timely a correct information return required 
under section 6055, see section 6721 and the regulations under that 
section. For provisions relating to the penalty for failure to furnish 
timely a correct statement to responsible individuals required under 
section 6055, see section 6722 and the regulations under that section. 
See section 6724 and the regulations under that section for rules 
relating to the waiver of penalties if a failure to file timely or 
accurately is due to reasonable cause and is not due to willful neglect.
    (2) Application of section 6721 and 6722 penalties to section 6055 
reporting. For purposes of section 6055 reporting, if the information 
reported on a return (including a transmittal) or a statement required 
by this section is incomplete or incorrect as a result of a change in 
circumstances (such as a retroactive change in coverage), a failure to 
timely file or furnish a corrected document is a failure to file or 
furnish a correct return or statement under sections 6721 and 6722.
    (i) [Reserved]
    (j) Effective/applicability date. This section applies for calendar 
years beginning after December 31, 2014. Reporting entities will not be 
subject to penalties under section 6721 or 6722 for failure to comply 
with the section 6055 reporting requirements for coverage in 2014 (for 
information returns filed and statements furnished in 2015).

[T.D. 9660, 79 FR 13227, Mar. 10, 2014; 79 FR 24331, Apr. 30, 2014]



Sec. 1.6055-2  Electronic furnishing of statements.

    (a) Electronic furnishing of statements--(1) In general. A person 
required by section 6055 to furnish a statement (furnisher) to a 
responsible individual (a recipient) may furnish the statement in an 
electronic format in lieu of a paper format. A furnisher who meets the 
requirements of paragraphs (a)(2) through (a)(6) of this section is 
treated as furnishing the statement in a timely manner.
    (2) Consent--(i) In general. The recipient must have affirmatively 
consented to receive the statement in an electronic format. The consent 
may be made electronically in any manner that reasonably demonstrates 
that the recipient can access the statement in the electronic format in 
which it will be furnished. Alternatively, the consent may be made in a 
paper document that is confirmed electronically.
    (ii) Withdrawal of consent. The consent requirement of this 
paragraph (a)(2) is not satisfied if the recipient withdraws the consent 
and the withdrawal takes effect before the statement is furnished. The 
furnisher may provide that a withdrawal of consent takes effect either 
on the date the furnisher receives it or on another date no more than 60 
days later. The furnisher also may provide that a recipient's request 
for a paper statement will be treated as a withdrawal of the recipient's 
consent.
    (iii) Change in hardware or software requirements. If a change in 
the hardware or software required to access the statement creates a 
material risk that the recipient will not be able to access a statement, 
a furnisher must, prior to changing the hardware or software, notify the 
recipient. The notice must describe the revised hardware and software 
required to access the statement and inform the recipient that a new 
consent to receive the statement in the revised electronic format must 
be provided to the furnisher. After implementing the revised hardware or 
software, the furnisher must obtain from the recipient, in the manner 
described in paragraph (a)(2)(ii) of this section, a new consent or 
confirmation of consent to receive the statement electronically.

[[Page 510]]

    (iv) Examples. The following examples illustrate the rules of this 
paragraph (a)(2):

    Example 1. Furnisher F sends Recipient R a letter stating that R may 
consent to receive the statement required under section 6055 
electronically on a Web site instead of in a paper format. The letter 
contains instructions explaining how to consent to receive the statement 
electronically by accessing the Web site, downloading and completing the 
consent document, and emailing the completed consent back to F. The 
consent document posted on the Web site uses the same electronic format 
that F will use for the electronically furnished statement. R reads the 
instructions and submits the consent in the manner provided in the 
instructions. R has consented to receive the statement required under 
section 6055 electronically in the manner described in paragraph 
(a)(2)(i) of this section.
    Example 2. Furnisher F sends Recipient R an email stating that R may 
consent to receive the statement required under section 6055 
electronically instead of in a paper format. The email contains an 
attachment instructing R how to consent to receive the statement 
electronically. The email attachment uses the same electronic format 
that F will use for the electronically furnished statement. R opens the 
attachment, reads the instructions, and submits the consent in the 
manner provided in the instructions. R has consented to receive the 
statement required under section 6055 electronically in the manner 
described in paragraph (a)(2)(i) of this section.
    Example 3. Furnisher F posts a notice on its Web site stating that 
Recipient R may receive the statement required under section 6055 
electronically instead of in a paper format. The Web site contains 
instructions on how R may access a secure Web page and consent to 
receive the statement electronically. The consent via the secure Web 
page uses the same electronic format that F will use for electronically 
furnishing the statement. R accesses the secure Web page and follows the 
instructions for giving consent. R has consented to receive the 
statement required under section 6055 electronically in the manner 
described in paragraph (a)(2)(i) of this section.

    (3) Required disclosures--(i) In general. Prior to, or at the time 
of, a recipient's consent, a furnisher must provide to the recipient a 
clear and conspicuous disclosure statement containing each of the 
disclosures described in this paragraph (a)(3).
    (ii) Paper statement. The furnisher must inform the recipient that 
the statement will be furnished on paper if the recipient does not 
consent to receive it electronically.
    (iii) Scope and duration of consent. The furnisher must inform the 
recipient of the scope and duration of the consent. For example, the 
recipient must be informed whether the consent applies to each statement 
required to be furnished after the consent is given until it is 
withdrawn or only to the first statement required to be furnished 
following the date of the consent.
    (iv) Post-consent request for a paper statement. The furnisher must 
inform the recipient of any procedure for obtaining a paper copy of the 
recipient's statement after giving the consent described in paragraph 
(a)(2)(i) of this section and whether a request for a paper statement 
will be treated as a withdrawal of consent.
    (v) Withdrawal of consent. The furnisher must inform the recipient 
that--
    (A) The recipient may withdraw a consent by writing (electronically 
or on paper) to the person or department whose name, mailing address, 
telephone number, and email address is provided in the disclosure 
statement;
    (B) The furnisher will confirm the withdrawal and the date on which 
it takes effect in writing (either electronically or on paper); and
    (C) A withdrawal of consent does not apply to a statement that was 
furnished electronically in the manner described in this paragraph (a) 
before the date on which the withdrawal of consent takes effect.
    (vi) Notice of termination. The furnisher must inform the recipient 
of the conditions under which the furnisher will cease furnishing 
statements electronically to the recipient (for example, termination of 
the recipient's employment with a furnisher who is the recipient's 
employer).
    (vii) Updating information. The furnisher must inform the recipient 
of the procedures for updating the information needed to contact the 
recipient. The furnisher must inform the recipient of any change in the 
furnisher's contact information.
    (viii) Hardware and software requirements. The furnisher must 
provide the recipient with a description of the hardware and software 
required to access, print, and retain the statement,

[[Page 511]]

and the date when the statement will no longer be available on the Web 
site. The furnisher must advise the recipient that the statement may be 
required to be printed and attached to a Federal, State, or local income 
tax return.
    (4) Format. The electronic version of the statement must contain all 
required information and comply with applicable published guidance (see 
Sec. 601.601(d) of this chapter) relating to substitute statements to 
recipients.
    (5) Notice--(i) In general. If a statement is furnished on a Web 
site, the furnisher must notify the recipient. The notice may be 
delivered by mail, electronic mail, or in person. The notice must 
provide instructions on how to access and print the statement and 
include the following statement in capital letters, ``IMPORTANT TAX 
RETURN DOCUMENT AVAILABLE.'' If the notice is provided by electronic 
mail, this statement must be on the subject line of the electronic mail.
    (ii) Undeliverable electronic address. If an electronic notice 
described in paragraph (a)(5)(i) of this section is returned as 
undeliverable, and the furnisher cannot obtain the correct electronic 
address from the furnisher's records or from the recipient, the 
furnisher must furnish the notice by mail or in person within 30 days 
after the electronic notice is returned.
    (iii) Corrected statement. If the furnisher has corrected a 
recipient's statement and the original statement was furnished 
electronically, the furnisher must furnish a corrected statement to the 
recipient electronically. If the original statement was furnished 
through a Web site posting, the furnisher must notify the recipient that 
it has posted the corrected statement on the Web site in the manner 
described in paragraph (a)(5)(i) of this section within 30 days of the 
posting. The corrected statement or the notice must be furnished by mail 
or in person if--
    (A) An electronic notice of the Web site posting of an original 
statement or the corrected statement was returned as undeliverable; and
    (B) The recipient has not provided a new email address.
    (6) Access period. Statements furnished on a Web site must be 
retained on the Web site through October 15 of the year following the 
calendar year to which the statements relate (or the first business day 
after October 15, if October 15 falls on a Saturday, Sunday, or legal 
holiday). The furnisher must maintain access to corrected statements 
that are posted on the Web site through October 15 of the year following 
the calendar year to which the statements relate (or the first business 
day after such October 15, if October 15 falls on a Saturday, Sunday, or 
legal holiday) or the date 90 days after the corrected forms are posted, 
whichever is later.
    (7) Paper statements after withdrawal of consent. A furnisher must 
furnish a paper statement if a recipient withdraws consent to receive a 
statement electronically and the withdrawal takes effect before the 
statement is furnished. A paper statement furnished after the statement 
due date under this paragraph (a)(7) is timely if furnished within 30 
days after the date the furnisher receives the withdrawal of consent.
    (b) Effective/applicability date. This section applies for calendar 
years beginning after December 31, 2014. Reporting entities will not be 
subject to penalties under section 6722 with respect to the reporting 
requirements for 2014 (for statements furnished in 2015).

[T.D. 9660, 79 FR 13227, Mar. 10, 2014]



Sec. 1.6060-1  Reporting requirements for tax return preparers.

    (a) In general. (1) Each person who employs one or more signing tax 
return preparers to prepare any return of tax or claim for refund of 
tax, other than for the person, at any time during a return period shall 
satisfy the requirements of section 6060 of the Internal Revenue Code 
by--
    (i) Retaining a record of the name, taxpayer identification number, 
and principal place of work during the return period of each tax return 
preparer employed by the person at any time during that period; and
    (ii) Making that record available for inspection upon request by the 
Commissioner.
    (2) The record described in this paragraph (a) must be retained and 
kept available for inspection for the 3-year

[[Page 512]]

period following the close of the return period to which that record 
relates.
    (3) The person may choose any form of documentation to be used under 
this section as a record of the signing tax return preparers employed 
during a return period. The record, however, must disclose on its face 
which individuals were employed as tax return preparers during that 
period.
    (4) For the definition of the term ``signing tax return preparer'', 
see Sec. 301.7701-15(b)(1) of this chapter. For the definition of the 
term ``return period'', see paragraph (b) of this section.
    (5)(i) For purposes of this section, any individual who, in acting 
as a signing tax return preparer, is not employed by another tax return 
preparer shall be treated as his or her own employer. Thus, a sole 
proprietor shall retain and make available a record with respect to 
himself (or herself) as provided in this section.
    (ii) A partnership shall, for purposes of this section, be treated 
as the employer of the partners of the partnership and shall retain and 
make available a record with respect to the partners and others employed 
by the partnership as provided in this section.
    (b) Return period defined. For purposes of this section, the term 
return period means the 12-month period beginning on July 1 of each 
year.
    (c) Penalty. For the civil penalty for failure to retain and make 
available a record of the tax return preparers employed during a return 
period as required under this section, or for failure to include an item 
in the record required to be retained and made available under this 
section, see Sec. 1.6695-1(e).
    (d) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after December 31, 2008.

[T.D. 7640, 44 FR 49451, Aug. 23, 1979, as amended by T.D. 9436, 73 FR 
78437, Dec. 22, 2008]

          signing and verifying of returns and other documents



Sec. 1.6061-1  Signing of returns and other documents by individuals.

    (a) Requirement. Each individual (including a fiduciary) shall sign 
the income tax return required to be made by him, except that the return 
may be signed for the taxpayer by an agent who is duly authorized in 
accordance with paragraph (a)(5) or (b) of Sec. 1.6012-1 to make such 
return. Other returns, statements, or documents required under the 
provisions of subtitle A or F of the Code or of the regulations 
thereunder to be made by any person with respect to any tax imposed by 
subtitle A of the Code shall be signed in accordance with any 
regulations contained in this chapter, or any instructions, issued with 
respect to such returns, statements, or other documents.
    (b) Cross references. For provisions relating to the signing of 
returns, statements, or other documents required to be made by 
corporations and partnerships with respect to any tax imposed by 
subtitle A of the Code, see Sec. Sec. 1.6062-1 and 1.6063-1, 
respectively. For provisions relating to the making of returns by 
agents, see paragraphs (a)(5) and (b) of Sec. 1.6012-1; and to the 
making of returns for minors and persons under a disability, see 
paragraph (a)(4) of Sec. 1.6012-1 and paragraph (b) of Sec. 1.6012-3.

[T.D. 7332, 39 FR 44232, Dec. 23, 1974]



Sec. 1.6062-1  Signing of returns, statements, and other documents
made by corporations.

    (a) Returns--(1) In general. Returns required to be made by 
corporations under the provisions of subtitle A or F of the Code, or the 
regulations thereunder, with respect to any tax imposed by subtitle A of 
the Code, shall be signed for the corporation by the president, vice-
president, treasurer, assistant treasurer, chief accounting officer, or 
any other officer duly authorized to sign such returns. It is not 
necessary that the corporate seal be affixed to the return. Spaces 
provided on return forms for affixing the corporate seal are for the 
convenience of corporations required by charter, or by law of the 
jurisdiction in which they are incorporated, to affix their corporate 
seals in the execution of instruments.
    (2) By fiduciaries. A return with respect to income required to be 
made for a corporation by a fiduciary, pursuant to the provisions of 
section 6012(b)(3), shall be signed by such fiduciary. See paragraph 
(b)(4) of Sec. 1.6012-3.

[[Page 513]]

    (3) By agents. A return with respect to income required to be made 
by an agent for a foreign corporation shall be signed by such agent. See 
paragraph (g) of Sec. 1.6012-2.
    (b) Statements and other documents. Statements and other documents 
required to be made by or for corporations under the provisions of 
subtitle A or F of the Code, or the regulations thereunder, with respect 
to any tax imposed by subtitle A, shall be signed in accordance with the 
regulations contained in this chapter, or the forms and instructions, 
issued with respect to such statements or other documents.
    (c) Evidence of authority to sign. An individual's signature on a 
return, statement, or other document made by or for a corporation shall 
be prima facie evidence that such individual is authorized to sign such 
return, statement, or other document.
    (d) Related provisions. For the rules realating to the verification 
of returns, see Sec. 1.6065-1.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 7293, 38 FR 
32804, Nov. 28, 1973]



Sec. 1.6063-1  Signing of returns, statements, and other documents 
made by partnerships.

    (a) In general. Returns, statements, and other documents required to 
be made by partnerships under the provisions of subtitle A or F of the 
Code, or the regulations thereunder, with respect to any tax imposed by 
subtitle A of the Code shall be signed by any one of the partners. 
However, with respect to the signing of powers of attorney, see 
paragraph (a)(2) of Sec. 601.504 of this chapter (Statement of 
Procedural Rules).
    (b) Evidence of authority to sign. A partner's signature on a 
return, statement, or other document made by or for a partnership of 
which he is a member shall be prima facie evidence that such partner is 
authorized to sign such return, statement, or other document.
    (c) Certain partnership elections--(1) In general. For rules 
regarding the authority of a partner to sign a partnership return filed 
solely for the purpose of making certain partnership level elections, 
see Sec. 1.6031(a)-1(b)(5)(ii).
    (2) Effective date. Paragraph (c) of this section applies to taxable 
years of a partnership beginning after December 31, 1999.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 8841, 64 FR 
61502, Nov. 12, 1999]



Sec. 1.6065-1  Verification of returns.

    (a) Persons signing returns. If a return, declaration, statement, or 
other document made under the provisions of subtitle A or F of the Code, 
or the regulation thereunder, with respect to any tax imposed by 
subtitle A of the Code is required by the regulations contained in this 
chapter, or the form and instructions, issued with respect to such 
return, declaration, statement, or other document, to contain or be 
verified by a written declaration that it is made under the penalties of 
perjury, such return, declaration, statement, or other document shall be 
so verified by the person signing it.
    (b) Persons preparing returns--(1) In general. Except as provided in 
subparagraph (2) of this paragraph, if a return, declaration, statement, 
or other document is prepared for a taxpayer by another person for 
compensation or as an incident to the performance of other services for 
which such person receives compensation, and the return, declaration, 
statement, or other document requires that it shall contain or be 
verified by a written declaration that it is prepared under the 
penalties of perjury, the preparer must so verify the return, 
declaration, statement, or other document. A person who renders mere 
mechanical assistance in the preparation of a return, declaration, 
statement, or other document as, for example, a stenographer or typist, 
is not considered as preparing the return, declaration, statement, or 
other document.
    (2) Exception. The verification required by subparagraph (1) of this 
paragraph is not required on returns, declarations, statements, or other 
documents which are prepared:
    (i) For an employee either by his employer or by an employee 
designated for such purpose by the employer, or

[[Page 514]]

    (ii) For an employer as a usual incident of the employment of one 
regularly or continuously employed by such employer.

[T.D. 6364, 24 FR 1196, Feb. 17, 1959]

               time for filing returns and other documents



Sec. 1.6071-1  Time for filing returns and other documents.

    (a) In general. Whenever a return, statement, or other document is 
required to be made under the provisions of subtitle A or F of the Code, 
or the regulations thereunder, with respect to any tax imposed by 
subtitle A of the Code, and the time for filing such return, statement, 
or other document is not provided for by the Code, it shall be filed at 
the time prescribed by the regulations contained in this chapter with 
respect to such return, statement, or other document.
    (b) Return for a short period. In the case of a return with respect 
to tax under subtitle A of the Code for a short period (as defined in 
section 443), the district director or director of the Internal Revenue 
Service Center may, upon a showing by the taxpayer of unusual 
circumstances, prescribe a time for filing the return for such period 
later than the time when such return would otherwise be due. However, 
the district director or director of the Internal Revenue Service Center 
may not extend the time when the return for a DISC (as defined in 
section 992(a)(1)) must be filed, as specified in section 6072(b).
    (c) Time for filing certain information returns. (1) For provisions 
relating to the time for filing returns of partnership income, see 
paragraph (e)(2) of Sec. 1.6031-1.
    (2) For provisions relating to the time for filing information 
returns by banks with respect to common trust funds, see Sec. 1.6032-1.
    (3) For provisions relating to the time for filing information 
returns by certain organizations exempt from taxation under section 
501(a), see paragraph (e) of Sec. 1.6033-1.
    (4) For provisions relating to the time for filing returns by trusts 
claiming charitable deductions under section 642(c), see paragraph (c) 
of Sec. 1.6034-1.
    (5) [Reserved{time} 
    (6) For provisions relating to the time for filing information 
returns with respect to certain stock option transactions, see paragraph 
(c) of Sec. 1.6039-1.
    (7) For provisions relating to the time for filing information 
returns by persons making certain payments, see Sec. 1.6041-2(a)(3) and 
Sec. 1.6041-6.
    (8) For provisions relating to the time for filing information 
returns regarding payments of dividends, see Sec. 1.6042-2(c).
    (9) For provisions relating to the time for filing information 
returns by corporations with respect to contemplated dissolution or 
liquidations, see paragraph (a) of Sec. 1.6043-1.
    (10) For provisions relating to the time for filing information 
returns by corporations with respect to distributions in liquidation, 
see paragraph (a) of Sec. 1.6043-2.
    (11) For provisions relating to the time for filing information 
returns with respect to payments of patronage dividends, see Sec. 
1.6044-2(d).
    (12) For provisions relating to the time for filing information 
returns with respect to formation or reorganization of foreign 
corporations, see Sec. 1.6046-1.
    (13) For provisions relating to the time for filing information 
returns regarding certain payments of interest, see Sec. 1.6049-4(g).
    (14) For provisions relating to the time for filing information 
returns with respect to payment of wages in the form of group-term life 
insurance, see paragraph (b) of Sec. 1.6052-1.
    (15) For provisions relating to the time for filing an annual 
information return on Form 1042-S, ``Foreign Person's U.S. Source Income 
subject to Withholding,'' or Form 8805, ``Foreign Partner's Information 
Statement of Section 1446 Withholding Tax,'' for any tax withheld under 
chapter 3 of the Internal Revenue Code (relating to withholding of tax 
on nonresident aliens and foreign corporations and tax-free covenant 
bonds), see Sec. 1.1461-1(c) and Sec. 1.1446-3(d).
    (16) For provisions relating to the time for filing the annual 
information

[[Page 515]]

return on Form 1042S of the tax withheld under chapter 3 of the Code 
(relating to withholding of tax on nonresident aliens and foreign 
corporations and tax-free covenant bonds), see paragraph (c) of Sec. 
1.1461-2.
    (d) Effective/Applicability date. The references to Form 8805 and 
Sec. 1.1446-3(d) in paragraph (c)(15) of this section shall apply to 
partnership taxable years beginning after April 29, 2008.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6887, 31 FR 
8814, June 24, 1966; T.D. 6908, 31 FR 16775, Dec. 31, 1966; T.D. 7284, 
38 FR 20829, Aug. 3, 1973; T.D. 7533, 43 FR 6604, Feb. 15, 1978; T.D. 
8734, 62 FR 53492, Oct. 14, 1997; T.D. 9394, 73 FR 23085, Apr. 29, 2008; 
T.D. 9849, 84 FR 9237, Mar. 14, 2019]



Sec. 1.6072-1  Time for filing returns of individuals, estates, 
and trusts.

    (a) In general--(1) Returns of income for individuals, estates and 
trusts. Except as provided in paragraphs (b) and (c) of this section, 
returns of income required under sections 6012, 6013, 6014, and 6017 of 
individuals, estates, domestic trusts, and foreign trusts having an 
office or place of business in the United States (including unrelated 
business tax returns of such trusts referred to in section 511(b)(2)) 
shall be filed on or before the fifteenth day of the fourth month 
following the close of the taxable year.
    (2) Return of trust, or portion of a trust, treated as owned by a 
decedent--(i) In general. In the case of a return of a trust, or portion 
of a trust, that was treated as owned by a decedent under subpart E 
(section 671 and following), part I, subchapter J, chapter 1 of the 
Internal Revenue Code as of the date of the decedent's death that is 
filed in accordance with Sec. 1.671-4(a) for the fractional part of the 
year ending with the date of the decedent's death, the due date of such 
return shall be the fifteenth day of the fourth month following the 
close of the 12-month period which began with the first day of the 
decedent's taxable year.
    (ii) Effective date. This paragraph (a)(2) applies to taxable years 
ending on or after December 24, 2002.
    (b) Decedents. In the case of a final return of a decedent for a 
fractional part of a year, the due date of such return shall be the 
fifteenth day of the fourth month following the close of the 12-month 
period which began with the first day of such fractional part of the 
year.
    (c) Nonresident alien individuals and foreign trusts. The income tax 
return of a nonresident alien individual (other than one treated as a 
resident under section 6013 (g) or (h)) and of a foreign trust which 
does not have an office or place of business in the United States 
(including unrelated business tax returns of such trusts referred to in 
section 511(b)(2)0 shall be filed on or before the fifteenth day of the 
sixth month following the close of the taxable year. However, a 
nonresident alien individual who for the taxable year has wages subject 
to withholding under chapter 24 of the Code shall file his income tax 
return on or before the fifteenth day of the fourth month following the 
close of the taxable year.
    (d) Last day for filing return. For provisions relating to the time 
for filing a return where the last day for filing falls on Saturday, 
Sunday, or a legal holiday, see section 7503 and Sec. 301.7503-1 of 
this chapter (Regulations on Procedure and Administration).

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 7426, 41 FR 
33263, Aug. 9, 1976; T.D. 7670, 45 FR 6931, Jan. 31, 1980; T.D. 9032, 67 
FR 78382, Dec. 24, 2002]



Sec. 1.6072-2  Time for filing returns of corporations.

    (a) Domestic and certain foreign corporations--(1) In general--(i) C 
corporations. Except as provided in paragraph (a)(2) of this section, 
the income tax return required under section 6012 of a domestic C 
corporation (as defined in section 1361(a)(2)) or of a foreign C 
corporation having an office or place of business in the United States 
shall be filed on or before the fifteenth day of the fourth month 
following the close of the taxable year.
    (ii) S corporations. The income tax return required under sections 
6012 and 6037 of an S corporation (as defined in section 1361(a)(1)) 
shall be filed on or before the fifteenth day of the third month 
following the close of the taxable year.
    (2) Exception. For taxable years beginning before January 1, 2026, 
the income tax return of a C corporation described in paragraph 
(a)(1)(i) of this

[[Page 516]]

section that has a taxable year that ends on June 30 shall be filed on 
or before the fifteenth day of the third month following the close of 
the taxable year. For purposes of this paragraph (a)(2), the return for 
a short period (within the meaning of section 443) that ends on any day 
in June shall be treated as the return for a taxable year that ends on 
June 30.
    (b) Foreign corporations not having an office or place of business 
in the United States. The income tax return of a foreign corporation 
which does not have an office or place of business in the United States 
shall be filed on or before the fifteenth day of the sixth month 
following the close of the taxable year.
    (c) Exempt organizations. For taxable years beginning after November 
10, 1978, the income tax return required under section 6012 and Sec. 
1.6012-2(e) of an organization exempt from taxation under section 501(a) 
(other than an employee's trust under section 401(a)) shall be filed on 
or before the fifteenth day of the fifth month following the close of 
the organization's taxable year.
    (d) Cooperative organizations. The income tax return of the 
following cooperative organizations shall be filed on or before the 
fifteenth day of the ninth month following the close of the taxable 
year:
    (1) Section 521 associations. A farmers', fruit growers', or like 
association, organized and operated in compliance with the requirements 
of section 521 and Sec. 1.521-1; and
    (2) Section 1381 corporations. For a taxable year beginning after 
December 31, 1962, a corporation described in section 1381(a)(2), which 
is under a valid enforceable written obligation to pay patronage 
dividends (as defined in section 1388(a) and Sec. 1.1388-1(a)) in an 
amount equal to at least 50 percent of its net earnings from business 
done with or for its patrons, or which paid patronage dividends in such 
an amount out of the net earnings from business done with or for patrons 
during the most recent taxable year for which it had such net earnings. 
Net earnings for purposes of this paragraph (d)(2) shall not be reduced 
by any taxes imposed by subtitle A of the Internal Revenue Code and 
shall not be reduced by dividends paid on capital stock or other 
proprietary interest.
    (e) DISC's and former DISC's. The return required under section 
6011(c)(2) of a corporation which is a DISC (as defined in section 
992(a) shall be filed on or before the 15th day of the 9th month 
following the close of the taxable year. For the rule that a DISC may 
not have an extension of time in which to file such return, see 
Sec. Sec. 1.6071-1(b), 1.6081-1(a), and 1.6081-3(e). The return 
required under Sec. 1.6011-2(b)(1) by a former DISC shall be filed at 
the time it is required to file its income tax return.
    (f) Cross references. For provisions relating to the time for filing 
a return where the last day for filing falls on Saturday, Sunday, or a 
legal holiday, see section 7503 and Sec. 301.7503-1 of this chapter 
(Regulations on Procedure and Administration). For provisions relating 
to the fixing of a later time for filing in the case of a return for a 
short period, see paragraph (b) of Sec. 1.6071-1. For provisions 
relating to time for filing consolidated returns and separate returns 
for short periods not included in consolidated returns, see Sec. Sec. 
1.1502-75 and 1.1502-76.
    (g) Applicability date. This section applies to returns filed on or 
after January 30, 2020. Section 1.6072-2T (as contained in 26 CFR part 
1, revised April 2019) applies to returns before January 30, 2020.

[T.D. 6500, 25 FR 12133, Nov. 26, 1960, as amended by T.D. 6643, 28 FR 
3163, Apr. 2, 1963; T.D. 7244, 37 FR 28897, Dec. 30, 1972; T.D. 7533, 43 
FR 6604, Feb. 15, 1978; T.D. 7896, 48 FR 23818, May 27, 1983; T.D. 9821, 
82 FR 33445, July 20, 2017; T.D. 9892, 85 FR 5326, Jan. 30, 2020]



Sec. 1.6072-3  Income tax due dates postponed in case of China 
Trade Act corporations.

    (a) With respect to a taxable year beginning after December 31, 
1948, and ending before October 1, 1956, the income tax return of any 
corporation organized under the China Trade Act of 1922 (15 U.S.C. ch. 
4), as amended, shall not become due until December 31, 1956, provided 
that during any such taxable year conditions in China have been 
generally so unsettled as to militate against the normal commercial 
operations and corporate activities of

[[Page 517]]

such corporation. However, the postponement of the due date shall not 
apply to an income tax return for any such taxable year if:
    (1) The books of account and business records are available so as to 
permit the filing of a proper return, and the corporation has otherwise 
been in a position to carry on its commercial operations and corporate 
activities and to make a proper distribution of its earnings or profits, 
if any, so as to permit the certification required by section 941(b); or
    (2) All the commercial operations and corporate activities of such 
corporation have been carried on in Hong Kong, Macao, or Taiwan 
(Formosa).
    (b) Notwithstanding the provisions of paragraph (a) (1) or (2) of 
this section, the postponed due date referred to in this section will 
apply if a corporation satisfies the Commissioner that special 
circumstances exist, related to the unsettled conditions in China, which 
warrant such postponement.
    (c) The postponed due date provided for in this section is expressly 
subject to the power of the Commissioner to extend, as in other cases, 
the time for filing the income tax return. See section 6081 and the 
regulations thereunder.



Sec. 1.6072-4  Time for filing other returns of income.

    (a) Reports for recovery of excessive profits on Government 
contracts. For the time for filing annual reports by persons completing 
Government contracts, see 26 CFR (1939) 17.16 (Treasury Decision 4906, 
approved June 23, 1939), and 26 CFR (1939) 16.15 (Treasury Decision 
4909, approved June 28, 1939), as made applicable to section 1471 of the 
Internal Revenue Code of 1954 by Treasury Decision 6091, approved August 
16, 1954 (19 FR 5167, C.B. 1954-2, 47).
    (b) [Reserved]

[T.D. 6908, 31 FR 16775, Dec. 31, 1966, as amended by T.D. 9849, 84 FR 
9237, Mar. 14, 2019]



Sec. 1.6073-1  Time and place for filing declarations of estimated 
income tax by individuals.

    (a) Individuals other than farmers or fishermen. Declarations of 
estimated tax for the calendar year shall be made on or before April 
15th of such calendar year by every individual whose anticipated income 
for the year meets the requirements of section 6015(a). If, however, the 
requirements necessitating the filing of the declaration are first met, 
in the case of an individual on the calendar year basis, after April 
1st, but before June 2d of the calendar year, the declaration must be 
filed on or before June 15th; if such requirements are first met after 
June 1st and before September 2d, the declaration must be filed on or 
before September 15th; and if such requirements are first met after 
September 1st, the declaration must be filed on or before January 15th 
of the succeeding calendar year. In the case of an individual on the 
fiscal year basis, see Sec. 1.6073-2. A special rule applies to 
nonresident aliens who do not have wages subject to withholding under 
Chapter 24 of the code and are not treated as residents under section 
6013 (g) or (h) of the code. For taxable years beginning after December 
31, 1976, these aliens are not required to file a declaration of 
estimated tax before June 15th.
    (b) Farmers or fishermen--(1) In general. In the case of an 
individual on a calendar year basis:
    (i) If at least two-thirds of the individual's total estimated gross 
income from all sources for the calendar year is from farming or fishing 
(including oyster farming), or
    (ii) If at least two-thirds of the individual's total gross income 
from all sources shown on the return for the preceding taxable year was 
from farming or fishing (including oyster farming) (with respect to 
declarations of estimated tax for taxable years beginning after November 
10, 1978),


He may file a declaration of estimated tax on or before the 15th day of 
January of the succeeding calendar year in lieu of the time prescribed 
in paragraph (a) of this section. For the filing of a return in lieu of 
a declaration, see paragraph (a) of Sec. 1.6015-1.
    (2) Farmers. The estimated gross income from farming is the 
estimated income resulting from oyster farming, the cultivation of the 
soil, the raising or harvesting of any agricultural or horticultural 
commodities, and the raising of livestock, bees, or poultry. In

[[Page 518]]

other words, the requisite gross income must be derived from the 
operations of a stock, dairy, poultry, fruit, or truck farm, or 
plantation, ranch, nursery, range, orchard, or oyster bed. If an 
individual receives for the use of his land income in the form of a 
share of the crops produced thereon such income is from farming. As to 
determination of income of farmers, see sections 61 and 162 and the 
regulations thereunder.
    (3) Fishermen. The estimated gross income from fishing is the 
estimated income resulting from the catching, taking, harvesting, 
cultivating or farming of any kind of fish, shellfish (for example, 
clams and mussels), crustacea (for example, lobsters, crabs, and 
shrimps), sponges, seaweeds, or other aquatic forms of animal and 
vegetable life. The estimated gross income from fishing includes the 
income expected to be received by an officer or member of the crew of a 
vessel while the vessel is engaged in any such activity, whether or not 
the officer or member of the crew is himself so engaged, and, in the 
case of an individual who is engaged in any such activity in the employ 
of any person, the income expected to be received by such individual 
from such employment. In addition, income expected to be received for 
services performed as an ordinary incident to any such activity is 
estimated gross income from fishing. Similarly, for example, the 
estimated gross income from fishing includes income expected to be 
received from the shore services of an officer or member of the crew of 
a vessel engaged in any such activity, if such services are an ordinary 
incident to any such activity. Services performed as an ordinary 
incident to such activities include, for example, services performed in 
such cleaning, icing, and packing of fish as are necessary for the 
immediate preservation of the catch.
    (c) Nonresident aliens. Notwithstanding the provisions of paragraph 
(a) of this section, for taxable years beginning after December 31, 
1976, in the case of a nonresident alien described in section 6072(c) 
(relating to returns of nonresident aliens whose wages are not subject 
to withholding) whose estimated gross income for the calendar year meets 
the requirements of section 6015(a), a declaration of estimated tax for 
the calendar year need not be made before June 15th of such calendar 
year.
    (d) Place for filing declaration. Except as provided in paragraph 
(b) of Sec. 301.6091-1 (relating to hand-carried documents), the 
declaration of estimated tax shall be filed at the place prescribed by 
the instructions applicable to such declaration. For example, if the 
instructions applicable to a declaration provide that the declaration of 
a taxpayer located in North Carolina be filed with the Director, 
Internal Revenue Service Center, Chamblee, Ga., such declaration shall 
be filed with the service center.
    (e) Amendment of declaration. An amended declaration of estimated 
tax may be filed during any interval between installment dates 
prescribed for the taxable year. However, no amended declaration may be 
filed until after the installment date on or before which the original 
declaration was filed and only one amended declaration may be filed 
during each interval between installment dates. Except as provided in 
paragraph (b) of Sec. 301.6091-1 (relating to hand-carried documents), 
an amended declaration shall be filed with the internal revenue officer 
with whom the original declaration was filed.

[T.D. 6678, 28 FR 10516, Oct. 1, 1963, as amended by T.D. 6950, 33 FR 
5355, Apr. 4, 1968; T.D. 7670, 45 FR 6931, Jan. 31, 1980; T.D. 7719, 45 
FR 60902, Sept. 15, 1980]



Sec. 1.6073-2  Fiscal years.

    (a) Individuals other than farmers or fishermen. In the case of an 
individual on the fiscal year basis, the declaration must be filed on or 
before the 15th day of the 4th month of the taxable year. If, however, 
the requirements of section 6015(a) are first met after the 1st day of 
the 4th month and before the 2d day of the 6th month, the declaration 
must be filed on or before the 15th day of the 6th month of the taxable 
year. If such requirements are first met after the 1st day of the 6th 
month, and before the 2d day of the 9th month, the declaration must be 
filed on or before the 15th day of the 9th month of the taxable year. If 
such requirements are first met after the 1st day of the 9th month, the 
declaration must be filed on or before the 15th day of the 1st month of 
the succeeding fiscal year.

[[Page 519]]

Thus, if an individual taxpayer has a fiscal year ending on June 30, 
1956, his declaration must be filed on or before October 15, 1955, if 
the requirements of section 6015(a) are met on or before October 1, 
1955. If, however, such requirements are not met until after October 1, 
1955, and before December 2, 1955, the declaration need not be filed 
until December 15, 1955.
    (b) Farmers or fishermen. In the case of an individual on a fiscal 
year basis:
    (1) If at least two-thirds of the individual's total estimated gross 
income from all sources for the fiscal year is from farming or fishing 
(including oyster farming), or
    (2) If at least two-thirds of the individual's total gross income 
from all sources shown on the return for the preceding taxable year was 
from farming or fishing (including oyster farming) (with respect to 
declarations of estimated tax for taxable years beginning after November 
10, 1978),


he may file a declaration on or before the 15th day of the month 
immediately following the close of his taxable year, in lieu of the time 
prescribed in paragraph (a) of this section.
    (c) Nonresident aliens. Notwithstanding the provisions of paragraph 
(a) of this section, in the case of a nonresident alien described in 
section 6072(c) (relating to returns of nonresident aliens whose wages 
are not subject to withholding) whose anticipated income for the fiscal 
year meets the requirements of section 6015(a), Sec. 1.6015(a)-1, and 
Sec. 1.6015(i)-1, the declaration of estimated tax for the fiscal year 
need not be filed before the 15th day of the 6th month of such fiscal 
year.

[T.D. 6678, 28 FR 10516, Oct. 1, 1963, as amended by T.D. 7719, 45 FR 
60903, Sept. 15, 1980]



Sec. 1.6073-3  Short taxable years.

    (a) Individuals other than farmers or fishermen. In the case of 
short taxable years the declaration shall be filed on or before the 15th 
day of the 4th month of such taxable year if the requirements of section 
6015(a) are met on or before the 1st day of the 4th month of such year. 
If such requirements are first met after the 1st day of the 4th month 
but before the 2d day of the 6th month, the declaration must be filed on 
or before the 15th day of the 6th month. If such requirements are first 
met after the 1st day of the 6th month but before the 2d day of the 9th 
month, the declaration must be filed on or before the 15th day of the 
9th month. If, however, the period for which the declaration is filed is 
one of 4 months, or one of 6 months and the requirements of section 
6015(a) are not met until after the 1st day of the 4th month, or one of 
9 months and such requirements are not met until after the 1st day of 
the 6th month, the declaration may be filed on or before the 15th day of 
the succeeding taxable year.
    (b) Farmers or fishermen. In the case of an individual:
    (1) Whose current taxable year is a short taxable year and whose 
estimated gross income from farming or fishing (including oyster 
farming) is at least two-thirds of his total estimated gross income from 
all sources for such current taxable year, or
    (2) Whose taxable year preceding the current taxable year was a 
short taxable year and whose gross income from farming or fishing 
(including oyster farming) was at least two-thirds of the total gross 
income from all sources shown on the return for such preceding short 
taxable year (with respect to declarations of estimated tax for taxable 
years beginning after November 10, 1978),


he may file a declaration of estimated tax on or before the 15th day of 
the month immediately following the close of the current taxable year, 
in lieu of the time prescribed in paragraph (a) of this section.
    (c) Nonresident aliens. Notwithstanding the provisions of paragraph 
(a) of this section, in the case of a short taxable year, a nonresident 
alien described in section 6072(c) (relating to returns of nonresident 
aliens whose wages are not subject to withholding) whose anticipated 
income for the short taxable year meets the requirements of section 
6015(a). Sections 1.6015(a)-1, 1.6015(g)-1, and 1.6015(i)-1 on or before 
the 1st day of the 6th month following the beginning of such year need 
not file a declaration of estimated tax before

[[Page 520]]

the 15th day of the 6th month following the beginning of such year.

[T.D. 6678, 28 FR 10516, Oct. 1, 1963, as amended by T.D. 7719, 45 FR 
60903, Sept. 15, 1980]



Sec. 1.6073-4  Extension of time for filing declarations by 
individuals.

    (a) In general. District directors and directors of service centers 
are authorized to grant a reasonable extension of time for filing a 
declaration or an amended declaration. Except as provided in paragraph 
(b) of Sec. 301.6091-1 (relating to hand-carried documents), an 
application for an extension of time for filing such a declaration shall 
be addressed to the internal revenue officer with whom the taxpayer is 
required to file his declaration, and must contain a full recital of the 
causes for the delay. Except in the case of taxpayers who are abroad, no 
extension for filing declarations may be granted for more than 6 months.
    (b) Citizens outside of the United States. In the case of a United 
States citizen outside the United States and Puerto Rico on the 15th day 
of the 4th month of his taxable year, an extension of time for filing 
his declaration of estimated tax otherwise due on or before the 15th day 
of the 4th month of the taxable year is granted to and including the 
15th day of the 6th month of the taxable year. For purposes of applying 
this paragraph to taxable years beginning prior to January 1, 1964, 
Alaska shall be considered outside the United States.
    (c) Residents outside the United States. In the case of a U.S. 
resident living or traveling outside the United States and Puerto Rico 
on the 15th day of the 4th month of a taxable year beginning after 
December 31, 1978, an extension of time for filing the declaration of 
estimated tax otherwise due on or before the 15th day of the 4th month 
of the taxable year is granted to and including the 15th day of the 6th 
month of the taxable year.
    (d) Addition to tax applicable. An extension of time for filing the 
declaration of estimated tax automatically extends the time for paying 
the estimated tax (without interest) for the same period. However, such 
extension does not relieve the taxpayer from the addition to the tax 
imposed by section 6654, and the period of the underpayment will be 
determined under section 6654(c) without regard to such extension.

[T.D. 6500, 25 FR 12008, Nov. 26, 1960, as amended by T.D. 6638, 28 FR 
1765, Feb. 26, 1963; T.D. 6950, 33 FR 5355, Apr. 4, 1968; T.D. 7736, 45 
FR 76143, Nov. 18, 1980]



Sec. 1.6074-1  Time and place for filing declarations of estimated
income tax by corporations.

    (a) Taxable years beginning on or before December 31, 1963. For 
taxable years ending on or after December 31, 1955, and beginning on or 
before December 31, 1963, declarations of estimated tax for the taxable 
year shall be filed on or before the 15th day of the 9th month of such 
year by every corporation whose then anticipated income tax liability 
under section 11 or 1201(a), or subchapter L, chapter 1 of the Code, for 
the year meets the requirements of section 6016(a). If, however, the 
requirements necessitating the filing of a declaration are first met 
after the last day of the 8th month and before the first day of the 12th 
month of the taxable year the declaration shall be filed on or before 
the 15th day of the 12th month of the taxable year. If, however, the 
requirements of section 6016(a) are not met before the first day of the 
12th month of the taxable year, no declaration need be filed for such 
year.
    (b) Taxable years beginning after December 31, 1963. A declaration 
of estimated tax for a taxable year beginning after December 31, 1963, 
required of a corporation by section 6016 shall be filed as follows:

------------------------------------------------------------------------
  If the requirements of section 6016 are     The declaration shall be
                first met--                     filed on or before--
------------------------------------------------------------------------
before the 1st day of the 4th month of the  the 15th day of the 4th
 taxable year.                               month of the taxable year
after the last day of the 3d month and      the 15th day of the 67th
 before the 1st day of the 6th month of      month of the taxable year
 the taxable year.
after the last day of the 5th month and     the 15th day of the 9th
 before the 1st day of the 9th month of      month of the taxable year
 the taxable year.
after the last day of the 8th month and     the 15th day of the 12th
 before the 1st day of the 12th month of     month of the taxable year
 the taxable year.
------------------------------------------------------------------------

    (c) Place for filing declaration. Except as provided in paragraph 
(b) of Sec. 301.6091-1 (relating to hand-carried

[[Page 521]]

documents), the declaration of estimated tax shall be filed at the place 
prescribed by the instructions applicable to such declaration. For 
example, if the instructions applicable to a declaration provide that 
the declaration of a corporation located in North Carolina be filed with 
the Director, Internal Revenue Service Center, Chamblee, Ga., such 
declaration shall be filed with the service center.
    (d) Amendment of declaration--(1) Taxable years beginning on or 
before December 31, 1963. A declaration of estimated tax for a taxable 
year beginning on or before December 31, 1963, which is filed by a 
corporation prior to the 15th day of the 12th month of the taxable year 
may be amended in the manner prescribed in Sec. 1.6016-3, at any time 
on or before such 15th day. An amended declaration shall be filed with 
the internal revenue officer with whom the original declaration was 
filed.
    (2) Taxable years beginning after December 31, 1963. In any case 
where a declaration of estimated tax for a taxable year beginning after 
December 31, 1963, has been filed, an amended declaration of estimated 
tax may be filed during any interval between installment dates 
prescribed for the taxable year. However, no amended declaration may be 
filed until after the installment date on or before which the original 
declaration was filed and only one amended declaration may be filed 
during each interval between installment dates. See Sec. 1.6016-3 for 
the manner of making an amended declaration. Except as provided in 
paragraph (b) of Sec. 301.6091-1 (relating to hand-carried documents), 
an amended declaration shall be filed with the internal revenue officer 
with whom the original declaration was filed.

[T.D. 6768, 29 FR 14922, Nov. 4, 1964, as amended by T.D. 6950, 33 FR 
5355, Apr. 4, 1968]



Sec. 1.6074-2  Time for filing declarations by corporations in case 
of a short taxable year.

    (a) Taxable years beginning on or before December 31, 1963--(1) In 
general. In the case of a short taxable year of 9 months or more 
beginning on or before December 31, 1963, where the requirements of 
section 6016(a) are met before the 1st day of the 9th month of the short 
taxable year, the declaration shall be filed on or before the 15th day 
of the 9th month of such short year. In the case of a short taxable year 
of more than 9 months, where the requirements of section 6016(a) are 
first met after the last day of the 8th month, but before the 1st day of 
the last month of the short taxable year, the declaration shall be filed 
on or before the 15th day of the last month of such short year. See 
Sec. 1.6016-4, relating to the requirement of a declaration in the case 
of a short taxable year, and paragraph (a) of Sec. 1.6154-2, relating 
to the time for payment of the estimated tax in case of a short taxable 
year.
    (2) Example. The application of the provisions of this paragraph may 
be illustrated by the following example:

    Example. A corporation which changes from a calendar year basis to a 
fiscal year basis beginning November 1, 1960, will have a short taxable 
year beginning January 1, 1960, and ending October 31, 1960. If the 
requirements of section 6016(a) are met before September 1, 1960 (the 
1st day of the 9th month), the corporation is required to file its 
declaration on or before September 15, 1960 (the 15th day of the 9th 
month). However, if the requirements of section 6016(a) are first met 
after August 31, 1960 (the last day of the 8th month), but before 
October 1, 1960 (the 1st day of the last month of the short year), the 
corporation is required to file its declaration on or before October 15, 
1960 (the 15th day of the last month of the short year).

    (b) Taxable years beginning after December 31, 1963--(1) In general. 
In the case of a short taxable year of 4 or more months which begins 
after December 31, 1963, the declaration shall be filed on or before the 
applicable date specified in paragraph (b) of Sec. 1.6074-1, except 
that in the case of a short taxable year ending after November 30, 1964, 
the declaration shall be filed on or before the 15th day of the last 
month of the short taxable year if the requirements of section 6016(a) 
are first met before the first day of such last month and the date 
specified in such paragraph (b) as applicable is not within the short 
taxable year. See Sec. 1.6016-4, relating to the requirement of a 
declaration in the case of a short taxable year, and paragraph (b) of 
Sec. 1.6154-2, relating to the time for payment of the estimated tax in 
case of a short taxable year.

[[Page 522]]

    (2) Examples. The application of the provisions of this paragraph 
may be illustrated by the following examples:

    Example 1. A corporation filing on a calendar year basis which 
changes to a fiscal year beginning September 1, 1965, will have a short 
taxable year beginning January 1, 1965, and ending August 31, 1965. If 
the requirements of section 6016(a) are met before April 1, 1965 (the 
1st day of the 4th month), the declaration of estimated tax must be 
filed on or before April 15, 1965 (the 15th day of the 4th month).
    Example 2. If, in the first example, the corporation first meets the 
requirements of section 6016(a) during July 1965, then the requirements 
of section 6016(a) were met before the first day of the last month of 
the short taxable year, and a declaration of estimated tax is required 
to be filed on or before August 15, 1965, for the short taxable year. 
However, if the corporation does not meet the requirements of section 
6016(a) until August 1, 1965, then the requirements of section 6016(a) 
were not met before the first day of the last month of the short taxable 
year, and no declaration of estimated tax is required to be filed for 
the short taxable year.

    (c) Amendment of declaration--(1) Taxable years beginning on or 
before December 31, 1963. Where a declaration of estimated tax for a 
short taxable year of more than 9 months beginning on or before December 
31, 1963, is filed before the 15th day of the last month of the short 
taxable year, an amended declaration may be filed any time on or before 
such 15th day.
    (2) Taxable years beginning after December 31, 1963. Where a 
declaration of estimated tax for a short taxable year beginning after 
December 31, 1963, has been filed, an amended declaration may be filed 
during any interval between installment dates. However, no amended 
declaration for a short taxable year may be filed until after the 
installment date on or before which the original declaration was filed 
and only one amended declaration may be filed during each interval 
between installment dates. For purposes of this subparagraph the term 
``installment date'' includes the 15th day of the last month of a short 
taxable year if such 15th day does not fall on a prescribed installment 
date.

[T.D. 6768, 29 FR 14923, Nov. 4, 1964]



Sec. 1.6074-3  Extension of time for filing declarations by
corporations.

    (a) In general. District directors and directors of service centers 
are authorized to grant a reasonable extension of time for filing a 
declaration or an amended declaration. Except as provided in paragraph 
(b) of Sec. 301.6091-1 (relating to hand-carried documents), an 
application by a corporation for an extension of time for filing such a 
declaration shall be addressed to the internal revenue officer with whom 
the corporation is required to file its declaration and must contain a 
full recital of the causes for the delay.
    (b) Addition to tax applicable. An extension of time granted to a 
corporation for filing a declaration of estimated tax automatically 
extends the time for paying the estimated tax (without interest) for the 
same period. However, such extension does not relieve the corporation 
from the addition to the tax imposed by section 6655, and the period of 
the underpayment will be determined under section 6655(c) without regard 
to such extension.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6950, 33 FR 
5355, Apr. 4, 1968]

                  Extension of Time for Filing Returns



Sec. 1.6081-1  Extension of time for filing returns.

    (a) In general. The Commissioner is authorized to grant a reasonable 
extension of time for filing any return, declaration, statement, or 
other document that relates to any tax imposed by subtitle A of the 
Internal Revenue Code (Code) and that is required under the provisions 
of subtitle A or F of the Code. However, other than in the case of 
taxpayers who are abroad or as specified in section 6081(b), such 
extensions of time shall not be granted for more than six months, and 
the extension of time for filing the return of a DISC (as defined in 
section 992(a)), as specified in section 6072(b), shall not be granted. 
Except in the case of an extension of time pursuant to Sec. 1.6081-5, 
an extension of time for filing an income tax return shall not operate 
to extend the time for the payment of the tax unless

[[Page 523]]

specified to the contrary in the extension. For rules relating to 
extensions of time for paying tax, see Sec. 1.6161-1.
    (b) Application for extension of time--(1) In general. Under other 
sections in this chapter, certain taxpayers may request an automatic 
extension of time to file certain returns. Except in undue hardship 
cases, no extension of time to file a return will be allowed under this 
section until an automatic extension of time to file the return has been 
allowed under the applicable section. No extension of time to file a 
return will be granted under this section for a period of time greater 
than that provided for by automatic extension. A taxpayer desiring an 
extension of the time for filing a return, statement, or other document 
shall submit an application for extension on or before the due date of 
such return, statement, or other document. If a form exists for the 
application for an extension, the taxpayer should use the form; however, 
taxpayers may apply for an extension in a letter that includes the 
information required by this paragraph. Except as provided in Sec. 
301.6091-1(b) of this chapter (relating to hand-carried documents), the 
taxpayer should make the application for extension to the Internal 
Revenue Service office where such return, statement, or other document 
is required to be filed. Except for requests for automatic extensions of 
time to file certain returns provided for elsewhere in this chapter, the 
application must be in writing, signed by the taxpayer or his duly 
authorized agent, and must clearly set forth--
    (i) The particular tax return, information return, statement, or 
other document, including the taxable year or period thereof, for which 
the taxpayer requests an extension; and
    (ii) An explanation of the reasons for requesting the extension to 
aid the internal revenue officer in determining whether to grant the 
request.
    (2) Taxpayer unable to sign. In any case in which a taxpayer is 
unable, by reason of illness, absence, or other good cause, to sign a 
request for an extension, any person standing in close personal or 
business relationship to the taxpayer may sign the request on his 
behalf, and shall be considered as a duly authorized agent for this 
purpose, provided the request sets forth the reasons for a signature 
other than the taxpayer's and the relationship existing between the 
taxpayer and the signer.
    (c) Applicability date. This section applies to requests for 
extension of time to file returns on or after January 30, 2020. Section 
1.6081-1T (as contained in 26 CFR part 1, revised April 2019) applies to 
requests for extension of time to file returns before January 30, 2020.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6581, 26 FR 
11678, Dec. 6, 1961; T.D. 6950, 33 FR 5355, Apr. 4, 1968; T.D. 7260, 38 
FR 4258, Feb. 12, 1973; T.D. 7533, 43 FR 6604, Feb. 15, 1978; T.D. 7651, 
44 FR 61597, Oct. 26, 1979; T.D. 8241, 54 FR 7762, Feb. 23, 1989; T.D. 
9163, 69 FR 70548, Dec. 7, 2004; T.D. 9407, 73 FR 37365, July 1, 2008; 
T.D. 9821, 82 FR 33446, July 20, 2017; T.D. 9892, 85 FR 5326, Jan. 30, 
2020]



Sec. 1.6081-2  Automatic extension of time to file certain returns 
filed by partnerships.

    (a) In general. A partnership required to file Form 1065, ``U.S. 
Partnership Return of Income,'' or Form 8804, ``Annual Return for 
Partnership Withholding Tax,'' for any taxable year will be allowed an 
automatic six-month extension of time to file the return after the date 
prescribed for filing the return if the partnership files an application 
under this section in accordance with paragraph (b) of this section. No 
additional extension will be allowed pursuant to Sec. 1.6081-1(b) 
beyond the automatic six-month extension provided by this section. In 
the case of a partnership described in Sec. 1.6081-5(a)(1), the 
automatic extension of time to file allowed under this section runs 
concurrently with an extension of time to file granted pursuant to Sec. 
1.6081-5.
    (b) Requirements. To satisfy this paragraph (b), the partnership 
must--
    (1) Submit a complete application on Form 7004, ``Application for 
Automatic Extension of Time to File Certain Business Income Tax, 
Information, and Other Returns,'' or in any other manner prescribed by 
the Commissioner;
    (2) File the application on or before the later of--
    (i) The date prescribed for filing the return of the partnership; or
    (ii) The expiration of any extension of time to file granted under 
Sec. 1.6081-5(a); and

[[Page 524]]

    (3) File the application with the Internal Revenue Service office 
designated in the application's instructions.
    (c) Payment of section 7519 amount. An automatic extension of time 
for filing a partnership return of income granted under paragraph (a) of 
this section does not extend the time for payment of any amount due 
under section 7519, relating to required payments for entities electing 
not to have a required taxable year.
    (d) Section 444 election. An automatic extension of time for filing 
a partnership return of income will run concurrently with any extension 
of time for filing a return allowed because of section 444, relating to 
the election of a taxable year other than a required taxable year.
    (e) Effect of extension on partner. An automatic extension of time 
for filing a partnership return of income under this section does not 
extend the time for filing a partner's income tax return or the time for 
the payment of any tax due on a partner's income tax return.
    (f) Termination of automatic extension. The Commissioner may 
terminate an automatic extension at any time by mailing to the 
partnership a notice of termination at least 10 days prior to the 
termination date designated in such notice. The Commissioner must mail 
the notice of termination to the address shown on the Form 7004 or to 
the partnership's last known address. For further guidance regarding the 
definition of last known address, see Sec. 301.6212-2 of this chapter.
    (g) Penalties. See section 6698 for failure to file a partnership 
return.
    (h) Applicability date. This section applies to applications for an 
automatic extension of time to file the partnership returns listed in 
paragraph (a) of this section on or after January 30, 2020. Section 
1.6081-2T (as contained in 26 CFR part 1, revised April 2019) applies to 
applications for an automatic extension of time to file before January 
30, 2020.

[T.D. 9531, 76 FR 36998, June 24, 2011; T.D. 9821, 82 FR 33446, July 20, 
2017; T.D. 9892, 85 FR 5326, Jan. 30, 2020]



Sec. 1.6081-3  Automatic extension of time for filing corporation 
income tax returns.


    (a) In general. Except as provided in paragraphs (e) and (f) of this 
section, a corporation or an affiliated group of corporations filing a 
consolidated return will be allowed an automatic 6-month extension of 
time to file its income tax return after the date prescribed for filing 
the return if the following requirements are met.
    (1) An application must be submitted on Form 7004, ``Application for 
Automatic Extension of Time to File Certain Business Income Tax, 
Information, and Other Returns,'' or in any other manner prescribed by 
the Commissioner.
    (2) The application must be filed on or before the date prescribed 
for the filing of the return of the corporation (or the consolidated 
return of the affiliated group of corporations) with the Internal 
Revenue Service office designated in the application's instructions.
    (3) The corporation (or affiliated group of corporations filing a 
consolidated return) must remit the amount of the properly estimated 
unpaid tax liability on or before the date prescribed for payment.
    (4) The application must include a statement listing the name and 
address of each member of the affiliated group if the affiliated group 
will file a consolidated return. Upon the timely filing of Form 7004, 
the 6-month extension of time to file shall be considered as granted to 
the affiliated group for the filing of its consolidated return or for 
the filing of each member's separate return.
    (b) No extension of time for the payment of tax. Any automatic 
extension of time for filing a corporation income tax return granted 
under paragraph (a) of this section shall not operate to extend the time 
for payment of any tax due on such return.
    (c) Termination of automatic extension. The Commissioner may 
terminate an automatic extension at any time by mailing a notice of 
termination to the corporation (parent corporation in the case of an 
affiliated group of corporations filing a consolidated return). The 
notice shall be mailed at least 10 days

[[Page 525]]

prior to the termination date designated in such notice. The notice of 
termination shall be sufficient for all purposes when mailed to the 
corporation at the address shown on Form 7004 or to the corporation's 
last known address. For further guidance regarding the definition of 
last known address, see Sec. 301.6212-2 of this chapter.
    (d) No extension for DISCs. Paragraphs (a) through (c) of this 
section shall not apply to returns filed by a DISC pursuant to section 
6011(c)(2).
    (e) Exception. In the case of any return for a taxable year of a C 
corporation that ends on June 30 and begins before January 1, 2026, the 
first sentence of paragraph (a) of this section shall be applied by 
substituting ``7-month'' for ``6-month.'' For purposes of this paragraph 
(e), the return for a short period (within the meaning of section 443) 
that ends on any day in June shall be treated as the return for a 
taxable year that ends on June 30.
    (f) Cross reference. For provisions relating to extensions of time 
to file Form 1120-POL, ``U.S. Income Tax Return for Certain Political 
Organizations,'' see Sec. 1.6081-9.
    (g) Applicability date. This section applies to requests for 
extension of time to file corporation income tax returns on or after 
January 30, 2020. Section 1.6081-3T (as contained in 26 CFR part 1, 
revised April 2019) applies to applications for an automatic extension 
of time to file before January 30, 2020.

[T.D. 9163, 69 FR 70548, Dec. 7, 2004, as amended by T.D. 9229, 70 FR 
67359, Nov. 7, 2005; T.D. 9407, 73 FR 37366, July 1, 2008; T.D. 9821, 82 
FR 33446, July 20, 2017; T.D. 9892, 85 FR 5326, Jan. 30, 2020]



Sec. 1.6081-4  Automatic extension of time for filing individual
income tax return.

    (a) In general. An individual who is required to file an individual 
income tax return will be allowed an automatic 6-month extension of time 
to file the return after the date prescribed for filing the return if 
the individual files an application under this section in accordance 
with paragraph (b) of this section. In the case of an individual 
described in Sec. 1.6081-5(a)(5) or (6), the automatic 6-month 
extension will run concurrently with the extension of time to file 
granted pursuant to Sec. 1.6081-5.
    (b) Requirements. To satisfy this paragraph (b), an individual 
must--
    (1) Submit a complete application on Form 4868, ``Application for 
Automatic Extension of Time To File U.S. Individual Income Tax Return,'' 
or in any other manner prescribed by the Commissioner;
    (2) File the application on or before the later of--
    (i) The date prescribed for filing the return; or
    (ii) The expiration of any extension of time to file granted 
pursuant to Sec. 1.6081-5;
    (3) File the application with the Internal Revenue Service office 
designated in the application's instructions; and
    (4) Show the full amount properly estimated as tax for the taxable 
year.
    (c) No extension of time for the payment of tax. An automatic 
extension of time for filing a return granted under paragraph (a) of 
this section will not extend the time for payment of any tax due on such 
return.
    (d) Termination of automatic extension. The Commissioner may 
terminate an automatic extension at any time by mailing to the 
individual a notice of termination at least 10 days prior to the 
termination date designated in such notice. The Commissioner must mail 
the notice of termination to the address shown on the Form 4868 or to 
the individual's last known address. For further guidance regarding the 
definition of last known address, see Sec. 301.6212-2 of this chapter.
    (e) Penalties. See section 6651 for failure to file an individual 
income tax return or failure to pay the amount shown as tax on the 
return. In particular, see Sec. 301.6651-1(c)(3) of this chapter 
(relating to a presumption of reasonable cause in certain circumstances 
involving an automatic extension of time for filing an individual income 
tax return).
    (f) Effective/applicability dates. This section is applicable for 
applications for an automatic extension of time to file an individual 
income tax return filed after July 1, 2008.

[T.D. 9407, 73 FR 37366, July 1, 2008]

[[Page 526]]



Sec. 1.6081-5  Extensions of time in the case of certain partnerships,
corporations and U.S. citizens and residents.

    (a) An extension of time for filing returns of income and for paying 
any tax shown on the return is hereby granted to and including the 
fifteenth day of the sixth month following the close of the taxable year 
in the case of--
    (1) Partnerships, which are required under section 6072(b) to file 
returns on the fifteenth day of the third month following the close of 
the taxable year of the partnership, that keep their records and books 
of account outside the United States and Puerto Rico;
    (2) Domestic corporations which transact their business and keep 
their records and books of account outside the United States and Puerto 
Rico;
    (3) Foreign corporations which maintain an office or place of 
business within the United States;
    (4) Domestic corporations whose principal income is from sources 
within the possessions of the United States;
    (5) United States citizens or residents whose tax homes and abodes, 
in a real and substantial sense, are outside the United States and 
Puerto Rico; and
    (6) United States citizens and residents in military or naval 
service on duty, including non-permanent or short term duty, outside the 
United States and Puerto Rico.
    (b) In order to qualify for the extension under this section--
    (1) A statement must be attached to the return showing that the 
person for whom the return is made is a person described in paragraph 
(a) of this section; or
    (2) If a person described in paragraph (a) of this section requests 
additional time to file, the person must request the extension on or 
before the fifteenth day of the sixth month following the close of the 
taxable year and check the appropriate box on Form 4868, ``Application 
for Automatic Extension of Time To File a U.S. Individual Income Tax 
Return,'' or Form 7004, ``Application for Automatic Extension of Time to 
File Certain Business Income Tax, Information, and Other Returns,'' 
whichever is applicable, or in any other manner prescribed by the 
Commissioner.
    (c) For purposes of paragraph (a)(5) of this section, whether a 
person is a United States resident will be determined in accordance with 
section 7701(b) of the Code. The term ``tax home,'' as used in paragraph 
(a)(5), will have the same meaning which it has for purposes of section 
162(a)(2) (relating to travel expenses away from home). If a person does 
not have a regular or principal place of business, that person's tax 
home will be considered to be his regular place of abode in a real and 
substantial sense.
    (d) In order to qualify for the extension under paragraph (a)(6), 
the assigned tour of duty outside the United States and Puerto Rico must 
be for a period that includes the entire due date of the return.
    (e) A person otherwise qualifying for the extension under paragraph 
(a)(5) or paragraph (a)(6) shall not be disqualified because he is 
physically present in the United States or Puerto Rico at any time, 
including the due date of the return.
    (f) This section applies to returns filed on or after January 30, 
2020. Section 1.6081-5T (as contained in 26 CFR part 1, revised April 
2019) applies to applications for an automatic extension of time to file 
returns before January 30, 2020.

[T.D. 8312, 55 FR 37227, Sept. 10, 1990; 55 FR 41310, Oct. 10, 1990, as 
amended by T.D. 9163, 69 FR 70550, Dec. 7, 2004; T.D. 9229, 70 FR 67359, 
Nov. 7, 2005; T.D. 9407, 73 FR 37366, July 1, 2008; T.D. 9821, 82 FR 
33447, July 20, 2017; T.D. 9892, 85 FR 5326, Jan. 30, 2020]



Sec. 1.6081-6  Automatic extension of time to file estate or trust 
income tax return.

    (a) In general. (1) Except as provided in paragraph (a)(2) of this 
section, any estate, including but not limited to an estate defined in 
section 2031, or trust required to file an income tax return on Form 
1041, ``U.S. Income Tax Return for Estates and Trusts,'' will be allowed 
an automatic five and one-half month extension of time to file the 
return after the date prescribed for filing the return if the estate or 
trust files an application under this section in accordance with 
paragraph (b) of this section. No additional extension will be allowed 
pursuant to Sec. 1.6081-1(b) beyond

[[Page 527]]

the automatic five and one-half month extension provided by this 
section.
    (2) A bankruptcy estate that is created when an individual debtor 
files a petition under either chapter 7 or chapter 11 of title 11 of the 
U.S. Code that is required to file an income tax return on Form 1041, 
``U.S. Income Tax Return for Estates and Trusts,'' and an estate or 
trust required to file an income tax return on Form 1041-N, ``U.S. 
Income Tax Return for Electing Alaska Native Settlement,'' or Form 1041-
QFT, ``U.S. Income Tax Return for Qualified Funeral Trusts'' for any 
taxable year will be allowed an automatic 6-month extension of time to 
file the return after the date prescribed for filing the return if the 
estate files an application under this section in accordance with 
paragraph (b) of this section.
    (b) Requirements. To satisfy this paragraph (b), an estate or trust 
must--
    (1) Submit a complete application on Form 7004, ``Application for 
Automatic Extension of Time to File Certain Business Income Tax, 
Information, and Other Returns,'' or in any other manner prescribed by 
the Commissioner;
    (2) File the application on or before the date prescribed for filing 
the return with the Internal Revenue Service office designated in the 
application's instructions; and
    (3) Show the amount properly estimated as tax for the estate or 
trust for the taxable year.
    (c) No extension of time for the payment of tax. An automatic 
extension of time for filing a return granted under paragraph (a) of 
this section will not extend the time for payment of any tax due on such 
return.
    (d) Effect of extension on beneficiary. An automatic extension of 
time to file an estate or trust income tax return under this section 
will not extend the time for filing the income tax return of a 
beneficiary of the estate or trust or the time for the payment of any 
tax due on the beneficiary's income tax return.
    (e) Termination of automatic extension. The Commissioner may 
terminate an automatic extension at any time by mailing to the estate or 
trust a notice of termination at least 10 days prior to the termination 
date designated in such notice. The Commissioner must mail the notice of 
termination to the address shown on the Form 7004 or to the estate or 
trust's last known address. For further guidance regarding the 
definition of last known address, see Sec. 301.6212-2 of this chapter.
    (f) Penalties. See section 6651 for failure to file an estate or 
trust income tax return or failure to pay the amount shown as tax on the 
return.
    (g) Applicability date. This section applies to applications for an 
automatic extension of time to file an estate or trust income tax return 
on or after January 30, 2020. Section 1.6081-6T (as contained in 26 CFR 
part 1, revised April 2019) applies to applications for an automatic 
extension of time to file a return before January 30, 2020.

[T.D. 9531, 76 FR 36999, June 24, 2011, as amended by T.D. 9821, 82 FR 
33447, July 20, 2017; T.D. 9892, 5326, Jan. 30, 2020]



Sec. 1.6081-7  Automatic extension of time to file Real Estate
Mortgage Investment Conduit (REMIC) income tax return.

    (a) In general. A Real Estate Mortgage Investment Conduit (REMIC) 
required to file an income tax return on Form 1066, ``U.S. Real Estate 
Mortgage Investment Conduit Income Tax Return,'' or Form 8831, ``Excise 
Tax on Excess Inclusions of REMIC Residual Interests,'' for any taxable 
year will be allowed an automatic 6-month extension of time to file the 
return after the date prescribed for filing the return if the REMIC 
files an application under this section in accordance with paragraph (b) 
of this section.
    (b) Requirements. To satisfy this paragraph (b), a REMIC must--
    (1) Submit a complete application on Form 7004, ``Application for 
Automatic Extension of Time to File Certain Business Income Tax, 
Information, and Other Returns,'' or in any other manner prescribed by 
the Commissioner;
    (2) File the application on or before the date prescribed for filing 
the return with the Internal Revenue Service office designated in the 
application's instructions; and
    (3) Show the full amount properly estimated as tax for the REMIC for 
the taxable year.
    (c) No extension of time for the payment of tax. An automatic 
extension of time

[[Page 528]]

for filing a return granted under paragraph (a) of this section will not 
extend the time for payment of any tax due on such return.
    (d) Effect of extension on residual or regular interest holders. An 
automatic extension of time to file a REMIC income tax return under this 
section will not extend the time for filing the income tax return of a 
residual or regular interest holder of the REMIC or the time for the 
payment of any tax due on the residual or regular interest holder's 
income tax return. An automatic extension will also not extend the time 
for payment of any excise tax on excess inclusions of REMIC residual 
interests.
    (e) Termination of automatic extension. The Commissioner may 
terminate an automatic extension at any time by mailing to the REMIC a 
notice of termination at least 10 days prior to the termination date 
designated in such notice. The Commissioner must mail the notice of 
termination to the address shown on the Form 7004 or to the REMIC's last 
known address. For further guidance regarding the definition of last 
known address, see Sec. 301.6212-2 of this chapter.
    (f) Penalties. See sections 6698 and 6651 for failure to file a 
REMIC income tax return or failure to pay an amount shown as tax on the 
return.
    (g) Effective/applicability dates. This section applies to 
applications for an automatic extension of time to file REMIC income and 
excise tax returns listed in paragraph (a) of this section filed after 
July 1, 2008.

[T.D. 9407, 73 FR 37367, July 1, 2008]



Sec. 1.6081-8  Extension of time to file certain information returns.

    (a) Certain information returns eligible for an automatic extension 
of time to file--(1) Automatic extension of time to file. A person 
required to file an information return (the filer) on the forms or form 
series listed in Table 1 will be allowed one automatic 30-day extension 
of time to file the information return beyond the due date for filing, 
if the filer or the person transmitting the information return for the 
filer (the transmitter) files an application in accordance with 
paragraph (c)(1) of this section.

                       Table 1 to Paragraph (a)(1)
------------------------------------------------------------------------
        Form or form series                     Name of form
------------------------------------------------------------------------
Form W-2G.........................  ``Certain Gambling Winnings''.
Form 1042-S.......................  ``Foreign Person's U.S. Source
                                     Income Subject to Withholding''.
Form 1094-C.......................  ``Transmittal of Employer-Provided
                                     Health Insurance Offer and Coverage
                                     Information Returns''.
Form 1095-B.......................  ``Health Coverage''.
Form 1095-C.......................  ``Employer-Provided Health Insurance
                                     Offer and Coverage''.
Form 3921.........................  ``Exercise of an Incentive Stock
                                     Option Under Section 422(b)''.
Form 3922.........................  ``Transfer of Stock Acquired Through
                                     an Employee Stock Purchase Plan
                                     Under Section 423(c)''.
Form 8027.........................  ``Employer's Annual Information
                                     Return of Tip Income and Allocated
                                     Tips''.
Form 1097 series..................
Form 1098 series..................
Form 1099 series (except forms
 reporting nonemployee
 compensation).
Form 5498 series..................
------------------------------------------------------------------------

    (2) Non-automatic extension of time to file. One additional 30-day 
extension of time to file an information return on a form listed in 
paragraph (a)(1) of this section may be allowed if the filer or 
transmitter submits a request for the additional extension of time to 
file before the expiration of the automatic 30-day extension of time to 
file. No extension of time to file will be granted under this paragraph 
(a)(2) unless the filer or transmitter has first obtained an automatic 
extension of time to file under paragraph (a)(1) of this section. To 
request the additional 30-day extension of time to file, the filer or 
transmitter must satisfy the requirements of paragraph (c)(2) of this 
section. No additional extension of time to file will be allowed for an 
information return

[[Page 529]]

on a form listed in paragraph (a)(1) of this section under Sec. 1.6081-
1 beyond the extensions of time to file provided by paragraph (a)(1) of 
this section and this paragraph (a)(2).
    (b) The Form W-2 series (except Form W-2G) or forms reporting 
nonemployee compensation. Except as provided in paragraph (f) of this 
section, the filer or transmitter of an information return on the Form 
W-2 series (except Form W-2G) or a form reporting nonemployee 
compensation may only request one non-automatic 30-day extension of time 
to file the information return beyond the due date for filing it. To 
make such a request, the filer or transmitter must submit an application 
for an extension of time to file in accordance with paragraph (c)(2) of 
this section. No additional extension of time to file will be allowed 
for an information return on a form listed in this paragraph (b) under 
Sec. 1.6081-1 beyond the 30-day extension of time to file provided by 
this paragraph (b).
    (c) Requirements--(1) Automatic extension of time to file. To 
satisfy this paragraph (c)(1), an application must--
    (i) Be submitted on Form 8809, ``Request for Extension of Time to 
File Information Returns,'' or in any other manner as may be prescribed 
by the Commissioner; and
    (ii) Be filed with the Internal Revenue Service office designated in 
the application's instructions on or before the due date for filing the 
information return.
    (2) Non-automatic extension of time to file. To satisfy this 
paragraph (c)(2), a filer or transmitter must--
    (i) Submit a complete application on Form 8809, or in any other 
manner prescribed by the Commissioner, indicating that at least one of 
the criteria set forth in the forms, instructions, or other guidance for 
granting an extension applies;
    (ii) File the application with the Internal Revenue Service in 
accordance with forms, instructions, or other appropriate guidance on or 
before the due date for filing the information return (for purposes of 
paragraph (a)(2) of this section, determined with regard to the 
extension of time to file under paragraph (a)(1) of this section); and
    (iii) Sign the application under penalties of perjury.
    (d) Penalties. See sections 6652, 6693, and 6721 through 6724 of the 
Code for failure to comply with information reporting requirements on 
information returns described in this section.
    (e) No effect on time to furnish statements. An extension of time to 
file an information return under this section does not extend the time 
for furnishing a statement to the person with respect to whom the 
information is required to be reported.
    (f) Form W-2 filed on expedited basis. This section does not apply 
to an information return on a form in the W-2 series if the procedures 
authorized in Rev. Proc. 96-57 (1996-2 CB 389) (or a successor revenue 
procedure) allow an automatic extension of time to file the information 
return. See Sec. 601.601(d)(2)(ii)(b) of this chapter.
    (g) Applicability date. This section applies to requests for 
extensions of time to file information returns required to be filed 
after December 31, 2018. Section 1.6081-8T (as contained in 26 CFR part 
1, revised April 1, 2018) applies to extensions of time to file 
information returns required to be filed before January 1, 2019.

[T.D. 9838, 83 FR 38028, Aug. 3, 2018]



Sec. 1.6081-9  Automatic extension of time to file exempt or political
organization returns.

    (a) In general. An entity required to file a return on a form in the 
Form 990 series (Form 990, ``Return of Organization Exempt From Income 
Tax,'' Form 990-BL, ``Information and Initial Excise Tax Return for 
Black Lung Benefit Trusts and Certain Related Persons,'' Form 990-EZ, 
``Short Form Return of Organization Exempt From Income Tax,'' Form 990-
PF, ``Return of Private Foundation,'' and Form 990-T, ``Exempt 
Organization Business Tax Return''), Form 1041-A, ``U.S. Information 
Return-Trust Accumulation of Charitable Amounts,'' Form 1120-POL, ``U.S. 
Income Tax Return for Certain Political Organizations,'' Form 4720, 
``Return of Certain Excise Taxes Under Chapters 41 and 42 of the 
Internal Revenue Code,'' Form 5227, ``Split-Interest Trust Information 
Return,'' Form 6069,

[[Page 530]]

``Return of Excise Tax on Excess Contributions to Black Lung Benefit 
Trust Under Section 4953 and Computation of Section 192 Deduction,'' and 
Form 8870, ``Information Return for Transfers Associated With Certain 
Personal Benefit Contracts,'' will be allowed an automatic six-month 
extension of time to file the return after the date prescribed for 
filing if the entity files an application in accordance with paragraph 
(b) of this section.
    (b) Requirements. To satisfy this paragraph (b), an application for 
an automatic extension under this section must--
    (1) Be submitted on Form 7004, ``Application for Automatic Extension 
of Time to File Certain Business Income Tax, Information, and Other 
Returns'' (in the case of an extension of time to file Form 1120-POL), 
Form 8868, ``Application for Automatic Extension of Time to File an 
Exempt Organization Return'' (in the case of an extension of time to 
file any other return listed in paragraph (a) of this section), or in 
any other manner as may be prescribed by the Commissioner;
    (2) Be filed with the Internal Revenue Service office designated in 
the application's instructions on or before the date prescribed for 
filing the return;
    (3) Show the full amount properly estimated as tentative tax for the 
entity for the taxable year; and
    (4) Be accompanied by the full remittance of the amount properly 
estimated as tentative tax which is unpaid as of the date prescribed for 
the filing of the return.
    (c) Termination of automatic extension. The Commissioner may 
terminate an automatic extension at any time by mailing to the entity a 
notice of termination. The notice must be mailed at least 10 days prior 
to the termination date designated in such notice. The notice of 
termination must be mailed to the address shown on the application for 
extension or to the entity's last known address. For further guidance 
regarding the definition of last known address, see Sec. 301.6212-2 of 
this chapter.
    (d) Penalties. See sections 6651 and 6652(c) for failure to file a 
return or failure to pay the amount shown as tax on the return.
    (e) Coordination with Sec. 1.6081-1. No extension of time will be 
granted under Sec. 1.6081-1 for filing a return listed in paragraph (a) 
of this section until an automatic extension has been allowed pursuant 
to this section.
    (f) Applicability date. This section applies to requests for 
extensions of time to file returns listed in paragraph (a) of this 
section on or after January 30, 2020. Sections 1.6081-3T and 1.6081-9T 
(as contained in 26 CFR part 1, revised April 2019) apply to requests 
for extensions before January 30, 2020.

[T.D. 9163, 69 FR 70549, Dec. 7, 2004, as amended by T.D. 9821, 82 FR 
33447, July 20, 2017; T.D. 9892, 85 FR 5327, Jan. 30, 2020]



Sec. 1.6081-10  Automatic extension of time to file withholding tax 
return for U.S. source income of foreign persons.

    (a) In general. A withholding agent or intermediary required to file 
a return on Form 1042, ``Annual Withholding Tax Return for U.S. Source 
Income of Foreign Persons,'' for any taxable year will be allowed an 
automatic 6-month extension of time to file the return after the date 
prescribed for filing the return if the withholding agent or 
intermediary files an application under this section in accordance with 
paragraph (b) of this section.
    (b) Requirements. To satisfy this paragraph (b), a withholding agent 
or intermediary must--
    (1) Submit a complete application on Form 7004, ``Application for 
Automatic Extension of Time to File Certain Business Income Tax, 
Information, and Other Returns,'' or in any other manner prescribed by 
the Commissioner;
    (2) File the application on or before the date prescribed for filing 
the return with the Internal Revenue Service office designated in the 
application's instructions; and
    (3) Remit the amount of the properly estimated unpaid tax liability 
on or before the date prescribed for payment.
    (c) No extension of time for the payment of tax. An automatic 
extension of time for filing a return granted under paragraph (a) of 
this section will not extend the time for payment of any tax due on such 
return.
    (d) Termination of automatic extension. The Commissioner may 
terminate an

[[Page 531]]

automatic extension at any time by mailing to the withholding agent or 
intermediary a notice of termination at least 10 days prior to the 
termination date designated in such notice. The Commissioner must mail 
the notice of termination to the address shown on the Form 7004 or to 
the withholding agent or intermediary's last known address. For further 
guidance regarding the definition of last known address, see Sec. 
301.6212-2 of this chapter.
    (e) Penalties. See section 6651 for failure to file a return or 
failure to pay an amount shown as tax on the return.
    (f) Effective/applicability dates. This section is applicable for 
applications for an automatic extension of time to file the withholding 
tax return for U.S. source income of foreign persons return filed after 
July 1, 2008.

[T.D. 9407, 73 FR 37367, July 1, 2008]



Sec. 1.6081-11  Automatic extension of time for filing certain 
employee plan returns.

    (a) In general. An administrator or sponsor of an employee benefit 
plan required to file a return under the provisions of chapter 61 or the 
regulations under that chapter on Form 5500 (series), ``Annual Return/
Report of Employee Benefit Plan,'' will be allowed an automatic 
extension of time to file the return until the 15th day of the third 
month following the date prescribed for filing the return if the 
administrator or sponsor files an application under this section in 
accordance with paragraph (b) of this section.
    (b) Requirements. To satisfy this paragraph (b), an administrator or 
sponsor must--
    (1) Submit a complete application on Form 5558, ``Application for 
Extension of Time To File Certain Employee Plan Returns,'' or in any 
other manner as may be prescribed by the Commissioner; and
    (2) File the application with the Internal Revenue Service office 
designated in the application's instructions on or before the date 
prescribed for filing the information return.
    (c) Termination of automatic extension. The Commissioner may 
terminate an automatic extension at any time by mailing to the 
administrator or sponsor a notice of termination at least 10 days prior 
to the termination date designated in such notice. The Commissioner must 
mail the notice of termination to the address shown on the Form 5558 or 
to the administrator or sponsor's last known address. For further 
guidance regarding the definition of last known address, see Sec. 
301.6212-2 of this chapter.
    (d) Penalties. See sections 6652, 6692, and the Employee Retirement 
Income Security Act of 1974 for penalties for failure to file a timely 
and complete Form 5500.
    (e) Effective/applicability dates. This section is applicable for 
applications for an automatic extension of time to file Forms 5500 for 
plan years ending after July 1, 2008.

[T.D. 9407, 73 FR 37368, July 1, 2008]

               Place for Filing Returns or Other Documents



Sec. 1.6091-1  Place for filing returns or other documents.

    (a) In general. Except as provided in Sec. 1.6091-4, whenever a 
return, statement, or other document is required to be made under the 
provisions of subtitle A or F of the Code, or the regulations 
thereunder, with respect to any tax imposed by subtitle A of the Code, 
and the place for filing such return, statement, or other document is 
not provided for by the Code, it shall be filed at the place prescribed 
by the regulations contained in this chapter.
    (b) Place for filing certain information returns. (1) For the place 
for filing returns of partnership income, see paragraph (e)(1) of Sec. 
1.6031(a)-1.
    (2) For the place for filing information returns by banks with 
respect to common trust funds, see Sec. 1.6032-1.
    (3) For the place for filing information returns by certain 
organizations exempt from taxation under section 501(a), see paragraph 
(e) of Sec. 1.6033-1.
    (4) For the place for filing information returns by trusts claiming 
charitable deductions under section 642(c), see paragraph (c) of Sec. 
1.6034-1.
    (5) [Reserved]
    (6) For the place for filing information returns relating to certain 
stock option transactions, see paragraph (c) of Sec. 1.6039-1.

[[Page 532]]

    (7) For the place for filing returns of information reporting 
certain payments, see paragraph (a)(5) of Sec. 1.6041-2 and Sec. 
1.6041-6.
    (8) For the place for filing returns of information regarding 
payments of dividends, see paragraph (c) of Sec. 1.6042-2 (relating to 
returns for calendar years after 1962).
    (9) For the place for filing information returns by corporations 
relating to contemplated dissolution or liquidation, see paragraph (a) 
of Sec. 1.6043-1.
    (10) For the place for filing information returns by corporations 
relating to distributions in liquidation, see paragraph (a) of Sec. 
1.6043-2.
    (11) For the place for filing returns of information regarding 
payments of patronage dividends, see paragraph (d) of Sec. 1.6044-2.
    (12) For the place for filing information returns relating to 
formation or reorganization of foreign corporations, see paragraph 
(j)(2) of Sec. 1.6046-1.
    (13) For the place for filing information returns regarding certain 
payments of interest, see paragraph (c) of Sec. 1.6049-1.
    (14) For the place for filing information returns with respect to 
payment of wages in the form of group-term life insurance, see paragraph 
(b) of Sec. 1.6052-1.
    (15) For the place for filing information returns on Forms 1042-S 
with respect to certain amounts paid to foreign persons, see 
instructions to the form.
    (16) For the place for filing information returns on Form 5074 with 
respect to the allocation of individual income tax to Guam, see 
paragraph (b)(3) of Sec. 1.935-1 and paragraph (d) of Sec. 301.7654-1 
of this chapter (Regulations on Procedure and Administration).
    (17) For the place for filing information returns on Form 8805, 
``Foreign Partner's Information Statement of Section 1446 Withholding 
Tax,'' with respect to certain amounts paid on behalf of foreign 
partners, see the instructions to the form.
    (c) Effective/Applicability date. Paragraph (b)(17) of this section 
shall apply to partnership taxable years beginning after April 29, 2008.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6887, 31 FR 
8814, June 24, 1966; T.D. 6922, 32 FR 8713, June 17, 1967; T.D. 7284, 38 
FR 20829, Aug. 3, 1973; T.D. 7385, 40 FR 50264, Oct. 29, 1975; T.D. 
8734, 62 FR 53493, Oct. 14, 1997; T.D. 9156, 69 FR 55744, Sept. 16, 
2004; T.D. 9394, 73 FR 23085, Apr. 29, 2008; T.D. 9849, 84 FR 9237, Mar. 
14, 2019]



Sec. 1.6091-2  Place for filing income tax returns.

    Except as provided in Sec. 1.6091-3 (relating to certain 
international income tax returns) and Sec. 1.6091-4 (relating to 
exceptional cases):
    (a) Individuals, estates, and trusts. (1) Except as provided in 
paragraph (c) of this section, income tax returns of individuals, 
estates, and trusts shall be filed with any person assigned the 
responsibility to receive returns at the local Internal Revenue Service 
office that serves the legal residence or principal place of business of 
the person required to make the return.
    (2) An individual employed on a salary or commission basis who is 
not also engaged in conducting a commercial or professional enterprise 
for profit on his own account does not have a ``principal place of 
business'' within the meaning of this section.
    (b) Corporations. Except as provided in paragraph (c) of this 
section, income tax returns of corporations shall be filed with any 
person assigned the responsibility to receive returns in the local 
Internal Revenue Service office that serves the principal place of 
business or principal office or agency of the corporation.
    (c) Returns filed with service centers. Notwithstanding paragraphs 
(a) and (b) of this section, whenever instructions applicable to income 
tax returns provide that the returns be filed with a service center, the 
returns must be so filed in accordance with the instructions.
    (d) Hand-carried returns. Notwithstanding paragraphs (1) and (2) of 
section 6091(b) and paragraph (c) of this section:
    (1) Persons other than corporations. Returns of persons other than 
corporations which are filed by hand carrying shall be filed with any 
person assigned

[[Page 533]]

the responsibility to receive hand-carried returns in the local Internal 
Revenue Service office as provided in paragraph (a) of this section.
    (2) Corporations. Returns of corporations which are filed by hand 
carrying shall be filed with any person assigned the responsibility to 
receive hand-carried returns in the local Internal Revenue Service 
office as provided in paragraph (b) of this section.


See Sec. 301.6091-1 of this chapter (Regulations on Procedure and 
Administration) for provisions relating to the definition of hand 
carried.
    (e) Amended returns. In the case of amended returns filed after 
April 14, 1968, except as provided in paragraph (d) of this section:
    (1) Persons other than corporations. Amended returns of persons 
other than corporations shall be filed with the service center serving 
the legal residence or principal place of business of the person 
required to make the return.
    (2) Corporations. Amended returns of corporations shall be filed 
with the service center serving the principal place of business or 
principal office or agency of the corporation.
    (f) Returns of persons subject to a termination assessment. 
Notwithstanding paragraph (c) of this section:
    (1) Persons other than corporations. Returns of persons other than 
corporations with respect to whom an assessment was made under section 
6851(a) with respect to the taxable year shall be filed with any person 
assigned the responsibility to receive returns in the local Internal 
Revenue Service office as provided in paragraph (a) of this section.
    (2) Corporations. Returns of corporations with respect to whom an 
assessment was made under section 6851(a) with respect to the taxable 
year shall be filed with any person assigned the responsibility to 
receive returns in the local Internal Revenue Service office as provided 
in paragraph (b) of this section.
    (g) Returns of persons subject to a termination assessment. 
Notwithstanding paragraph (c) of this section, income tax returns of 
persons with respect to whom an income tax assessment was made under 
section 6852(a) with respect to the taxable year must be filed with any 
person assigned the responsibility to receive returns in the local 
Internal Revenue Service office as provided in paragraphs (a) and (b) of 
this section.

[T.D. 6950, 33 FR 5356, Apr. 4, 1968, as amended by T.D. 7012, 34 FR 
7690, May 15, 1969; T.D. 7495, 42 FR 33726, July 1, 1977; T.D. 7575, 43 
FR 58816, Dec. 18, 1978; T.D. 8628, 60 FR 62210, Dec. 5, 1995; T.D. 
9156, 69 FR 55744, Sept. 16, 2004; 69 FR 60222, Oct. 7, 2004]



Sec. 1.6091-3  Filing certain international income tax returns.

    The following income tax returns shall be filed as directed in the 
applicable forms and instructions:
    (a) Income tax returns on which all, or a portion, of the tax is to 
be paid in foreign currency. See Sec. Sec. 301.6316-1 to 301.6316-6 
inclusive, and Sec. Sec. 301.6316-8 and 301.6316-9 of this chapter 
(Regulations on Procedure and Administration).
    (b) Income tax returns on an individual citizen of the United States 
whose principal place of abode for the period with respect to which the 
return is filed is outside the United States. A taxpayer's principal 
place of abode will be considered to be outside the United States if his 
legal residence is outside the United States or if his return bears a 
foreign address.
    (c) Income tax returns of an individual citizen of a possession of 
the United States (whether or not a citizen of the United States) who 
has no legal residence or principal place of business in any internal 
revenue district in the United States.
    (d) Except in the case of any departing alien return under section 
6851 and Sec. 1.6851-2, the income tax return of any nonresident alien 
(other than one treated as a resident under section 6013 (g) or (h)).
    (e) The income tax return of an estate or trust the fiduciary of 
which is outside the United States and has no legal residence or 
principal place of business in any internal revenue district in the 
United States.
    (f) Income tax returns of foreign corporations.
    (g) The return by a withholding agent of the income tax required to 
be withheld at source under chapter 3 of

[[Page 534]]

the Code on nonresident aliens and foreign corporations and tax-free 
covenant bonds, as provided in Sec. 1.1461-2.
    (h) Income tax returns of persons who claim the benefits of section 
911 (relating to earned income from sources without the United States).
    (i) Income tax returns of corporations which claim the benefits of 
section 922 (relating to special deduction for Western Hemisphere trade 
corporations) except in the case of consolidated returns filed pursuant 
to the regulations under section 1502.
    (j) Income tax returns of persons who claim the benefits of section 
931 (relating to income from sources within possessions of the United 
States).
    (k) Income tax returns of persons who claim the benefits of section 
933 (relating to income from sources within Puerto Rico).
    (l) Income tax returns of corporations which claim the benefits of 
section 941 (relating to the special deduction for China Trade Act 
corporations).

[T.D. 6950, 33 FR 5357, Apr. 4, 1968, as amended by T.D. 7012, 34 FR 
7690, May 15, 1969; T.D. 7670, 45 FR 6931, Jan. 31, 1980; T.D. 9156, 69 
FR 55744, Sept. 16, 2004]



Sec. 1.6091-4  Exceptional cases.

    (a) Permission to file in office other than required office. (1) The 
Commissioner may permit the filing of any income tax return required to 
be made under the provisions of subtitle A or F of the Code, or the 
regulations in this part, in any Internal Revenue Service office, 
notwithstanding the provisions of paragraphs (1) and (2) of section 
6091(b) and Sec. Sec. 1.6091-1 to 1.6091-3, inclusive.
    (2) In cases where the Commissioner authorizes (for all purposes 
except venue) an internal revenue service center to receive returns, 
such returns pursuant to instructions issued with respect thereto, may 
be sent directly to that service center and are thereby filed there for 
all purposes except as a factor in determining venue. However, after 
initial processing all such returns shall be forwarded by the service 
center to the office with which such returns are, without regard to this 
subparagraph, required to be filed. For the sole purpose of determining 
venue, such returns are filed only with such office.
    (3) Notwithstanding the provisions of other sections of this chapter 
or any rule issued under this chapter:
    (i) In cases where, in accordance with subparagraph (2) of this 
paragraph, a return is filed with a service center, the authority of the 
members of the office with whom such return would, without regard to 
such subparagraph, be required to be filed shall remain the same as if 
the return had been so filed;
    (ii) Unless a return or other document is a proper attachment to, or 
is, a return which the service center is expressly authorized to 
receive, such return or other document shall be filed as if all returns 
sent directly to the service centers, in accordance with subparagraph 
(2) of this paragraph, were filed in the office where such returns are, 
without regard to such subparagraph, required to be filed; and
    (iii) Unless the performance of an act is directly related to the 
sending of a return directly to the service center, such act shall be 
performed as if all returns sent directly to the service centers, in 
accordance with subparagraph (2) of this paragraph, were filed in the 
office where such returns are, without regard to such subparagraph, 
required to be filed.
    (4) The application of paragraphs (a)(2) and (3) of this section may 
be illustrated by the following example:

    Example. The Commissioner has authorized the Internal Revenue 
Service Center, Philadelphia, Pennsylvania (for all purposes except 
venue), to receive Form 1120. Except for that authorization, A, a 
corporation with its principal place of business in Greensboro, North 
Carolina, is required to file its Form 1120 for Year X with the Internal 
Revenue Service Center, Atlanta, Georgia. In addition, A may file an 
election to defer development expenditures paid or incurred in Year X. 
Under Sec. 1.616-2(e)(2) and applicable published guidance (in this 
case Notice 2003-19 (2003-1 C.B. 703)) that statement of election must 
be filed with the service center that serves A's principal place of 
business where A filed its income tax return. A may make that election 
on its income tax return or by filing it separately. Under paragraph 
(a)(2) of this section, A may send its Form 1120 to either the Internal 
Revenue Service Center,

[[Page 535]]

Philadelphia, Pennsylvania, or to the Internal Revenue Service Center, 
Atlanta, Georgia. If A files its statement of election separately from 
its income tax return for Year X, then the statement of election is not 
a proper attachment to A's income tax return and A should send the 
statement of election to the Internal Revenue Service Center, Atlanta, 
Georgia (with which A must, without regard to paragraph (a)(2) of this 
section, file its income tax return), no later than the time prescribed 
for filing Form 1120 for Year X (including extensions).

    (b) Returns of officers and employees of the Internal Revenue 
Service. The Commissioner may require any officer or employee of the 
Internal Revenue Service to file his income tax return in any Internal 
Revenue Service office selected by the Commissioner.
    (c) Residents of Guam. Income tax returns of an individual citizen 
of the United States who is a resident of Guam shall be filed with Guam, 
as provided in paragraph (b)(1) of Sec. 1.935-1.

[T.D. 6500, 25 FR 12108, Nov. 26, 1960, as amended by T.D. 6793, 30 FR 
704, Jan. 22, 1965; T.D. 7385, 40 FR 50264, Oct. 29, 1975; T.D. 9156, 69 
FR 55744, Sept. 16, 2004]

                        Miscellaneous Provisions



Sec. 1.6102-1  Computations on returns or other documents.

    For provisions with respect to the rounding off to whole-dollar 
amounts of money items on returns and accompanying schedules, see Sec. 
301.6102-1 of this chapter (Regulations on Procedure and 
Administration).

[T.D. 6500, 25 FR 12137, Nov. 26, 1960]



Sec. 1.6107-1  Tax return preparer must furnish copy of return or 
claim for refund to taxpayer and must retain a copy or record.

    (a) Furnishing copy to taxpayer--(1) A person who is a signing tax 
return preparer of any return of tax or claim for refund of tax under 
the Internal Revenue Code shall furnish a completed copy of the return 
or claim for refund to the taxpayer (or nontaxable entity) not later 
than the time the return or claim for refund is presented for the 
signature of the taxpayer (or nontaxable entity). The signing tax return 
preparer may, at its option, request a receipt or other evidence from 
the taxpayer (or nontaxable entity) sufficient to show satisfaction of 
the requirement of this paragraph (a).
    (2) The tax return preparer must provide a complete copy of the 
return or claim for refund filed with the IRS to the taxpayer in any 
media, including electronic media, that is acceptable to both the 
taxpayer and the tax return preparer. In the case of an electronically 
filed return, a complete copy of a taxpayer's return or claim for refund 
consists of the electronic portion of the return or claim for refund, 
including all schedules, forms, pdf attachments, and jurats, that was 
filed with the IRS. The copy provided to the taxpayer must include all 
information submitted to the IRS to enable the taxpayer to determine 
what schedules, forms, electronic files, and other supporting materials 
have been filed with the return. The copy, however, need not contain the 
identification number of the paid tax return preparer. The electronic 
portion of the return or claim for refund may be contained on a replica 
of an official form or on an unofficial form. On an unofficial form, 
however, data entries must reference the line numbers or descriptions on 
an official form.
    (3) For electronically filed Forms 1040EZ, ``Income Tax Return for 
Single Filers and Joint Filers With No Dependents,'' and Form 1040A, 
``U.S. Individual Income Tax Return,'' filed for the 2009, 2010 and 2011 
taxable years, the information may be provided on a replica of a Form 
1040, ``U.S. Individual Income Tax Return'', that provides all of the 
information. For other electronically filed returns, the information may 
be provided on a replica of an official form that provides all of the 
information.
    (b) Copy or record to be retained. (1) A person who is a signing tax 
return preparer of any return or claim for refund shall--
    (i)(A) Retain a completed copy of the return or claim for refund; or
    (B) Retain a record, by list, card file, or otherwise of the name, 
taxpayer identification number, and taxable year of the taxpayer (or 
nontaxable entity) for whom the return or claim for refund was prepared, 
and the type of return or claim for refund prepared;

[[Page 536]]

    (ii) Retain a record, by retention of a copy of the return or claim 
for refund, maintenance of a list, card file, or otherwise, for each 
return or claim for refund presented to the taxpayer (or nontaxable 
entity), of the name of the individual tax return preparer required to 
sign the return or claim for refund pursuant to Sec. 1.6695-1(b); and
    (iii) Make the copy or record of returns and claims for refund and 
record of the individuals required to sign available for inspection upon 
request by the Commissioner.
    (2) The material described in this paragraph (b) shall be retained 
and kept available for inspection for the 3-year period following the 
close of the return period during which the return or claim for refund 
was presented for signature to the taxpayer (or nontaxable entity). In 
the case of a return that becomes due (with extensions, if any) during a 
return period following the return period during which the return was 
presented for signature, the material shall be retained and kept 
available for inspection for the 3-year period following the close of 
the later return period in which the return became due. For the 
definition of ``return period,'' see section 6060(c). If the person 
subject to the record retention requirement of this paragraph (b) is a 
corporation or a partnership that is dissolved before completion of the 
3-year period, then all persons who are responsible for the winding up 
of the affairs of the corporation or partnership under state law shall 
be subject, on behalf of the corporation or partnership, to these record 
retention requirements until completion of the 3-year period. If state 
law does not specify any person or persons as responsible for winding 
up, then, collectively, the directors or general partners shall be 
subject, on behalf of the corporation or partnership, to the record 
retention requirements of this paragraph (b). For purposes of the 
penalty imposed by section 6695(d), such designated persons shall be 
deemed to be the tax return preparer and will be jointly and severally 
liable for each failure.
    (c) Tax return preparer. For the definition of ``signing tax return 
preparer,'' see Sec. 301.7701-15(b)(1) of this chapter. For purposes of 
applying this section, a corporation, partnership or other organization 
that employs a signing tax return preparer to prepare for compensation 
(or in which a signing tax return preparer is compensated as a partner 
or member to prepare) a return of tax or claim for refund shall be 
treated as the sole signing tax return preparer.
    (d) Penalties. (1) For the civil penalty for failure to furnish a 
copy of the return or claim for refund to the taxpayers (or nontaxable 
entity) as required under paragraph (a) of this section, see section 
6695(a) and Sec. 1.6695-1(a).
    (2) For the civil penalty for failure to retain a copy of the return 
or claim for refund, or to retain a record as required under paragraph 
(b) of this section, see section 6695(d) and Sec. 1.6695-1(d).
    (e) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after December 31, 2008.

[T.D. 9436, 73 FR 78438, Dec. 22, 2008, as amended at 74 FR 5104, Jan. 
29, 2009]



Sec. 1.6107-2  Form and manner of furnishing copy of return and 
retaining copy or record.

    (a) In general. The Commissioner may prescribe the form and manner 
of satisfying the requirements imposed by section 6107(a) and (b) and 
Sec. 1.6107-1(a) and (b) in forms, instructions, or other appropriate 
guidance (see Sec. 601.601(d)(2) of this chapter).
    (b) Effective date. To the extent this section relates to section 
6107(a) and Sec. 1.6107-1(a), it applies to income tax returns and 
claims for refund presented to a taxpayer for signature after December 
31, 2002. To the extent this section relates to section 6107(b) and 
Sec. 1.6107-1(b), it applies after December 31, 2002, to returns and 
claims for refund for which the 3-year period described in section 
6107(b) expires after December 31, 2002.

[T.D. 9119, 69 FR 15249, Mar. 25, 2004]



Sec. 1.6109-1  Identifying numbers.

    (a) Information to be furnished after April 15, 1974. For provisions 
concerning the requesting and furnishing of identifying numbers with 
respect to returns, statements, and other documents

[[Page 537]]

which must be filed after April 15, 1974, see Sec. 301.6109-1 of this 
chapter (Regulations on Procedure and Administration).
    (b) Information to be furnished before April 15, 1974. For 
provisions concerning the requesting and furnishing of identifying 
numbers with respect to returns, statements, and other documents which 
must be filed before April 16, 1974, see 26 CFR Sec. 1.6109-1 (revised 
as of April 1, 1973).

[T.D. 7306, 39 FR 9946, Mar. 15, 1974; 39 FR 11080, Mar. 25, 1974]



Sec. 1.6109-2  Tax return preparers furnishing identifying numbers 
for returns or claims for refund and related requirements.

    (a) Furnishing identifying number. (1) Each filed return of tax or 
claim for refund of tax under the Internal Revenue Code prepared by one 
or more tax return preparers must include the identifying number of the 
tax return preparer required by Sec. 1.6695-1(b) to sign the return or 
claim for refund. In addition, if there is an employment arrangement or 
association between the individual tax return preparer and another 
person (except to the extent the return prepared is for the person), the 
identifying number of the other person must also appear on the filed 
return or claim for refund. For the definition of the term ``tax return 
preparer,'' see section 7701(a)(36) and Sec. 301.7701-15 of this 
chapter.
    (2)(i) For tax returns or claims for refund filed on or before 
December 31, 2010, the identifying number of an individual tax return 
preparer is that individual's social security number or such alternative 
number as may be prescribed by the Internal Revenue Service in forms, 
instructions, or other appropriate guidance.
    (ii) For tax returns or claims for refund filed after December 31, 
2010, the identifying number of a tax return preparer is the 
individual's preparer tax identification number or such other number 
prescribed by the Internal Revenue Service in forms, instructions, or 
other appropriate guidance.
    (3) The identifying number of a person (whether an individual or 
entity) who employs or associates with an individual tax return preparer 
described in paragraph (a)(2) of this section to prepare the return or 
claim for refund (other than a return prepared for the person) is the 
person's employer identification number.
    (b) and (c) [Reserved]. For further guidance, see Sec. 1.6109-2A(b) 
and (c).
    (d) Beginning after December 31, 2010, all tax return preparers must 
have a preparer tax identification number or other prescribed 
identifying number that was applied for and received at the time and in 
the manner, including the payment of a user fee, as may be prescribed by 
the Internal Revenue Service in forms, instructions, or other 
appropriate guidance. Except as provided in paragraph (h) of this 
section, beginning after December 31, 2010, to obtain a preparer tax 
identification number or other prescribed identifying number, a tax 
return preparer must be an attorney, certified public accountant, 
enrolled agent, or registered tax return preparer authorized to practice 
before the Internal Revenue Service under 31 U.S.C. 330 and the 
regulations thereunder.
    (e) The Internal Revenue Service may designate an expiration date 
for any preparer tax identification number or other prescribed 
identifying number and may further prescribe the time and manner for 
renewing a preparer tax identification number or other prescribed 
identifying number, including the payment of a user fee, as set forth in 
forms, instructions, or other appropriate guidance. The Internal Revenue 
Service may provide that any identifying number issued by the Internal 
Revenue Service prior to the effective date of this regulation will 
expire on December 31, 2010, unless properly renewed as set forth in 
forms, instructions, or other appropriate guidance, including these 
regulations.
    (f) As may be prescribed in forms, instructions, or other 
appropriate guidance, the IRS may conduct a Federal tax compliance check 
on a tax return preparer who applies for or renews a preparer tax 
identification number or other prescribed identifying number.
    (g) Only for purposes of paragraphs (d), (e), and (f) of this 
section, the term tax return preparer means any individual who is 
compensated for preparing, or assisting in the preparation

[[Page 538]]

of, all or substantially all of a tax return or claim for refund of tax. 
Factors to consider in determining whether an individual is a tax return 
preparer under this paragraph (g) include, but are not limited to, the 
complexity of the work performed by the individual relative to the 
overall complexity of the tax return or claim for refund of tax; the 
amount of the items of income, deductions, or losses attributable to the 
work performed by the individual relative to the total amount of income, 
deductions, or losses required to be correctly reported on the tax 
return or claim for refund of tax; and the amount of tax or credit 
attributable to the work performed by the individual relative to the 
total tax liability required to be correctly reported on the tax return 
or claim for refund of tax. The preparation of a form, statement, or 
schedule, such as Schedule EIC (Form 1040), ``Earned Income Credit,'' 
may constitute the preparation of all or substantially all of a tax 
return or claim for refund based on the application of the foregoing 
factors. A tax return preparer does not include an individual who is not 
otherwise a tax return preparer as that term is defined in Sec. 
301.7701-15(b)(2), or who is an individual described in Sec. 301.7701-
15(f). The provisions of this paragraph (g) are illustrated by the 
following examples:

    Example 1. Employee A, an individual employed by Tax Return Preparer 
B, assists Tax Return Preparer B in answering telephone calls, making 
copies, inputting client tax information gathered by B into the data 
fields of tax preparation software on a computer, and using the computer 
to file electronic returns of tax prepared by B. Although Employee A 
must exercise judgment regarding which data fields in the tax 
preparation software to use, A does not exercise any discretion or 
independent judgment as to the clients' underlying tax positions. 
Employee A, therefore, merely provides clerical assistance or incidental 
services and is not a tax return preparer required to apply for a PTIN 
or other identifying number as the Internal Revenue Service may 
prescribe in forms, instructions, or other appropriate guidance.
    Example 2. The facts are the same as in Example 1, except that 
Employee A also interviews B's clients and obtains from them information 
needed for the preparation of tax returns. Employee A determines the 
amount and character of entries on the returns and whether the 
information provided is sufficient for purposes of preparing the 
returns. For at least some of B's clients, A obtains information and 
makes determinations that constitute all or substantially all of the tax 
return. Employee A is a tax return preparer required to apply for a PTIN 
or other identifying number as the Internal Revenue Service may 
prescribe in forms, instructions, or other appropriate guidance. 
Employee A is a tax return preparer even if Employee A relies on tax 
preparation software to prepare the return.
    Example 3. C is an employee of a firm that prepares tax returns and 
claims for refund of tax for compensation. C is responsible for 
preparing a Form 1040, ``U.S. Individual Income Tax Return,'' for a 
client. C obtains the information necessary for the preparation of the 
tax return during a meeting with the client, and makes determinations 
with respect to the proper application of the tax laws to the 
information in order to determine the client's tax liability. C 
completes the tax return and sends the completed return to employee D, 
who reviews the return for accuracy before signing it. Both C and D are 
tax return preparers required to apply for a PTIN or other identifying 
number as the Internal Revenue Service may prescribe in forms, 
instructions, or other appropriate guidance.
    Example 4. E is an employee at a firm which prepares tax returns and 
claims for refund of tax for compensation. The firm is engaged by a 
corporation to prepare its Federal income tax return on Form 1120, 
``U.S. Corporation Income Tax Return.'' Among the documentation that the 
corporation provides to E in connection with the preparation of the tax 
return is documentation relating to the corporation's potential 
eligibility to claim a recently enacted tax credit for the taxable year. 
In preparing the return, and specifically for purposes of the new tax 
credit, E (with the corporation's consent) obtains advice from F, a 
subject matter expert on this and similar credits. F advises E as to the 
corporation's entitlement to the credit and provides his calculation of 
the amount of the credit. Based on this advice from F, E prepares the 
corporation's Form 1120 claiming the tax credit in the amount 
recommended by F. The additional credit is one of many tax credits and 
deductions claimed on the tax return, and determining the credit amount 
does not constitute preparation of all or substantially all of the 
corporation's tax return under this paragraph (g). F will not be 
considered to have prepared all or substantially all of the 
corporation's tax return, and F is not a tax return preparer required to 
apply for a PTIN or other identifying number as the Internal Revenue 
Service may prescribe in forms, instructions, or other appropriate 
guidance. The analysis is the same whether or not the tax credit is a

[[Page 539]]

substantial portion of the return under Sec. 301.7701-15 of this 
chapter (as opposed to substantially all of the return), and whether or 
not F is in the same firm with E. E is a tax return preparer required to 
apply for a PTIN or other identifying number as the Internal Revenue 
Service may prescribe in forms, instructions, or other appropriate 
guidance.

    (h) The Internal Revenue Service, through forms, instructions, or 
other appropriate guidance, may prescribe exceptions to the requirements 
of this section, including the requirement that an individual be 
authorized to practice before the Internal Revenue Service before 
receiving a preparer tax identification number or other prescribed 
identifying number, as necessary in the interest of effective tax 
administration. The Internal Revenue Service, through other appropriate 
guidance, may also specify specific returns, schedules, and other forms 
that qualify as tax returns or claims for refund for purposes of these 
regulations.
    (i) Effective/applicability date. Paragraph (a)(1) of this section 
is applicable to tax returns and claims for refund filed after December 
31, 2008. Paragraph (a)(2)(i) of this section is applicable to tax 
returns and claims for refund filed on or before December 31, 2010. 
Paragraph (a)(2)(ii) of this section is applicable to tax returns and 
claims for refund filed after December 31, 2010. Paragraph (d) of this 
section is applicable to tax return preparers after December 31, 2010. 
Paragraphs (e) through (h) of this section are effective after September 
30, 2010.

[T.D. 9014, 67 FR 52863, Aug. 14, 2002, as amended by T.D. 9436, 73 FR 
78439, Dec. 22, 2008; T.D. 9501, 75 FR 60315, Sept. 30, 2010]



Sec. 1.6115-1  Disclosure requirements for quid pro quo contributions.

    (a) Good faith estimate defined--(1) In general. A good faith 
estimate of the value of goods or services provided by an organization 
described in section 170(c) in consideration for a taxpayer's payment to 
that organization is an estimate of the fair market value, within the 
meaning of Sec. 1.170A-1(c)(2), of the goods or services. The 
organization may use any reasonable methodology in making a good faith 
estimate, provided it applies the methodology in good faith. If the 
organization fails to apply the methodology in good faith, the 
organization will be treated as not having met the requirements of 
section 6115. See section 6714 for the penalties that apply for failure 
to meet the requirements of section 6115.
    (2) Good faith estimate for goods or services that are not 
commercially available. A good faith estimate of the value of goods or 
services that are not generally available in a commercial transaction 
may be determined by reference to the fair market value of similar or 
comparable goods or services. Goods or services may be similar or 
comparable even though they do not have the unique qualities of the 
goods or services that are being valued.
    (3) Examples. The following examples illustrate the rules of this 
paragraph (a).

    Example 1. Facility not available on a commercial basis. Museum M, 
an organization described in section 170(c), is located in Community N. 
In return for a payment of $50,000 or more, M allows a donor to hold a 
private event in a room located in M. Private events other than those 
held by such donors are not permitted to be held in M. In Community N, 
there are four hotels, O, P, Q, and R, that have ballrooms with the same 
capacity as the room in M. Of these hotels, only O and P have ballrooms 
that offer amenities and atmosphere that are similar to the amenities 
and atmosphere of the room in M (although O and P lack the unique 
collection of art that is displayed in the room in M). Because the 
capacity, amenities, and atmosphere of ballrooms in O and P are 
comparable to the capacity, amenities, and atmosphere of the room in M, 
a good faith estimate of the benefits received from M may be determined 
by reference to the cost of renting either the ballroom in O or the 
ballroom in P. The cost of renting the ballroom in O is $2500 and, 
therefore, a good faith estimate of the fair market value of the right 
to host a private event in the room at M is $2500. In this example, the 
ballrooms in O and P are considered similar and comparable facilities to 
the room in M for valuation purposes, notwithstanding the fact that the 
room in M displays a unique collection of art.
    Example 2. Services available on a commercial basis. Charity S is an 
organization described in section 170(c). S offers to provide a one-hour 
tennis lesson with Tennis Professional T in return for the first payment 
of $500 or more that it receives. T provides one-hour tennis lessons on 
a commercial basis for $100. Taxpayer pays $500 to S and in return 
receives the tennis lesson with T. A good faith

[[Page 540]]

estimate of the fair market value of the lesson provided in exchange for 
Taxpayer's payment is $100.
    Example 3. Celebrity presence. Charity U is an organization 
described in section 170(c). In return for the first payment of $1000 or 
more that it receives, U will provide a dinner for two followed by an 
evening tour of Museum V conducted by Artist W, whose most recent works 
are on display at V. W does not provide tours of V on a commercial 
basis. Typically, tours of V are free to the public. Taxpayer pays $1000 
to U and in return receives a dinner valued at $100 and an evening tour 
of V conducted by W. Because tours of V are typically free to the 
public, a good faith estimate of the value of the evening tour conducted 
by W is $0. In this example, the fact that Taxpayer's tour of V is 
conducted by W rather than V's regular tour guides does not render the 
tours dissimilar or incomparable for valuation purposes.

    (b) Certain goods or services disregarded. For purposes of section 
6115, an organization described in section 170(c) may disregard goods or 
services described in Sec. 1.170A-13(f)(8)(i).
    (c) Value of the right to purchase tickets to college or university 
athletic events. For purposes of section 6115, the right to purchase 
tickets for seating at an athletic event in exchange for a payment 
described in section 170(l) is treated as having a value equal to twenty 
percent of such payment.
    (d) Goods or services provided to employees or partners of donors--
(1) Certain goods or services disregarded. For purposes of section 6115, 
goods or services provided by an organization described in section 
170(c) to employees of a donor or to partners of a partnership that is a 
donor in return for a payment to the donee organization may be 
disregarded to the extent that the goods or services provided to each 
employee or partner are the same as those described in Sec. 1.170A-
13(f)(8)(i).
    (2) Description permitted in lieu of good faith estimate for other 
goods or services. The written disclosure statement required by section 
6115 may include a description of goods or services, in lieu of a good 
faith estimate of their value, if the donor is--
    (i) An employer and, in return for the donor's quid pro quo 
contribution, an organization described in section 170(c) provides the 
donor's employees with goods or services other than those described in 
paragraph (d)(1) of this section; or
    (ii) A partnership and, in return for its quid pro quo contribution, 
the organization provides partners in the partnership with goods or 
services other than those described in paragraph (d)(1) of this section.
    (e) Effective date. This section applies to contributions made on or 
after December 16, 1996. However, taxpayers may rely on the rules of 
this section for contributions made on or after January 1, 1994.

[T.D. 8690, 61 FR 65954, Dec. 16, 1996]

 Regulations Applicable to Returns or Claims for Refund Filed Prior to 
                             January 1, 2000



Sec. 1.6109-2A  Furnishing identifying number of income tax return
preparer.

    (a) Furnishing identifying number. For returns or claims for refund 
filed prior to January 1, 2000, each return of tax under subtitle A of 
the Internal Revenue Code or claim for refund of tax under subtitle A of 
the Internal Revenue Code prepared by one or more income tax return 
preparers must bear the identifying number of the preparer required by 
Sec. 1.6695-1(b) to sign the return or claim for refund. In addition, 
it there is a partnership or employment arrangement between two or more 
preparers, the identifying number of the partnership or the person who 
employs (or engages) one or more other persons to prepare for 
compensation the return or claim for refund shall also appear on the 
return or claim for refund. If the preparer is:
    (1) An individual (not described in subparagraph (2) of this 
paragraph (a) who is a citizen or resident of the United States such 
preparer's social security account number shall be affixed; and
    (2) A person (whether an individual, corporation, or partnership) 
who employs (or engages) one or more persons to prepare the return or 
claim for refund (other than for the person), or who is not a citizen or 
resident of the United States and also is not employed or engaged by 
another preparer, such preparer's employer identification number shall 
be affixed.


[[Page 541]]



For the definition of the term ``income tax return preparer'' (or 
``preparer'') see section 7701(a)(36) and Sec. 301.7701-15.
    (b) Furnishing address. (1) Each return or claim for refund which is 
prepared by one or more income tax return preparers shall bear the 
street address, city, State, and postal ZIP code of that preparer's 
place of business where the preparation of the return or claim for 
refund was completed. However, if this place of business is not 
maintained on a year-round basis, the return or claim for refund shall 
bear the street address, city, State, and postal ZIP code of such 
preparer's principal office or business location which is maintained on 
a yearround basis, or it none, that preparer's residence.
    (2) For purposes of satisfying the requirement of the first sentence 
of paragraph (b)(1) of this section, and income tax return preparer, 
may, on returns and claims for refund, disclose only the postal ZIP code 
of the described place of business as a satisfactory address, but only 
if the preparer first by written notice advises each affected Internal 
Revenue Service Center that he intends to follow this practice.
    (c) Penalty. For the civil penalty for failure to furnish an 
identifying number as required under paragraph (a) of this section, see 
section 6695(c) and Sec. 1.6695-1(c).
    (d) Effective date. Paragraph (a) of this section and this paragraph 
(d) apply to returns or claims for refund filed prior to January 1, 
2000. For returns or claims for refund filed after December 31, 1999, 
see Sec. 1.6109-2(a).

[T.D. 7519, 42 FR 59967, Nov. 23, 1977, as amended by T.D. 8835, 64 FR 
43911, Aug. 12, 1999. Redesignated and amended by T.D. 9014, 67 FR 
52863, Aug. 14, 2002]

                      Time and Place for Paying Tax

                  Place and Due Date for Payment of Tax



Sec. 1.6151-1  Time and place for paying tax shown on returns.

    (a) In general. Except as provided in section 6152 and paragraph (b) 
of this section, the tax shown on any income tax return shall, without 
assessment or notice and demand, be paid to the internal revenue officer 
with whom the return is filed at the time fixed for filing the return 
(determined without regard to any extension of time for filing the 
return). For provisions relating to the time for filing income tax 
returns, see section 6072 and Sec. Sec. 1.6072-1 to 1.6072-4, 
inclusive. For provisions relating to the place for filing income tax 
returns, see section 6091 and Sec. Sec. 1.6091-1 to 1.6091-4, 
inclusive.
    (b)(1) Returns on which tax is not shown. If a taxpayer files a 
return and in accordance with section 6014 and the regulations 
thereunder, elects not to show the tax on the return, the amount of tax 
determined to be due shall be paid within 30 days after the date of 
mailing to the taxpayer a notice stating the amount payable and making 
demand upon the taxpayer therefor. However, if the notice is mailed to 
the taxpayer more than 30 days before the due date of the return, 
payment of the tax shall not be required prior to such due date.
    (2) Where tax is shown on the return. In any case in which a 
taxpayer files a return on Form 1040A pursuant to paragraph (a)(7) of 
Sec. 1.6012-1 and shows the amount of tax on the return, the unpaid 
balance of the tax shall, without assessment or notice and demand, be 
paid not later than the date fixed for filing the return.
    (c) Date fixed for payment of tax. In any case in which a tax 
imposed by subtitle A of the Code is required to be paid on or before a 
certain date, or within a certain period, any reference in subtitle A or 
F of the Code to the date fixed for payment of such tax shall be deemed 
a reference to the last day fixed for such payment (determined without 
regard to any extension of time for paying the tax).
    (d) Use of Government depositaries. (1) For provisions relating to 
the use of authorized financial institutions in depositing income and 
estimated income taxes of certain corporations, see Sec. 1.6302-1.
    (2) For provisions relating to the use of such financial 
institutions for the deposit of taxes required to be withheld under 
chapter 3 of the Code on nonresident aliens and foreign corporations and 
tax-free covenant bonds, see Sec. 1.6302-2. With respect to section 
1446, the previous sentence shall apply only

[[Page 542]]

to a publicly traded partnership described in Sec. 1.1446-4.
    (e) Effective/Applicability date. Paragraph (d)(2) of this section 
shall apply to publicly traded partnerships described in Sec. 1.1446-4 
for partnership taxable years beginning after April 29, 2008.

(Approved by the Office of Management and Budget under control number 
1545-0257)

[T.D. 6500, 25 FR 12137, Nov. 26, 1960, as amended by T.D. 6922, 32 FR 
8713, June 17, 1967; T.D. 6950, 33 FR 5357, Apr. 4, 1968; T.D. 7102, 36 
FR 5498, Mar. 24, 1971; T.D. 7953, 49 FR 19644, May 9, 1984; T.D. 8952, 
66 FR 33831, June 26, 2001; T.D. 9394, 73 FR 23085, Apr. 29, 2008; T.D. 
9394, 74 FR 14932, Apr. 2, 2009]



Sec. 1.6153-1  Payment of estimated tax by individuals.

    (a) In general. (1) The time for payment of the estimated tax by 
individuals for calendar years shall be as follows:

------------------------------------------------------------------------
                                                 Dates of payment of
        Date of filing declaration                  estimated tax
------------------------------------------------------------------------
(i) On or before April 15.................  In 4 equal installments--one
                                             at time of filing
                                             declaration, one on or
                                             before June 15, one on or
                                             before September 15, and
                                             one on or before January 15
                                             of the succeeding taxable
                                             year
(ii) After April 15 and before June 16 if   In 3 equal installments--one
 not required to be filed on or before       at time of filing
 April 15.                                   declaration, one on or
                                             before September 15, and
                                             one on or before January 15
                                             of the succeeding taxable
                                             year
(iii) After June 15 and before September    In 2 equal installments--one
 16 if not required to be filed on or        at time of filing
 before June 15.                             declaration, and the other
                                             on or before January 15 of
                                             the succeeding taxable year
(iv) After September 15 if not required to  In full at time of filing
 be filed on or before September 15.         declaration
------------------------------------------------------------------------

    (2) If, for example, due to the nature and amount of his gross 
income for 1955, the taxpayer is not required to file his declaration as 
of April 15, but is required to file the declaration on or before June 
15, 1955, the case comes within the scope of subparagraph (1)(ii) of 
this paragraph and the estimated tax is payable in 3 equal installments, 
the 1st on the date of filing, the 2d on or before September 15, 1955, 
and the 3d installment on or before January 15, 1956.
    (3) If a declaration is filed after the time prescribed in section 
6073(a) (including any extension of time granted for filing the 
declaration), there shall be paid at such time all installments of the 
estimated tax which would have been payable on or before such date of 
filing if the declaration had been timely filed in accordance with the 
provisions of section 6073(a). The remaining installments shall be paid 
at the times and in the amounts in which they would have been payable if 
the declaration had been timely filed. Thus, for example, B, a single 
man who makes his return on the calendar year basis, was employed from 
the beginning of 1955 and for several years prior thereto at an annual 
salary of $6,000, thus meeting the requirements of section 6015(a). B 
filed his declaration for 1955 on September 16, 1955. In such case, B 
should have filed a declaration on or before April 15, 1955, and at the 
time of filing his declaration he was delinquent in the payment of three 
installments of his estimated tax for the taxable year 1955. Hence, upon 
his filing the declaration on September 16, 1955, three-fourths of the 
estimated tax shown thereon must be paid.
    (4) In the case of a decedent, payments of estimated tax are not 
required subsequent to the date of death. See, however, paragraph (c) of 
Sec. 1.6015(b)-1, relating to the making of an amended declaration by a 
surviving spouse if a joint declaration was made before the death of the 
decedent.
    (5) The payment of any installment of the estimated tax shall be 
considered payment on account of the tax for such taxable year. Hence, 
upon the return for such taxable year, the aggregate amount of the 
payments of estimated tax should be entered as payments to be applied 
against the tax shown on such return.
    (b) Farmers or fishermen. Special provisions are made with respect 
to the filing of the declaration and the payment of the tax by an 
individual whose estimated gross income from farming or, with respect to 
taxable years beginning after December 31, 1962, from fishing is at 
least two-thirds of his total gross income from all sources for the 
taxable year. As to what constitutes income from farming or fishing 
within the meaning of this paragraph, see paragraph (b) of Sec. 1.6073-
1. The declaration of such an individual may be filed

[[Page 543]]

on or before January 15 of the succeeding taxable year in lieu of the 
time prescribed for individuals generally. Where such an individual 
makes a declaration of estimated tax after September 15 of the taxable 
year, the estimated tax shall be paid in full at the time of the filing 
of the declaration.
    (c) Amendment of declaration. If any amendment of a declaration is 
filed, the remaining installments, if any, shall be ratably increased or 
decreased, as the case may be, to reflect the increase or decrease in 
the estimated tax by reason of the amendment. If any amendment is made 
after September 15 of the taxable year, any increase in the estimated 
tax by reason thereof shall be paid at the time of making the amendment.
    (d) Installments paid in advance. At the election of the taxpayer 
any installment of the estimated tax may be paid prior to the date 
prescribed for its payment.

[T.D. 6500, 25 FR 12139, Nov. 26, 1960, as amended by T.D. 6678, 28 FR 
10517, Oct. 1, 1963]



Sec. 1.6153-2  Fiscal years.

    In the case of an individual on the fiscal year basis, the dates 
prescribed for payment of the estimated tax shall be the 15th day of the 
4th month, the 15th day of the 6th month, and the 15th day of the 9th 
month of the taxable year and the 15th day of the 1st month of the 
succeeding taxable year. For example, if an individual having a fiscal 
year ending on June 30, 1956, first meets the requirements of section 
6015(a) on January 15, 1956, and the declaration is filed on or before 
March 15, 1956, the estimated tax shall be paid in 2 equal installments, 
one at the time of filing of such declaration and the other on or before 
July 15, 1956.

[T.D. 6500, 25 FR 12139, Nov. 26, 1960]



Sec. 1.6153-3  Short taxable years.

    In the case of a short taxable year of an individual for which a 
declaration is required to be filed the estimated tax shall be paid in 
equal installments, one at the time of filing the declaration, one on 
the 15th day of the 6th month of the taxable year and another on the 
15th day of the 9th month of such year unless the short taxable year 
closed during or prior to such 6th or 9th month, and one on the 15th day 
of the 1st month of the succeeding taxable year. For example, if the 
short taxable year is the period of 10 months from January 1, 1955, to 
October 31, 1955, and the declaration is required to be filed on or 
before April 15, 1955, the estimated tax is payable in 4 equal 
installments, one on the date of filing the declaration, and one each on 
June 15, September 15, and November 15, 1955. If in such case the 
declaration is required to be filed after April 15 but on or before June 
15, the tax will be payable in 3 equal installments, one on the date of 
filing the declaration, and one each on September 15, and November 15, 
1955. The provisions of paragraph (a)(3) of Sec. 1.6153-1, relating to 
payment of estimated tax in any case in which the declaration is filed 
after the time prescribed in section 6073 and Sec. Sec. 1.6073-1 to 
1.6073-4, inclusive, are equally applicable to the payment of the 
estimated tax for short taxable years.

[T.D. 6500, 25 FR 12139, Nov. 26, 1960]



Sec. 1.6153-4  Extension of time for paying the estimated tax.

    An extension of time granted an individual under section 6081 for 
filing the declaration of estimated tax automatically extends the time 
for paying the estimated tax (without interest) for the same period. See 
Sec. 1.6073-4 for rules relating to extensions of time for filing 
declarations of estimated tax by individuals. Except as provided in 
paragraph (b) of Sec. 301.6091-1 (relating to hand-carried documents), 
an application for an extension of time for paying a particular 
installment of the estimated tax shall be addressed to the internal 
revenue officer with whom the taxpayer files his declaration. Each 
application must contain a full recital of the causes for the delay. 
Such extension may be for a reasonable period not to exceed 6 months 
from the date fixed for payment thereof except in the case of a taxpayer 
who is abroad. Such extension does not relieve the taxpayer from the 
addition to the tax imposed by section 6654, and the period of the 
underpayment will be determined

[[Page 544]]

under section 6654(c) without regard to such extension.

[T.D. 6950, 33 FR 5357, Apr. 4, 1968]

                     Extensions of Time for Payment

    Source: Sections 1.6161-1 through 1.6165-1 contained in T.D. 6500, 
25 FR 12140, Nov. 26, 1960, unless otherwise noted.



Sec. 1.6161-1  Extension of time for paying tax or deficiency.

    (a) In general--(1) Tax shown or required to be shown on return. A 
reasonable extension of the time for payment of the amount of any tax 
imposed by subtitle A of the Code and shown or required to be shown on 
any return, or for payment of the amount of any installment of such tax, 
may be granted by the district directors (including the Director of 
International Operations) at the request of the taxpayer. The period of 
such extension shall not be in excess of six months from the date fixed 
for payment of such tax or installment, except that if the taxpayer is 
abroad the period of the extension may be in excess of six months.
    (2) Deficiency. The time for payment of any amount determined as a 
deficiency in respect of tax imposed by chapter 1 of the Code, or for 
the payment of any part thereof, may, at the request of the taxpayer, be 
extended by the internal revenue officer to whom the tax is required to 
be paid for a period not to exceed 18 months from the date fixed for 
payment of the deficiency, as shown on the notice and demand, and, in 
exceptional cases, for a further period not in excess of 12 months. No 
extension of the time for payment of a deficiency shall be granted if 
the deficiency is due to negligence, to intentional disregard of rules 
and regulations, or to fraud with intent to evade tax.
    (b) Undue hardship required for extension. An extension of the time 
for payment shall be granted only upon a satisfactory showing that 
payment on the due date of the amount with respect to which the 
extension is desired will result in an undue hardship. The extension 
will not be granted upon a general statement of hardship. The term 
``undue hardship'' means more than an inconvenience to the taxpayer. It 
must appear that substantial financial loss, for example, loss due to 
the sale of property at a sacrifice price, will result to the taxpayer 
for making payment on the due date of the amount with respect to which 
the extension is desired. If a market exists, the sale of property at 
the current market price is not ordinarily considered as resulting in an 
undue hardship.
    (c) Application for extension. An application for an extension of 
the time for payment of the tax shown or required to be shown on any 
return, or for the payment of any installment thereof, or for the 
payment of any amount determined as a deficiency shall be made on Form 
1127 and shall be accompanied by evidence showing the undue hardship 
that would result to the taxpayer if the extension were refused. Such 
application shall also be accompanied by a statement of the assets and 
liabilities of the taxpayer and an itemized statement showing all 
receipts and disbursements for each of the 3 months immediately 
preceding the due date of the amount to which the application relates. 
The application, with supporting documents, must be filed on or before 
the date prescribed for payment of the amount with respect to which the 
extension is desired. If the tax is required to be paid to the Director 
of International Operations, such application must be filed with him, 
otherwise, the application must be filed with the applicable district 
director referred to in paragraph (a) or (b) of Sec. 1.6091-2, 
regardless of whether the return is to be filed with, or tax is to be 
paid to, such district director. The application will be examined, and 
within 30 days, if possible, will be denied, granted, or tentatively 
granted subject to certain conditions of which the taxpayer will be 
notified. If an additional extension is desired, the request therefor 
must be made on or before the expiration of the period for which the 
prior extension is granted.
    (d) Payment pursuant to extension. If an extension of time for 
payment is granted, the amount the time for payment of which is so 
extended shall be paid on or before the expiration of the period of the 
extension without the necessity of notice and demand. The granting of an 
extension of the time for

[[Page 545]]

payment of the tax or deficiency does not relieve the taxpayer from 
liability for the payment of interest thereon during the period of the 
extension. See section 6601 and Sec. 301.6601-1 of this chapter 
(Regulations on Procedure and Administration). Further, the granting of 
an extension of the time for payment of one installment of the tax does 
not extend the time for payment of subsequent installments.
    (e) Cross reference. For extensions of time for payment of estimated 
tax, see Sec. Sec. 1.6073-4 and 1.6074-3.

[T.D. 6500, 25 FR 12140, Nov. 26, 1960, as amended by T.D. 6950, 33 FR 
5357, Apr. 4, 1968; T.D. 7260, 38 FR 4259, Feb. 12, 1973]



Sec. 1.6162-1  Extension of time for payment of tax on gain 
attributable to liquidation of personal holding companies.

    (a) In general. (1) If it is shown to the satisfaction of the 
district director that undue hardship to the taxpayer will result from 
the payment of such portion of the amount determined as the tax under 
chapter 1 of the Code by the taxpayer as is attributable to the short-
term or long-term capital gain derived by the taxpayer from the receipt 
by him of property other than money on a complete liquidation of a 
corporation to which section 331(a)(1) or 342 applies, the district 
director may grant an extension of time for the payment of such portion 
of the tax. For the meaning of the term ``undue hardship'', see 
paragraph (b) of Sec. 1.6161-1.
    (2) The extension of time for payment shall be for a period not in 
excess of five years. The extension shall only be granted for a taxable 
year beginning before January 1, 1956, and shall apply only if the 
corporation, for its taxable year preceding the year in which occurred 
the complete liquidation (or the first of the series of distributions in 
complete liquidation), was, under the law applicable to such taxable 
year, a personal holding company or a foreign personal holding company.
    (b) Requirement of bond. As a condition to the granting of an 
extension of time for payment, the taxpayer will usually be required by 
the district director to furnish a bond as provided in section 6165 and 
the regulations thereunder. For other provisions with respect to bonds, 
see section 7101 and the regulations in part 301 of this chapter 
(Regulations on Procedure and Administration).



Sec. 1.6164-1  Extensions of time for payment of taxes by corporations
expecting carrybacks.

    (a) In general. If a corporation in any taxable year files a 
statement with respect to an expected net operating loss carryback from 
such taxable year, such corporation may extend the time for the payment 
of all or part of any tax imposed by subtitle A of the Code for the 
taxable year immediately preceding such taxable year to the extent and 
subject to the limitations provided in section 6164. A corporation may 
extend the time for payment with respect to only such taxes as meet the 
following requirements:
    (1) The tax must be one imposed by subtitle A of the Code;
    (2) The tax must be for the taxable year immediately preceding the 
taxable year of the expected net operating loss;
    (3) The tax must be shown on the return or must be assessed within 
the taxable year of the expected net operating loss; and
    (4) The tax must not have been paid or required to have been paid 
prior to the filing of the statement.
    (b) Statement for purpose of extending time for payment. (1) The 
time for payment of the tax is automatically extended upon the filing of 
a statement on Form 1138 by the corporation with the district director 
for the district where the tax is payable. The statement on Form 1138 
must be filled out in accordance with the instructions accompanying the 
form, and all information required by the form and the instructions must 
be furnished by the taxpayer. The district director, upon request, will 
furnish a receipt for any statement filed. Such receipt will show the 
date the statement was filed.
    (2) The period of extension is that provided in section 6164(d) and 
Sec. 1.6164-5 unless sooner terminated by action of either the district 
director or the corporation.

[[Page 546]]



Sec. 1.6164-2  Amount of tax the time for payment of which may be 
extended.

    (a) Total amount to which extension may relate. The total amount of 
tax the time for payment of which may be extended under section 6164 may 
not exceed the amount of the reduction of the taxes previously 
determined attributable to the expected carryback.
    (b) Amount of tax to which extension may relate. (1) The taxpayer 
shall specify on Form 1138 the kind of tax and the amount thereof the 
time for payment of which is to be extended. The amount of tax to which 
an extension may relate shall not exceed the amount of such tax shown on 
the return as filed, increased by any amount assessed as a deficiency 
(or as interest or addition to the tax) prior to the date of filing the 
statement and decreased by any amount paid or required to be paid prior 
to such date. In determining the amount of tax required to be paid prior 
to the date of filing the statement, only the following amounts shall be 
taken into consideration:
    (i) The amount of the tax shown on the return as filed; and
    (ii) Any amount assessed as a deficiency (or as interest or addition 
to the tax) if the tenth day after notice and demand for its payment 
occurs prior to the date of the filing of the statement.
    (2) Delinquent installments are to be considered amounts required to 
be paid prior to the date of filing the statement. In the case of any 
authorized extension of time under sections 6161 and 6162, the amount of 
tax the time for payment of which is so extended is not to be considered 
required to be paid prior to the end of such extension. Similarly, any 
amount assessed as a deficiency (or as interest or addition to the tax) 
is not to be considered required to be paid prior to the date of the 
filing of the statement unless the tenth day after notice and demand for 
its payment falls prior to the date of the filing of the statement.
    (3) The taxpayer may choose to extend the time for payment of all of 
one or more taxes, or it may choose to extend the time for payment of 
portions of several taxes. The taxes chosen by the taxpayer need not be 
those taxes which are affected by the carryback.



Sec. 1.6164-3  Computation of the amount of reduction of the tax
previously determined.

    (a) Tax previously determined. The taxpayer is to determine the 
amount of the reduction, attributable to the expected carryback, in the 
aggregate of the taxes previously determined for taxable years prior to 
the taxable year of the expected net operating loss. The tax previously 
determined is to be ascertained in accordance with the method prescribed 
in section 1314(a). Thus, the tax previously determined will be the tax 
shown on the return as filed, increased by any amounts assessed (or 
collected without assessment) as deficiencies prior to the date of the 
filing of the statement, and decreased by any amounts abated, credited, 
refunded, or otherwise repaid prior to such date. Any items as to which 
the Internal Revenue Service and the taxpayer are in disagreement at the 
time of the filing of the statement shall be taken into account in 
ascertaining the tax previously determined only if, and to the extent 
that, they were reported in the return, or were reflected in any amounts 
assessed (or collected without assessment) as deficiencies, or in any 
amounts abated, credited, refunded, or otherwise repaid, prior to the 
date of the filing of the statement. The tax previously determined will 
reflect the foreign tax credit and the credit for tax withheld at source 
provided in section 32.
    (b) Reduction attributable to the expected carryback. The reduction, 
attributable to the expected carryback or related adjustments, in any 
tax previously determined is to be ascertained by applying the expected 
carryback as if it were a determined net operating loss carryback, in 
accordance with the provisions of section 172 and the regulations 
thereunder. Items must be taken into account only to the extent that 
such items were included in the return, or were reflected in amounts 
assessed (or collected without assessment) as deficiencies, or in 
amounts abated, credited, refunded, or otherwise repaid, prior to the 
date of the filing of the statement. Thus, for example, if the taxpayer 
claims a deduction for depreciation of $10,000 in its return and the 
Internal Revenue Service asserts

[[Page 547]]

that only $4,000 is properly deductible, no change is to be made in the 
$10,000 depreciation deduction as shown by the taxpayer on his return 
unless a deficiency has been assessed, or an amount collected without 
assessment, prior to the date of filing of the statement as a result of 
a change in the depreciation deduction, or unless such change in the 
depreciation deduction was reflected in an amount abated, credited, 
refunded, or otherwise repaid prior to such date.

[T.D. 6500, 25 FR 12140, Nov. 26, 1960, as amended by T.D. 6862, 30 FR 
14432, Nov. 18, 1965]



Sec. 1.6164-4  Payment of remainder of tax where extension relates
to only part of the tax.

    (a) Time for payment. If an extension of time relates to only part 
of the tax, the time for payment of the remainder of the tax shall be 
considered to be the dates on which payments would have been required if 
such remainder had been the tax and the taxpayer had elected to pay the 
tax in installments as provided in section 6152(a).
    (b) Example. The provisions of this section may be illustrated by 
the following example:

    Example. Corporation X, which keeps its books and makes its tax 
returns on the calendar year basis, filed its income tax return for 1956 
on March 15, 1957. The corporation showed a tax of $1,000 on its return 
and paid 50 percent of such tax, or $500 on March 15, 1957. On June 3, 
1957, Corporation X, pursuant to the provisions of section 6164, 
extended the time for payment of $400 of such tax. The remainder of the 
tax the time for payment of which was not so extended, i.e., $600, is to 
be considered the tax for purposes of determining when it is to be paid. 
The remainder is considered to be due on the dates on which payment 
would have been required if such remainder had been the tax. Since the 
taxable year ended on December 31, 1956, the tax is payable in two equal 
installments of $300 each on March 15, 1957, and June 17, 1957. The 
taxpayer, having paid $500 on March 15, 1957, will have $100 to pay on 
June 17, 1957.



Sec. 1.6164-5  Period of extension.

    If the time for the payment of any tax has been extended pursuant to 
section 6164, such extension shall expire:
    (a) On the last day of the month in which falls the last date 
prescribed by law (including any extension of time granted the taxpayer) 
for the filing of the return for the taxable year of the expected net 
operating loss; or
    (b) If an application for a tentative carryback adjustment provided 
in section 6411 with respect to such loss is filed before the expiration 
of the period specified in paragraph (a) of this section, on the date on 
which notice is mailed by registered mail prior to September 3, 1958, 
and by either registered or certified mail on and after September 3, 
1958, to the taxpayer that such application is allowed or disallowed in 
whole or in part.



Sec. 1.6164-6  Revised statements.

    (a) Requirements and effect. A corporation may file more than one 
statement under section 6164 with respect to any one taxable year. Each 
statement is to be considered a new statement and not an amendment of 
any prior statement. Each such new statement is to be in lieu of the 
last statement previously filed with respect to the taxable year. The 
new statement may extend the time for payment of a greater or lesser 
amount of tax than was extended under the prior statement or may change 
the kind of tax the time for payment of which is to be extended. The 
extension may not relate to any amount of tax which was paid or required 
to be paid prior to the date of filing the new statement. Any amount of 
tax the time for payment of which was extended under a prior statement, 
however, may continue to be extended under the new statement. If the 
amount the time for payment of which is extended under the new statement 
is less than the amount so extended under the last statement previously 
filed, the extension of time shall be terminated on the date the new 
statement is filed as to the difference between the two amounts. See 
Sec. 1.6164-8 for the dates on which such difference must be paid. If a 
corporation pays any amount of tax, the time for payment of which was 
extended, prior to the date the extension would otherwise terminate, the 
extension with respect to such amount shall be deemed terminated, 
without regard to whether a new statement is filed, on the date such 
amount is paid. The corporation shall indicate on each new statement 
filed that it has already filed one or more prior statements with

[[Page 548]]

respect to the taxable year. The corporation shall likewise indicate the 
date each prior statement was filed and the amount of each tax the time 
for payment of which was extended under each prior statement.
    (b) Example. The provisions of this section may be illustrated by 
the following example:

    Example. Corporation Y, which keeps its books and makes its tax 
returns on the calendar year basis, filed its income tax return for 1956 
on March 15, 1957, showing a tax of $100,000. At the same time it filed 
a statement under section 6164 in which it stated that it expected to 
have a net operating loss of $75,000 in 1957 and that the reduction in 
the tax previously determined for 1955 (the second taxable year 
preceding the year of the expected net operating loss) attributable to 
the expected net operating loss carryback resulting from such expected 
loss, would be $39,000. The corporation accordingly extended the time 
for payment of $39,000 of its income tax for 1956, and paid $30,500 (50 
percent of the excess of $100,000 over $39,000) of such tax on March 15, 
1957 (see section 6164(c) and Sec. 1.6164-4). As a result of its 
operations during the next several months, the corporation filed a 
second statement on June 3, 1957, in which it stated that its expected 
net operating loss for 1957 would amount to $150,000 and that the 
corresponding reduction in the tax for 1955 would amount to $78,000. 
Corporation Y under the new statement may extend the time for payment of 
$30,500, the installment due on June 17, 1957, and the time for payment 
of the $39,000 extended under the first statement filed on March 15, 
1957, may continue to be extended under the second statement. The 
$30,500 which was paid on March 15, 1957, will not be affected by the 
second statement filed on June 3, 1957.



Sec. 1.6164-7  Termination by district director.

    (a) After an examination of the statement filed by the corporation 
is made. The district director is authorized to make such examination of 
the statements filed as he deems necessary and practicable. If, upon 
such examination as he may make, the district director believes that, as 
of the time he makes the examination, all or any part of the statement 
is in a material respect erroneous or unreasonable, he will terminate 
the extension as to any part of the amount to which such extension 
relates which he deems should be terminated.
    (b) Jeopardy. If the district director believes that the collection 
of any amount to which an extension under section 6164 relates is in 
jeopardy, he will immediately terminate the extension. In the case of 
such a termination, notice and demand shall be made by the district 
director for payment of such amount, and there may be no further 
extension of time under section 6164 with respect to such amount.



Sec. 1.6164-8  Payments on termination.

    (a) In general. If an extension of time under section 6164 is 
terminated with respect to any amount either (1) by the filing of a new 
statement by the taxpayer under section 6164(e) extending the time for 
payment of a lesser amount than was extended in a prior statement, or 
(2) by action of the district director under section 6164(f) after 
making an examination of the statement filed by the corporation, no 
further extension of time may be made under section 6164 with respect to 
such amount. The time for payment of such amount shall be the dates on 
which payments would have been required if there had been no extension 
with respect to such amount and the taxpayer had elected under section 
6152(a) to pay the tax in installments.
    (b) Example. The provisions of this section may be illustrated by 
the following example:

    Example. Corporation Z, which keeps its books and makes its tax 
returns on the calendar year basis, filed its income tax return for 1956 
on March 15, 1957, showing a tax of $100,000. At the same time it filed 
a statement under section 6164 extending the time for payment of the 
entire $100,000 on the basis of an expected net operating loss carryback 
from 1957. On April 10, 1957, the corporation filed a new statement 
indicating that the reduction, attributable to the carryback from 1957, 
in its income tax for 1956, would only be $80,000, and thus terminated 
the above extension of $20,000. The time for payment of such $20,000 may 
not be extended again, and such $20,000 is payable as if it were the tax 
for 1956 and Corporation Z had elected to pay such tax in installments. 
That is, $10,000 is payable on March 15, 1957, and $10,000 payable on 
June 17, 1957. Inasmuch as the March 15 date had already passed when the 
Corporation Z terminated the extension with respect to the $20,000, 
$10,000 is payable immediately upon such termination, and the other 
installment of

[[Page 549]]

$10,000 is payable on June 17, 1957. This example would also apply if 
the extension of time for payment of the $20,000 were terminated instead 
by the district director on April 10, 1957.



Sec. 1.6164-9  Cross references.

    For provisions with respect to interest due on amounts the payment 
of which is extended under section 6164, see section 6601 and paragraph 
(e) of Sec. 301.6601-1 of this chapter (Regulations on Procedure and 
Administration). For extensions of time under section 6164 in the case 
of corporations making or required to make consolidated returns, see 
Sec. 1.1502-77(a).

[T.D. 6500, 25 FR 12140, Nov. 26, 1960, as amended by T.D. 7244, 37 FR 
28897, Dec. 30, 1972]



Sec. 1.6165-1  Bonds where time to pay the tax or deficiency has
been extended.

    The district director, including the Director of International 
Operations, may, as a condition to the granting of an extension of time 
within which to pay any tax or any deficiency therein, require the 
taxpayer to furnish a bond in an amount not exceeding double the amount 
of the tax with respect to which the extension is granted. Such bond 
shall be furnished in accordance with the provisions contained in 
section 7101 and the regulations in part 301 of this chapter 
(Regulations on Procedure and Administration).

                               COLLECTION

                           General Provisions



Sec. 1.6302-1  Deposit rules for corporation income and estimated
income taxes and certain taxes of tax-exempt organizations.

    (a) Requirement. A corporation, any organization subject to the tax 
imposed by section 511, and any private foundation subject to the tax 
imposed by section 4940, shall deposit all payments of tax imposed by 
chapter 1 of the Internal Revenue Code (or treated as so imposed by 
section 6154(h)), including any payments of estimated tax, on or before 
the date otherwise prescribed for paying such tax. This paragraph (a) 
does not apply to a foreign corporation or entity that has no office or 
place of business in the United States.
    (b) Deposits by electronic funds transfer. For the requirement to 
deposit corporation income and estimated income taxes and certain taxes 
of tax-exempt organizations by electronic funds transfer, see Sec. 
31.6302-1(h) of this chapter. A taxpayer not required to deposit by 
electronic funds transfer pursuant to Sec. 31.6302-1(h) of this chapter 
remains subject to the rules of paragraph (b)(1) of this section.
    (c) Failure to deposit. For provisions relating to the penalty for 
failure to make a deposit within the prescribed time, see section 6656.
    (d) Effective/applicability date. This section applies to deposits 
and payments made after December 31, 2010.

[T.D. 6914, 32 FR 3820, Mar. 8, 1967, as amended by T.D. 6941, 32 FR 
18040, Dec. 16, 1967; T.D. 7293, 38 FR 32804, Nov. 28, 1973; T.D. 7953, 
49 FR 19644, May 9, 1984; T.D. 8157, 52 FR 33809, Sept. 9, 1987; T.D. 
8723, 62 FR 37492, July 14, 1997, T.D. 8947, 66 FR 32542, June 15, 2001; 
T.D. 8952, 66 FR 33831, June 26, 2001; T.D. 9239, 71 FR 13, Jan. 3, 
2006; T.D. 9507, 75 FR 75899, Dec. 7, 2010]



Sec. 1.6302-2  Deposit rules for tax withheld on nonresident aliens
and foreign corporations.

    (a) Time for making deposits--(1) Deposits--(i) Monthly deposits. 
Except as provided in paragraphs (a)(1)(ii) and (iv) of this section, 
every withholding agent that, pursuant to chapter 3 of the Internal 
Revenue Code, has accumulated at the close of any calendar month an 
aggregate amount of undeposited taxes of $200 or more shall deposit such 
aggregate amount by the 15th day of the following month. However, the 
preceding sentence shall not apply if the withholding agent has made a 
deposit of taxes pursuant to paragraph (a)(1)(ii) of this section to a 
quarter-monthly period that occurred during such month. If the 15th day 
of the following month is a Saturday, Sunday, or legal holiday in the 
District of Columbia under section 7503, taxes will be treated as timely 
deposited if deposited on the next succeeding day which is not a 
Saturday, Sunday, or legal holiday. With respect to section 1446, this 
section applies only to a publicly traded partnership described in Sec. 
1.1446-4.

[[Page 550]]

    (ii) Quarter-monthly deposits. If at the close of any quarter-
monthly period within a calendar month, the aggregate amount of 
undeposited taxes required to be withheld pursuant to chapter 3 of the 
Internal Revenue Code is $2,000 or more, the withholding agent shall 
deposit such aggregate amount within 3 business days after the close of 
such quarter-monthly period. Business days include every calendar day 
other than Saturdays, Sundays, or legal holidays in the District of 
Columbia under section 7503. If any of the three weekdays following the 
close of a quarter-monthly period is a legal holiday under section 7503, 
the withholding agent has an additional day for each day that is a legal 
holiday by which to make the required deposit. For example, if the 
Monday following the close of a quarter-monthly period is New Year's 
Day, a legal holiday, the required deposit for the quarter-monthly 
period is not due until the following Thursday rather than the following 
Wednesday.
    (iii) Excess deposits. The excess (if any) of a deposit over the 
actual taxes for a monthly or quarter-monthly deposit period shall be 
applied in order of time to each of the withholding agent's succeeding 
deposits with respect to the same calendar year, until exhausted, to the 
extent that the amount by which the taxes for a subsequent deposit 
period exceed the deposit for such subsequent deposit period.
    (iv) Annual deposits. If at the close of December of each calendar 
year, the aggregate amount of undeposited taxes required to be withheld 
pursuant to chapter 3 of the Internal Revenue Code is less than $200, 
the withholding agent may deposit such aggregate amount by March 15 of 
the following calendar year. If such aggregate amount is not so 
deposited, it shall be remitted in accordance with paragraph (a)(1) of 
Sec. 1.1461-1.
    (2) Cross reference. For rules relating to the adjustment of 
deposits, see Sec. Sec. 1.1461-2(b) and 1.6414-1. For rules requiring 
payment of any undeposited tax, see Sec. 1.1461-1.
    (b) Manner of payment--(1) Payments not required by electronic funds 
transfer. A payment that is not required to be deposited by this section 
shall be made separately from a payment required by any other section. 
The payment may be submitted with the filed return. The timeliness of 
the payment will be determined by the date payment is received by the 
Internal Revenue Service at the place prescribed for filing by 
regulations or forms and instructions, or if section 7502(a) applies, by 
the date the payment is treated as received under section 7502(a), or on 
the last day prescribed for filing the return (determined without regard 
to any extension of time for filing the return), whichever is later. 
Each withholding agent making payments under this section shall report 
on the return, for the period to which such payments are made, 
information regarding such payments according to the instructions that 
apply to such return.
    (2) Voluntary deposits. An amount of tax which is not required to be 
deposited may nevertheless be deposited if the withholding agent so 
desires.
    (3) Separation of deposits. A deposit required by paragraph (a) of 
this section for any period occurring in one calendar year shall be made 
separately from any deposit for any period occurring in another calendar 
year. In addition, a deposit required to be made by paragraph (a) of 
this section shall be made separately from a deposit required by any 
other section.
    (4) Multiple remittances. A withholding agent may make one, or more 
than one, remittance of the amount required to be deposited if each 
remittance is accompanied by the applicable deposit form.
    (5) Time deemed paid. In general amounts deposited under this 
section shall be considered as paid on the last day prescribed for 
filing the return (Form 1042) in respect of such tax (determined without 
regard to any extension of time for filing such return), or at the time 
deposited, whichever is later. For purposes of section 6511 and the 
regulations thereunder, relating to period of limitation on credit or 
refund, if an amount is so deposited prior to April 15th of a calendar 
year immediately succeeding the calendar year in which occurs the period 
for which such amount was so deposited, such amount shall be considered 
as paid on such April 15th.

[[Page 551]]

    (c) Deposits by electronic funds transfer. For the requirement to 
deposit taxes withheld on nonresident aliens and foreign corporations by 
electronic funds transfer, see Sec. 31.6302-1(h) of this chapter. A 
taxpayer not required to deposit by electronic funds transfer pursuant 
to Sec. 31.6302-1(h) of this chapter remains subject to the rules of 
paragraph (b) of this section.
    (d) Penalties for failure to make deposits. For provisions relating 
to the penalty for failure to make a deposit within the prescribed time, 
see section 6656.
    (e) Saturday, Sunday, or legal holidays. For provisions relating to 
the time for performance of acts where the last day falls on Saturday, 
Sunday, or a legal holiday, see Sec. 301.7503-1 of this chapter 
(Procedure and Administration Regulations).
    (f) Employer identification number. For the definition of the term 
``employer identification number'', see Sec. 301.7701-12 of this 
chapter (Procedure and Administration Regulations). For provisions 
relating to the penalty for failure to include the employer 
identification number in a return, statement, or other document, see 
Sec. 301.6676-1 of such chapter.
    (g) Effective/Applicability date. Except as otherwise provided, this 
section shall apply to tax required to be withheld under chapter 3 of 
the Internal Revenue Code after 1966. The last sentence of paragraph 
(a)(1)(i) of this section shall apply to partnership taxable years 
beginning after April 29, 2008. Paragraph (b)(1) of this section applies 
to deposits and payments made after December 31, 2010.

[T.D. 6922, 32 FR 8713, June 17, 1967, as amended by T.D. 6941, 32 FR 
18040, Dec. 16, 1967; T.D. 7243, 38 FR 22, Jan. 3, 1973; T.D. 7953, 49 
FR 19644, May 9, 1984; T.D. 8723, 62 FR 37492, July 14, 1997; T.D. 8947, 
66 FR 32542, June 15, 2001; T.D. 8952, 66 FR 33831, June 26, 2001; T.D. 
9239, 71 FR 13, Jan. 3, 2006; T.D. 9394, 73 FR 23085, Apr. 29, 2008; 
T.D. 9507, 75 FR 75899, Dec. 7, 2010]



Sec. 1.6302-3  Deposit rules for estimated taxes of certain trusts.

    (a) Requirement. A bank or other financial institution described in 
paragraph (b) of this section shall deposit all payments of estimated 
tax under section 6654(l) with respect to trusts for which such 
institution acts as a fiduciary by the date otherwise prescribed for 
paying such tax in the manner set forth in published guidance, 
publications, forms and instructions.
    (b) Banks and financial institutions subject to this requirement. 
The requirement of paragraph (a) of this section applies to banks and 
other financial institutions described in sections 581 and 591 that have 
been designated as authorized Federal tax depositaries described in 
section 6302(c) and that act as fiduciaries for at least 200 trusts to 
which section 6654(l) applies that during the calendar year are required 
to make installment payments of estimated tax with respect to such 
trusts. For purposes of this section, a fiduciary is the person 
responsible for filing the tax returns and paying the taxes with respect 
to a trust.
    (c) Cross-references. For the requirement to deposit estimated tax 
payments of taxable trusts by electronic funds transfer, see Sec. 
31.6302-1(h) of this chapter.
    (d) Effective/applicability date. This section applies to deposits 
and payments made after December 31, 2010.

[T.D. 8192, 53 FR 12008, Apr. 12, 1988; T.D. 8192, 53 FR 13464, Apr. 25, 
1988, as amended by T.D. 8723, 62 FR 37492, July 14, 1997; T.D. 8952, 66 
FR 33831, June 26, 2001; T.D. 9507, 75 FR 75900, Dec. 7, 2010]



Sec. 1.6302-4  Voluntary payments by electronic funds transfer.

    (a) Electronic funds transfer. Any person may voluntarily remit by 
electronic funds transfer any payment of tax imposed by subtitle A of 
the Internal Revenue Code, including any payment of estimated tax. Such 
payment must be made in the manner set forth in published guidance, 
publications, forms and instructions.
    (b) Effective/applicability date. This section applies to deposits 
and payments made after December 31, 2010.

[T.D. 9507, 75 FR 75900, Dec. 7, 2010]



Sec. 1.6361-1  Collection and administration of qualified State
individual income taxes.

    Except as otherwise provided in Sec. Sec. 301.6361-1 to 301.6365-2, 
inclusive, of this chapter (Regulations on Procedure and 
Administration), the provisions of

[[Page 552]]

this part under subtitle F of the Internal Revenue Code of 1954 relating 
to the collection and administration of the taxes imposed by chapter 1 
of such Code on the incomes of individuals (or relating to civil or 
criminal sanctions with respect to such collection and administration) 
shall apply to the collection and administration of qualified State 
individual income taxes (as defined in section 6362 of such Code and the 
regulations thereunder) as if such taxes were imposed by chapter 1.

[T.D. 7577, 43 FR 59358, Dec. 20, 1978]

                    ABATEMENTS, CREDITS, AND REFUNDS



Sec. 1.6411-1  Tentative carryback adjustments.

    (a) In general. Any taypayer who has a net operating loss under 
section 172, a net capital loss under section 1211(a) which is a 
carryback under section 1212, an unused investment credit under section 
46, or an unused work incentive program (WIN) credit under section 50A, 
may file an application under section 6411 for a tentative carryback 
adjustment of the taxes for taxable years prior to the taxable year of 
the net operating or capital loss or the unused credit, whichever is 
applicable, which are affected by the net operating loss carryback, the 
capital loss carryback, the unused investment credit carryback, or the 
unused WIN credit carryback, resulting from such loss or unused credit. 
The regulations under section 6411 shall apply with respect to 
investment credit carrybacks for taxable years ending after December 31, 
1961, but only with respect to applications for tentative carryback 
adjustments for investment credit carrybacks filed after November 2, 
1966. The regulations under section 6411 shall apply with respect to WIN 
credit carrybacks for taxable years beginning after December 31, 1971. 
The right to file an application for a tentative carryback adjustment is 
not limited to corporations, but is available to any taxpayer otherwise 
entitled to carryback a loss or unused credit. A corporation may file an 
application for a tentative carryback adjustment even though it has not 
extended the time for payment of tax under section 6164. In determining 
any decrease in tax under Sec. Sec. 1.6411-1 through 1.6411-4, the 
decrease in tax is determined net of any increase in the tax imposed by 
section 56 (relating to the minimum tax for tax preferences).
    (b) Contents of application. (1) The application for a tentative 
carryback adjustment shall be filed, in the case of a corporation, on 
Form 1139, and in the case of taxpayers other than corporations, on Form 
1045. The application shall be filled out in accordance with the 
instructions accompanying the form, and all information required by the 
form and the instructions must be furnished by the taxpayer.
    (2) An application for a tentative carryback adjustment does not 
constitute a claim for credit or refund. If such application is 
disallowed by the district director or director of a service center in 
whole or in part, no suit may be maintained in any court for the 
recovery of any tax based on such application. The filing of an 
application for a tentative carryback adjustment will not constitute the 
filing of a claim for credit or refund within the meaning of section 
6511 for purposes of determining whether a claim for credit or refund 
was filed prior to the expiration of the applicable period of 
limitation. The taxpayer, however, may file a claim for credit or refund 
under section 6402 at any time prior to the expiration of the applicable 
period of limitation, and may maintain a suit based on such claim if it 
is disallowed or if the district director or director of a service 
center does not act on the claim within 6 months from the date it is 
filed. Such claim may be filed before, simultaneously with, or after the 
filing of the application for a tentative carryback adjustment. A claim 
for credit or refund under section 6402 filed after the filing of an 
application for a tentative carryback adjustment is not to be considered 
an amendment of such application. Such claim, however, in proper cases 
may constitute an amendment to a prior claim filed under section 6402.
    (c) Time and place for filing application. Except as otherwise 
provided in this paragraph the application for a tentative carryback 
adjustment shall be filed on or after the date of the filing of the 
return for the taxable year of

[[Page 553]]

the net operating loss, net capital loss, unused investment credit, or 
unused WIN credit and shall be filed within a period of twelve months 
from the end of such taxable year. With respect to any portion of an 
investment credit carryback or a WIN credit carryback from a taxable 
year attributable to a net operating loss carryback or a capital loss 
carryback from a subsequent taxable year, the twelve-month period shall 
be measured from the end of such subsequent taxable year. In the case of 
an application for a tentative carryback adjustment attributable to the 
carryback of an unused investment credit, the twelve-month period for 
filing shall not expire before the close of December 31, 1966. Any 
application filed prior to the date on which the return for the taxable 
year of the loss or unused credit is filed shall be considered to have 
been filed on the date such return is filed. In the case of an 
application filed before April 15, 1968, the application shall be filed 
with the internal revenue officer to whom the tax was paid or by whom 
the assessment was made. Except as provided in paragraph (b) of Sec. 
301.6091-1 (relating to hand-carried documents), in the case of an 
application filed after April 14, 1968, if the tax was paid to the 
Director of International Operations, the application shall be filed 
with him; otherwise the application shall be filed with the internal 
revenue office with which the return was filed.

[T.D. 6500, 25 FR 12144, Nov. 26, 1960, as amended by T.D. 6862, 30 FR 
14432, Nov. 18, 1965; T.D. 6950, 33 FR 5357, Apr. 4, 1968; T.D. 7301, 39 
FR 973, Jan. 4, 1974; T.D. 7564, 43 FR 40498, Sept. 12, 1978; T.D. 8107, 
51 FR 43347, Dec. 2, 1986]



Sec. 1.6411-2  Computation of tentative carryback adjustment.

    (a) Tax previously determined. The taxpayer is to determine the 
amount of decrease, attributable to the carryback, in tax previously 
determined for each taxable year before the taxable year of the net 
operating loss, net capital loss, or unused investment credit. The tax 
previously determined is to be ascertained in accordance with the method 
prescribed in section 1314(a). Thus, the tax previously determined will 
be the tax shown on the return as filed, increased by any amounts 
assessed (or collected without assessment) as deficiencies before the 
date of the filing of the application for a tentative carryback 
adjustment, and decreased by any amounts abated, credited, refunded, or 
otherwise repaid prior to that date. Any items as to which the 
Commissioner and the taxpayer are in disagreement at the time of the 
filing of the application shall, for purposes of Sec. 1.6411-2, be 
taken into account in ascertaining the tax previously determined only 
if, and to the extent that, they were reported on the return, or were 
reflected in any amounts assessed (or collected without assessment) as 
deficiencies, or in any amounts abated, credited, refunded, or otherwise 
repaid, before the date of filing the application. The tax previously 
determined, therefore, will reflect the foreign tax credit and the 
credit for tax withheld at source provided in section 33.
    (b) Decrease attributable to carryback. After ascertaining the tax 
previously determined in the manner described in paragraph (a) of this 
section, the taxpayer shall determine the decrease in tax previously 
determined attributable to the carryback and any related adjustments on 
the basis of the items of tax taken into account in computing the tax 
previously determined. In determining any decrease attributable to the 
carryback or any related adjustment, items shall be taken into account 
under this subsection only to the extent that they were reported on the 
return, or were reflected in amounts assessed (or collected without 
assessment) as deficiencies, or in amounts abated, credited, refunded, 
or otherwise repaid, before the date of filing the application for a 
tentative carryback adjustment. If the Commissioner and the taxpayer are 
in disagreement as to the proper treatment of any item, it shall be 
assumed, for purposes of determining the decrease in the tax previously 
determined, that the item was reported correctly by the taxpayer unless, 
and to the extent that, the disagreement has resulted in the assessment 
of a deficiency (or the collection of an amount without an assessment),

[[Page 554]]

or the allowing or making of an abatement, credit, refund, or other 
repayment, before the date of filing the application. Thus, if the 
taxpayer claimed a deduction on its return of $50,000 for salaries paid 
its officers but the Commissioner proposes that the deduction should not 
exceed $20,000, and the Commissioner and the taxpayer have not agreed on 
the amount properly deductible before the date the application for a 
tentative carryback adjustment is filed, $50,000 shall be considered as 
the amount properly deductible for purposes of determining the decrease 
in tax previously determined in respect of the application for a 
tentative carryback adjustment. In determining the decrease in tax 
previously determined, any items that are affected by the carryback must 
be adjusted to reflect the carryback. Thus, unless otherwise provided, 
any deduction limited, for example, by adjusted gross income, such as 
the deduction for medical, dental, etc., expenses, is to be recomputed 
on the basis of the adjusted gross income as affected by the carryback. 
See Sec. 1.6411-3(d) for rules on the application of the decrease in 
tax to any tax liability.
    (c) Effective/applicability date. These regulations apply with 
respect to applications for tentative refund filed on or after August 
27, 2007.

[T.D. 6500, 25 FR 12144, Nov. 26, 1960, as amended by T.D. 7301, 39 FR 
973, Jan. 4, 1974; T.D. 9355, 72 FR 48933, Aug. 27, 2007; 72 FR 56619, 
Oct. 4, 2007; T.D. 9499, 75 FR 51934, Aug. 24, 2010]



Sec. 1.6411-3  Allowance of adjustments.

    (a) Time prescribed. The Commissioner shall act upon any application 
for a tentative carryback adjustment filed under section 6411(a) within 
a period of 90 days from whichever of the following two dates is the 
later:
    (1) The date the application is filed; or
    (2) The last day of the month in which falls the last date 
prescribed by law (including any extension of time granted the taxpayer) 
for filing the return for the taxable year of the net operating loss, 
net capital loss, or unused investment credit from which the carryback 
results.
    (b) Examination. Within the 90-day period described in paragraph (a) 
of this section, the Commissioner shall make, to the extent deemed 
practicable within this period, an examination of the application to 
discover omissions and errors of computation. The Commissioner shall 
determine within this period the decrease in tax previously determined, 
affected by the carryback or any related adjustments, upon the basis of 
the application and examination. The decrease shall be determined in the 
same manner as that provided in section 1314(a) for the determination by 
the taxpayer of the decrease in taxes previously determined, which must 
be set forth in the application for a tentative carryback adjustment. 
The Commissioner may correct any errors of computation or omissions 
discovered upon examination of the application. In determining the 
decrease in tax previously determined which is affected by the carryback 
or any related adjustment, the Commissioner may correct any mathematical 
error appearing on the application and may correct any modification 
required by the law and incorrectly made by the taxpayer in computing 
the net operating loss, net capital loss, or unused investment credit, 
the resulting carrybacks, or the net operating loss deduction, capital 
loss deduction, or investment credit allowable. If the required 
modification has not been made by the taxpayer and the Commissioner has 
the necessary information to make the modification within the 90-day 
period, the Commissioner may, in the Commissioner's discretion, make the 
modification. In determining the decrease, the Commissioner will not, 
for example, change the amount claimed on the return as a deduction for 
depreciation because the Commissioner believes that the taxpayer has 
claimed an excessive amount; and the Commissioner will not include in 
gross income any amount not so included by the taxpayer, even though the 
Commissioner believes that the amount is subject to tax and properly 
should be included in gross income.
    (c) Disallowance in whole or in part. If the Commissioner finds that 
an application for a tentative carryback adjustment contains material 
omissions

[[Page 555]]

or errors of computation, the Commissioner may disallow the application 
in whole or in part without further action. If the Commissioner deems 
that any error of computation can be corrected within the 90-day period, 
the Commissioner may do so and allow the application in whole or in 
part. The Commissioner's determination as to whether the Commissioner 
can correct any error of computation within the 90-day period shall be 
conclusive. The Commissioner's action in disallowing, in whole or in 
part, any application for a tentative carryback adjustment shall be 
final and may not be challenged in any proceeding. The taxpayer may, 
however, file a claim for credit or refund under section 6402, and may 
maintain a suit based on the claim if the claim is disallowed or if the 
Commissioner does not act upon the claim within 6 months from the date 
it is filed.
    (d) Application of decrease. (1) Each decrease determined by the 
Commissioner in any previously determined tax that is affected by the 
carryback or any related adjustments shall first be applied against any 
unpaid amount of the tax with respect to which such decrease was 
determined. The unpaid amount of tax may include one or more of the 
following:
    (i) An amount with respect to which the taxpayer is delinquent;
    (ii) An amount the time for payment of which has been extended under 
section 6164 and which is due and payable on or after the date of the 
allowance of the decrease.
    (iii) An amount (not including an amount the time for payment of 
which has been extended under section 6164) which is due and payable on 
or after the date of the allowance of the decrease, including any 
assessed liabilities, unassessed liabilities determined in a statutory 
notice of deficiency, unassessed liabilities identified in a proof of 
claim filed in a bankruptcy proceeding, and other unassessed liabilities 
in rare and unusual circumstances.
    (2) If the unpaid amount of tax includes more than one unpaid 
amount, the Commissioner may determine against which amount or amounts, 
and in what proportion, the decrease is to be applied. In general, 
however, the decrease will be applied against any amounts described in 
paragraphs (d)(1)(i) through (iii) of this section in the order named. 
If there are several amounts of the type described in paragraph 
(d)(1)(iii) of this section, any amount of the decrease that is to be 
applied against the amount will be applied by assuming that the tax 
previously determined minus the amount of the decrease to be so applied 
is ``the tax'' and that the taxpayer had elected to pay the tax in 
installments. The unpaid amount of tax against which a decrease may be 
applied under paragraph (d)(1) of this section may not include any 
amount of tax for any taxable year other than the year of the decrease. 
After making the application, the Commissioner will credit any remainder 
of the decrease against any unsatisfied amount of any tax for the 
taxable year immediately preceding the taxable year of the net operating 
loss, capital loss, or unused investment credit, the time for payment of 
which has been extended under section 6164.
    (3) Any remainder of the decrease after the application and credits 
may, within the 90-day period, in the discretion of the Commissioner, be 
credited against any tax liability or installment thereof then due from 
the taxpayer (including assessed liabilities, unassessed liabilities 
determined in a statutory notice of deficiency, unassessed liabilities 
identified in a proof of claim filed in a bankruptcy proceeding, and 
other unassessed liabilities in rare and unusual circumstances), and, if 
not so credited, shall be refunded to the taxpayer within the 90-day 
period.
    (e) Effective/applicability date. These regulations apply with 
respect to applications for tentative refund filed on or after August 
27, 2007.

[T.D. 6950, 33 FR 5358, Apr. 4, 1968, as amended by T.D. 7301, 39 FR 
973, Jan. 4, 1974; T.D. 9355, 72 FR 48934, 48934, Aug. 27, 2007; 72 FR 
56619, Oct. 4, 2007; T.D. 9499, 75 FR 51934, Aug. 24, 2010]



Sec. 1.6411-4  Consolidated groups.

    For further rules applicable to consolidated groups, see Sec. 
1.1502-78. For further rules applicable to consolidated groups that 
include insolvent financial

[[Page 556]]

institutions, see Sec. 301.6402-7 of this chapter.

[T.D. 8446, 57 FR 53034, Nov. 6, 1992]



Sec. 1.6414-1  Credit or refund of tax withheld on nonresident aliens
and foreign corporations.

    (a) In general. Any withholding agent who for the calendar year pays 
more than the correct amount of:
    (1) Tax required to be withheld under chapter 3 of the Code, or
    (2) Interest, addition to the tax, additional amount, or penalty 
with respect to such tax,


may file a claim for credit or refund of the overpayment in the manner 
and subject to the conditions stated in the Procedure and Administration 
Regulations (Part 301 of this chapter) under section 6402, or may claim 
credit for the overpayment as provided in paragraph (b) of this section. 
With respect to the payment of withholding tax under section 1446, this 
section shall only apply to a publicly traded partnership described in 
Sec. 1.1446-4. See Sec. 1.1446-3(d)(2)(iv) for rules regarding refunds 
to a withholding agent under section 1446.
    (b) Claim for credit on Form 1042. The withholding agent may claim 
credit of an overpayment described in paragraph (a) of this section for 
any calendar year by showing the amount of overpayment on the return on 
Form 1042 for such calendar year, which shall constitute a claim for 
credit under this paragraph. The claim for credit shall be evidenced by 
a statement on the return setting forth the amount determined as an 
overpayment and showing such other information as may be required by the 
instructions relating to the return. The amount claimed as a credit may 
be applied, to the extent it has not been applied under Sec. 1.1461-
2(b), by the withholding agent to reduce the amount of a payment or 
deposit of tax required by Sec. 1.1461-1 or Sec. 1.6302-2(a) for any 
payment period occurring in the calendar year following the calendar 
year of overwithholding. The amount so claimed as a credit shall also be 
entered on the annual return on Form 1042 for the calendar year 
following the calendar year of overwithholding and shall be applied as a 
payment on account of the tax shown on such form. If the withholding 
agent files a claim for credit or refund of the overpayment on Form 843 
in accordance with Sec. 301.6402-2 of this chapter (Procedure and 
Administration Regulations), or a claim for refund of the overpayment on 
Form 1042 in accordance with Sec. 301.6402-3 of such chapter, he may 
not claim credit for the overpayment under this paragraph.
    (c) Overpayment of amounts actually withheld. No credit or refund to 
the withholding agent shall be allowed for the amount of any overpayment 
of tax which, after taking into account paragraph (b) of Sec. 1.1464-1, 
the withholding agent has actually withheld from an item of income under 
chapter 3 of the Code.
    (d) Effective/Applicability date. The last two sentences of 
paragraph (a) of this section shall apply to partnership taxable years 
beginning after April 29, 2008.

[T.D. 6922, 32 FR 8714, June 17, 1967, as amended by T.D. 9394, 73 FR 
23085, Apr. 29, 2008]



Sec. 1.6425-1  Adjustment of overpayment of estimated income tax 
by corporation.

    (a) In general. Any corporation which has made an overpayment of 
estimated income tax for a taxable year beginning after December 31, 
1967, may file an application for an adjustment of such overpayment. The 
right to file an application for an adjustment of overpayment of 
estimated income tax is limited to corporations.
    (b) Contents of application. (1) The application for an adjustment 
of overpayment of estimated income tax shall be filed on Form 4466. The 
application shall be filled out in accordance with the instructions 
accompanying the form, and all information required by the form and 
instructions must be furnished by the corporation. The application shall 
be verified in the manner prescribed by section 6065 as in the case of a 
return of the corporation.
    (2) An application for an adjustment of overpayment of estimated 
income tax does not constitute a claim for credit or refund. If such 
application is disallowed by the district director, or director of a 
service center, in whole or

[[Page 557]]

in part, no suit may be maintained in any court for the recovery of any 
tax based on such application. The filing of an application for an 
adjustment of overpayment of estimated income tax will not constitute 
the filing of a claim for credit or refund within the meaning of section 
6511 for the purpose of determining whether a claim for refund was filed 
prior to the expiration of the applicable period of limitation. The 
corporation, however, may file a claim for credit or refund under 
section 6402 at any time prior to the expiration of the applicable 
period of limitation and may maintain a suit based on such claim if it 
is disallowed or if the district director, or director of a service 
center, does not act on the claim within 6 months from the date it is 
filed. Such claim may be filed before, simultaneously with, or after the 
filing of the application for the adjustment of overpayment of estimated 
tax. A claim for credit or refund under section 6402 filed after the 
filing of an application for an adjustment of overpayment of estimated 
income tax is not to be considered an amendment of such application. 
Such claim, however, in proper cases, may constitute an amendment to a 
prior claim filed under section 6402.
    (c) Time and place for filing application. (1) The application for 
an adjustment of overpayment of estimated income tax shall be filed 
after the last day of the taxable year and on or before the 15th day of 
the third month thereafter, or before the date on which the corporation 
first files its income tax return for such taxable year (whether or not 
it subsequently amends the return), whichever is earlier.
    (2) Except as provided in paragraph (b)(2) of Sec. 301.6091-1 of 
this chapter (relating to hand-carried documents), the application on 
Form 4466 shall be filed with the internal revenue officer designated in 
instructions applicable to such form.

[T.D. 7059, 35 FR 14546, Sept. 17, 1970]



Sec. 1.6425-2  Computation of adjustment of overpayment of
estimated tax.

    (a) Income tax liability defined. For purposes of Sec. 1.6425-1, 
this section, Sec. Sec. 1.6425-3 and 1.6655-7, relating to excessive 
adjustment, the term income tax liability means the excess of--
    (1) The sum of--
    (i) The tax imposed by section 11 or 1201(a), or subchapter L of 
chapter 1 of the Internal Revenue Code, whichever is applicable; plus
    (ii) The tax imposed by section 55; over
    (2) The credits against tax provided by part IV of subchapter A of 
chapter 1 of the Internal Revenue Code.
    (b) Computation of adjustment. The amount of an adjustment under 
section 6425 is an amount equal to the excess of the estimated income 
tax paid by the corporation during the taxable year over the amount 
which, at the time of filing Form 4466, the corporation estimates as its 
income tax liability for the taxable year.
    (c) Effective/applicability date. Paragraph (a) of this section is 
applicable to applications for adjustments of overpayments of estimated 
income tax that are filed in taxable years beginning after September 6, 
2007.

[T.D. 7059, 35 FR 14547, Sept. 17, 1970, as amended by T.D. 9347, 72 FR 
44348, Aug. 7, 2007]



Sec. 1.6425-3  Allowance of adjustments.

    (a) Limitation. No application under section 6425 shall be allowed 
unless the amount of the adjustment is (1) at least 10 percent of the 
amount which, at the time of filing Form 4466 the corporation estimates 
as its income tax liability for the taxable year, and (2) at least $500.
    (b) Time prescribed. The Internal Revenue Service shall act upon an 
application for an adjustment of overpayment of estimated income tax 
within a period of 45 days from the date on which such application is 
filed.
    (c) Examination. Within the 45-day period described in paragraph (b) 
of this section, the Internal Revenue Service shall make, to the extent 
it deems practicable in such period, a limited examination of the 
application to discover omissions and errors therein. The Service shall 
calculate the adjustment, which calculation must be set forth in the 
application for such adjustment, in the manner provided in section 
6425(c)(2) for the determination by the corporation of such adjustment. 
The

[[Page 558]]

Service, however, may correct any material error or omission that is 
discovered upon examination of the application. In determining the 
adjustment, the Service may correct any mathematical error appearing on 
the application, and it may likewise make any modification required by 
the law to correct the corporation's computation of the adjustment. If 
the required modification has not been made by the corporation and the 
Service has available the necessary information to make such 
modification within the 45- day period, it may make such modification. 
The examination of the application and the allowance of the adjustment 
shall not prejudice any right of the Service to claim later that the 
adjustment was improper.
    (d) Disallowance in whole or in part. If the Internal Revenue 
Service finds that an application for an adjustment of overpayment of 
estimated tax contains material omissions or errors, the Service may 
disallow such application in whole or in part without further action. 
If, however, the Service deems that any omission or error can be 
corrected by it within the 45-day period, it may do so and allow the 
application in whole or in part. In the case of a disallowance or 
modification, the Service shall notify the corporation of such action. 
The Service's determination as to whether it can correct any omission or 
error shall be conclusive. Similarly, its action in disallowing, in 
whole or in part, any application for an adjustment of overpayment of 
estimated income tax shall be final and may not be challenged in any 
proceeding. The corporation in such case, however, may file a claim for 
credit or refund under section 6402, and may maintain a suit based on 
such claim if it is disallowed or if the Service does not act upon the 
claim within 6 months from the date it is filed.
    (e) Application of adjustment. If the Internal Revenue Service 
allows the adjustment, it may first credit the amount of the adjustment 
against any liability in respect of an internal revenue tax on the part 
of the corporation which is due and payable on the date of the allowance 
of the adjustment before making payment of the balance to the 
corporation. In such a case, the Service shall notify the corporation of 
the credit, and refund the balance of the adjustment.
    (f) Effect of adjustment. (1) For purposes of all sections of the 
Internal Revenue Code except section 6655, relating to additions to tax 
for failure to pay estimated income tax, any adjustment under section 
6425 is to be treated as a reduction of prior estimated tax payments as 
of the date the credit is allowed or the refund is paid. For the purpose 
of sections 6655(a) through (g), (i), and (j), credit or refund of an 
adjustment is to be treated as if not made in determining whether there 
has been any underpayment of estimated income tax and, if there is an 
underpayment, the period during which the underpayment existed. However, 
an excessive adjustment under section 6425 is taken into account in 
applying the addition to tax under section 6655(h).
    (2) For the effect of an excessive adjustment under section 6425, 
see Sec. 1.6655-7.
    (3) Effective/applicability date: This paragraph (f) is applicable 
to applications for adjustments of overpayments of estimated income tax 
that are filed in taxable years beginning after September 6, 2007.

[T.D. 7059, 35 FR 14547, Sept. 17, 1970, as amended by T.D. 9347, 72 FR 
44348, Aug. 7, 2007]

   ADDITIONS TO THE TAX, ADDITIONAL AMOUNTS, AND ASSESSABLE PENALTIES



Sec. 1.6654-1  Addition to the tax in the case of an individual.

    (a) In general. (1) Section 6654 imposes an addition to the taxes 
under chapters 1 and 2 of the Code in the case of any underpayment of 
estimated tax by an individual (with certain exceptions described in 
section 6654(d)), including any underpayment of estimated qualified 
State individual income taxes which are treated pursuant to section 
6361(a) as if they were imposed by chapter 1. This addition to the tax 
is in addition to any applicable criminal penalties and is imposed 
whether or not there was reasonable cause for the underpayment. The 
amount of the underpayment for any installment date is the excess of:

[[Page 559]]

    (i) The following percentages of the tax shown on the return for the 
taxable year or, if no return was filed, of the tax for such year, 
divided by the number of installment dates prescribed for such taxable 
year:
    (A) 80 percent in the case of taxable years beginning after December 
31, 1966, of individuals not referred to in section 6073(b) (relating to 
income from farming or fishing);
    (B) 70 percent in the case of taxable years beginning before January 
1, 1967, of such individuals; and
    (C) 66\2/3\ percent in the case of individuals referred to in 
section 6073(b); over
    (ii) The amount, if any, of the installment paid on or before the 
last day prescribed for such payment.
    (2) The amount of the addition is determinated at the annual rate 
referred to in the regulations under section 6621 upon the underpayment 
of any installment of estimated tax for the period from the date such 
installment is required to be paid until the 15th day of the fourth 
month following the close of the taxable year, or the date such 
underpayment is paid, whichever is earlier. For purposes of determining 
the period of the underpayment (i) the date prescribed for the payment 
of any installment of estimated tax shall be determined without regard 
to any extension of time, and (ii) a payment of estimated tax on any 
installment date, to the extent that it exceeds the amount of the 
installment determined under subparagraph (1)(i) of this paragraph for 
such installment date, shall be considered a payment of any previous 
underpayment.
    (3) In determining the amount of the installment paid on or before 
the last day prescribed for payment thereof, the estimated tax shall be 
computed without any reduction for the amount which the taxpayer 
estimates as his credit under section 31 (relating to tax withheld at 
source on wages), and the amount of such credit shall be deemed a 
payment of estimated tax. An equal part of the amount of such credit 
shall be deemed paid on each installment date (determined under section 
6153) for the taxable year unless the taxpayer establishes the dates on 
which all amounts were actually withheld. In the latter case, all 
amounts withheld shall be considered as payments of estimated tax on the 
dates such amounts were actually withheld. Under section 31 the entire 
amount withheld during a calendar year is allowed as a credit against 
the tax for the taxable year which begins in such calendar year. 
However, where more than one taxable year begins in any calendar year no 
portion of the amount withheld during the calendar year will be treated 
as a payment of estimated tax for any taxable year other than the last 
taxable year beginning in such calendar year. The rules prescribed in 
this subparagraph for determining the time as of which the amount 
withheld shall be deemed paid are applicable even though such amount was 
withheld during a taxable year preceding that for which the credit is 
allowed.
    (4) The term tax when used in subparagraph (1)(i) of this paragraph 
shall mean:
    (i) The tax imposed by chapter 1 of the Code (other than by section 
56 or, for taxable years ending before September 30, 1968, the tax 
surcharge imposed by section 51), including any qualified State 
individual income taxes which are treated pursuant to section 6361(a) as 
if they were imposed by chapter 1, plus--
    (ii) For taxable years beginning after December 31, 1966, the tax 
imposed by chapter 2 of the Code, minus
    (iii) All credits allowed by part IV, subchapter A of chapter 1, 
except the credit provided by section 31, relating to tax withheld at 
source on wages, minus
    (iv) In the case of an individual who is subject to one or more 
qualified State individual incomes taxes, the sum of the credits allowed 
against such taxes pursuant to section 6362(b)(2) (B) or (C) or section 
6362(c)(4) and paragraph (c) of Sec. 301.6362-4 of this chapter 
(Regulations on Procedure and Administration) (relating to the credit 
for income taxes of other States or political subdivisions thereof) and 
paragraph (c)(2) of Sec. 301.6361-1 (relating to the credit for tax 
withheld from wages on account of qualified State individual income 
taxes), and minus
    (v) For taxable years ending after February 29, 1980, the 
individual's overpayment of windfall profit tax imposed

[[Page 560]]

by section 4986 of the Code for the taxable year. For this purpose, the 
amount of such overpayment is the sum of (A) the amount by which such 
individual's aggregate windfall profit tax liability for the taxable 
year as a producer of crude oil is exceeded by withholding of windfall 
profit tax for the taxable year, and (B) any amount treated under 
section 6429 or 6430 as an overpayment of windfall profit tax for crude 
oil removed during the taxable year. The deemed payment date in section 
4995(a)(4)(B) for the amount of windfall profit tax withheld with 
respect to payments for crude oil shall have no effect in the 
determination of the overpayment of windfall profit tax.
    (b) Statement relating to underpayment. If there has been an 
underpayment of estimated tax as of any installment date prescribed for 
its payment and the taxpayer believes that one or more of the exceptions 
described in Sec. 1.6654-2 precludes the assertion of the addition to 
the tax under section 6654, he should attach to his income tax return 
for the taxable year a Form 2210 showing the applicability of any 
exception upon which he relies.
    (c) Examples. The method prescribed in paragraph (a) of this section 
for computing the addition to the tax may be illustrated by the 
following examples:

    Example 1. An individual taxpayer files his return for the calendar 
year 1972 on April 15, 1973, showing a tax (income and self-employment 
tax) of $30,000. He had paid a total of $20,000 of estimated tax in four 
installments of $5,000 on each of the four installment dates prescribed 
for such year. No other payments were made prior to the date the return 
was filed. Since the amount of each installment paid by the last date 
prescribed for payment thereof is less than one-quarter of 80 percent of 
the tax shown on the return, the addition to the tax is applicable in 
respect of the underpayment existing as of each installment date and is 
computed as follows:

(1) Amount of tax shown on return.......................         $30,000
(2) 80 percent of item (1)..............................          24,000
                                                         ---------------
(3) One-fourth of item (2)..............................           6,000
(4) Deduct amount paid on each installment date.........           5,000
                                                         ---------------
(5) Amount of underpayment for each installment date               1,000
 (item (3) minus item (4))..............................
                                                         ===============
(6) Addition to the tax:
  1st installment--period 4-15-72 to 4-15-73............              60
  2nd installment--period 6-15-72 to 4-15-73............              50
  3rd installment--period 9-15-72 to 4-15-73............              35
  4th installment--period 1-15-73 to 4-15-73............              15
                                                         ---------------
    Total...............................................            $160
 

    Example 2. An individual taxpayer files his return for the calendar 
year 1955 on April 15, 1956, showing a tax of $30,000. The requirements 
of section 6015(a) were first met after April 1 and before June 2, 1955, 
and a total of $18,000 of estimated tax was paid in three equal 
installments of $6,000 on each of the three installment dates prescribed 
for such year. Since the amount of each installment paid by the last 
date prescribed for payment thereof is less than one-third of 70 percent 
of the tax shown on the return, the addition to the tax is existing as 
of each installment date and is applicable in respect of the 
underpayment computed as follows:

(1) Amount of tax shown on return..........................      $30,000
(2) 70 percent of item (1).................................       21,000
                                                   ==========
(3) One-third of item (2)..................................        7,000
(4) Deduct amount paid on each installment date............        6,000
                                                   ==========
(5) Amount of underpayment for each installment date (item         1,000
 (3) minus item (4)).......................................
(6) Addition to the tax:
  1st installment--period 6-15-55 to 4-15-56......      $50
  2d installment--period 9-15-55 to 4-15-56.......       35
  3d installment--period 1-15-56 to 4-15-56.......       15
      Total.......................................      100
 


(Secs. 6015, 6154, 6654, 6655, and 7805, Internal Revenue Code of 1954 
(96 Stat. 2395 and 2396, 68A Stat. 917; 26 U.S.C. 6015, 6154, 6654, 
6655, and 7805))

[T.D. 6500, 25 FR 12146, Nov. 26, 1960, as amended by T.D. 7384, 40 FR 
49322, Oct. 22, 1975; T.D. 7427, 41 FR 34029, Aug. 12, 1976; T.D. 7577, 
43 FR 59358, Dec. 20, 1978; T.D. 8016, 50 FR 11855, Mar. 26, 1985]



Sec. 1.6654-2  Exceptions to imposition of the addition to the
tax in the case of individuals.

    (a) In general. The addition to the tax under section 6654 will not 
be imposed for any underpayment of any installment of estimated tax if, 
on or before the date prescribed for payment of the installment, the 
total amount of all payments of estimated tax made equals or exceeds the 
lesser of the amount in Sec. 1.6654-2(a)(1) or the amount in Sec. 
1.6654-2(a)(2).

[[Page 561]]

    (1)(i) The amount which would have been required to be paid on or 
before the date prescribed for payment if the estimated tax were the tax 
shown on the return for the preceding taxable year, provided that the 
preceding taxable year was a year of 12 months and a return showing a 
liability for tax was filed for such year. However, this subparagraph 
shall not apply with respect to any taxable year which ends on or after 
September 30, 1968, for which a tax is imposed by section 51 (relating 
to tax surcharge), in the case of a payment of estimated tax the time 
prescribed for payment of which is on or after September 15, 1968.
    (ii) Special rule for taxable years beginning in 2009. For any 
taxable year beginning in 2009, for a qualified individual, the amount 
described in paragraph (a)(1)(i) of this section is reduced to 90 
percent of that amount.
    (A) Qualified individual means any individual whose adjusted gross 
income shown on the individual's return for the preceding taxable year 
is less than $500,000 and who certifies, as prescribed in paragraph 
(a)(1)(ii)(D) of this section, that more than 50 percent of the gross 
income shown on the return for the preceding taxable year was income 
from a small business.
    (B) Income from a small business means income from the operation of 
a bona fide trade or business of which the individual was an owner 
during calendar year 2009, and that on average had fewer than 500 
employees in calendar year 2008.
    (C) The trade or business may be organized as, or take the legal 
form of, a corporation, partnership, limited liability company, or sole 
proprietorship.
    (D) A qualified individual shall file a certification of the 
individual's qualification in the manner and at the time prescribed by 
the Internal Revenue Service in forms, publications, or other guidance.
    (2) The amount which would have been required to be paid on or 
before the date prescribed for payment if the estimated tax were an 
amount equal to a percentage of the tax computed by placing on an annual 
basis the taxable income for the calendar months in the taxable year 
ending before the month in which the installment is required to be paid. 
That percentage is 80 percent in the case of taxable years beginning 
after December 31, 1966, of individuals not referred to in section 
6073(b) (relating to income from farming or fishing), 70 percent in the 
case of taxable years beginning before January 1, 1967, of such 
individuals, and 66\2/3\ percent in the case of individuals referred to 
inferred to in section 6073(b). With respect to taxable years beginning 
after December 31, 1966, the adjusted self-employment income shall be 
taken into account in determining the amount referred to in this 
subparagraph if net earnings from self-employment (as defined in section 
1402(a)) for the taxable year equal or exceed $400. For purposes of this 
subparagraph:
    (i) Taxable income shall be placed on an annualized basis:
    (A) For taxable years beginning after 1976, by:
    (1) Multiplying by 12 (or the number of months in the taxable year 
if less than 12) the adjusted gross income and the itemized deductions 
for the calendar months in the taxable year ending before the month in 
which the installment is required to be paid,
    (2) Dividing the resulting amounts by the number of such calendar 
months,
    (3) Increasing the amount of the annualized adjusted gross income by 
the unused zero bracket amount, if any, determined by reference to the 
annualized itemized deductions, or decreasing the amount of the 
annualized adjusted gross income by the excess itemized deductions, if 
any, determined by reference to the annualized itemized deductions (the 
amount resulting under this step is annualized tax table income), and
    (4) Deducting from the annualized tax table income the deduction for 
personal exemptions (such personal exemptions being determined as of the 
date prescribed for payment of the installment).


If the taxpayer would be eligible to use the tax tables on the basis of 
annualized tax table income, the amount which would have been required 
to be paid for purposes of this subparagraph may be determined by 
applying the tax tables to annualized

[[Page 562]]

tax table income. the amount resulting under (3).
    (B) For taxable years beginning before 1977, by:
    (1) Multiplying by 12 (or the number of months in the taxable year 
if less than 12) the taxable income (computed without the standard 
deduction and without the deduction for personal exemptions), or the 
adjusted gross income if the standard deduction is to be used for the 
calendar months in the taxable year ending before the month in which the 
installment is required to be paid,
    (2) Dividing the resulting amount by the number of such calendar 
months, and
    (3) Deducting from such amount the standard deduction, if 
applicable, and the deduction for personal exemptions (such personal 
exemptions being determined as of the date prescribed for payment of the 
installment).
    (ii) The term ``adjusted self-employment income'' means:
    (A) The net earnings from self-employment (as defined in section 
1402(a)) for the calendar months in the taxable year ending before the 
month in which the installment is required to be paid, computed as if 
such months constituted the taxable year, but not more than
    (B) The excess of:
    (1) For taxable years beginning after 1966, $6,600
    (2) For taxable years beginning after 1971, $9,000,
    (3) For taxable years beginning after 1972, $10,800,
    (4) For taxable years beginning after 1973, $13,200, and
    (5) For taxable years beginning after 1974, an amount equal to the 
contribution and benefit base (as determined under section 230 of the 
Social Security Act) which is effective for the calendar year in which 
the taxable year begins, over the amount of the wages (within the 
meaning of section 1402(b)) for such calendar months placed on an annual 
basis. For this purpose, wages are annualized by multiplying by 12 (or 
the number of months in the taxable year in the case of a taxable year 
of less than 12 months) the wages for such calendar months and dividing 
the resulting amount by the number of such months.
    (3) An amount equal to 90 percent of the tax computed, at the rates 
applicable to the taxable year, on the basis of the actual taxable 
income for the calendar months in the taxable year ending before the 
month in which the installment is required to be paid, as if such months 
constituted the entire taxable year. For taxable years beginning after 
December 31, 1966, such computation shall include the tax imposed by 
chapter 2 on the actual self-employment income for such months. For 
purposes of this subparagraph, the term ``actual self-employment 
income'' means:
    (i) The net earnings from self-employment (as defined in section 
1402(a))for such calendar months, computed as if such months constituted 
the taxable year, but not more than
    (ii) The excess of:
    (A) For taxable years beginning after 1966, $6,600,
    (B) For taxable years beginning after 1971, $9,000,
    (C) For taxable years beginning after 1972, $10,800,
    (D) For taxable years beginning after 1973, $13,200, and
    (E) For taxable years beginning after 1974, an amount equal to the 
contribution and benefit base (as determined under section 230 of the 
Social Security Act) which is effective for the calendar year in which 
the taxable year begins, over the amount of wages (within the meaning of 
section 1402(b)) for such months.
    (4) The amount which would have been required to be paid on or 
before the date prescribed for payment if the estimated tax were an 
amount equal to a tax determined on the basis of the tax rates and the 
taxpayer's status with respect to personal exemptions under section 151 
for the taxable year, but otherwise on the basis of the facts shown on 
the return for the preceding taxable year and the law applicable to such 
year, in the case of an individual required to file a return for such 
preceding taxable year.


In the case of a taxpayer whose taxable year consists of 52 or 53 weeks 
in accordance with section 441(f), the rules

[[Page 563]]

prescribed by Sec. 1.441-2(c) shall be applicable in determining, for 
purposes of subparagraph (1) of this paragraph, whether a taxable year 
was a year of 12 months and, for purposes of subparagraphs (2) and (3) 
of this paragraph, the number of calendar months in a taxable year 
preceding the date prescribed for payment of an installment of estimated 
tax. For the rules to be applied in determining taxable income for any 
period described in subparagraphs (2) and (3) of this paragraph in the 
case of a taxpayer who employs accounting periods (e.g., thirteen 4-week 
periods or four 13-week periods) none of which terminates with the end 
of the applicable period described in subparagraph (2) or (3) of this 
paragraph, see paragraph (a)(5) of Sec. 1.6655-2.
    (b) Meaning of terms. As used in this section and Sec. 1.6654-3:
    (1) The term ``tax'' means:
    (i) The tax imposed by chapter 1 of the Code (other than by section 
56), including any qualified State individual income taxes which are 
treated pursuant to section 6361(a) as if they were imposed by chapter 
1, plus
    (ii) For taxable years beginning after December 31, 1966, the tax 
imposed by chapter 2 of the Code, minus
    (iii) The credits against tax allowed by part iv, subchapter A, 
chapter 1 of the Code, other than the credit against tax provided by 
section 31 (relating to tax withheld on wages), and without reduction 
for any payments of estimated tax, minus
    (iv) In the case of an individual who is subject to one or more 
qualified State individual income taxes, the sum of the credits allowed 
against such taxes pursuant to section 6262(b)(2) (B) or (C) or section 
6262(c)(4) and paragraph (c) of Sec. 301.6362-4 of this chapter 
(Regulations on Procedure and Administration) (relating to the credit 
for income taxes of other States or political subdivisions thereof) and 
paragraph (c)(2) of Sec. 301.6361-1 (relating to the credit for tax 
withheld from wages on account of qualified State individual income 
taxes), and minus
    (v) For taxable years ending after February 29, 1980, the 
individual's overpayment of windfall profit tax imposed by section 4986 
of the Code for the taxable year. For this purpose, the amount of such 
overpayment is the sum of (A) the amount by which such individual's 
aggregate windfall profit tax liability for the taxable year as producer 
of crude oil is exceeded by withholding of windfall profit tax for the 
taxable year, and (B) any amount treated under section 6429 or 6430 as 
an overpayment of windfall profit tax for crude oil removed during the 
taxable year. The deemed payment date in section 4995(a)(4)(B) for the 
amount of windfall profit tax withheld with respect to payments for 
crude oil shall have no effect in the determination of the overpayment 
of windfall profit tax.
    (2) The credits against tax allowed by part IV, subchapter A, 
chapter 1 of the Code, are:
    (i) In the case of the exception described in paragraph (a)(1) of 
this section, the credits shown on the return for the preceding taxable 
year,
    (ii) In the case of the exceptions described in paragraph (a)(2) and 
(3) of this section, the credits computed under the law and rates 
applicable to the current taxable year, and
    (iii) In the case of the exception described in paragraph (a)(4) of 
this section, the credits shown on the return for the preceding taxable 
year, except that if the amount of any such credit would be affected by 
any change in rates or status with respect to personal exemptions, the 
credits shall be determined by reference to the rates and status 
applicable to the current taxable year.


A change in rate may be either a change in the rate of tax, such as a 
change in the rate of the tax imposed by section 1 or section 1401, or a 
change in a percentage affecting the computation of the credit, such as 
a change in the rate of withholding under chapter 3 of the Code or a 
change in the percentage of a qualified investment which is specified in 
section 46 for use in determining the amount of the investment credit 
allowed by section 38.
    (3) The term ``return for the preceding taxable year'' means the 
income tax return for such year which is required by section 6012(a)(1) 
and, in the case of taxable years beginning after December 31, 1966, the 
self-employment tax return for such year which is required by section 
607.

[[Page 564]]

    (c) Examples. The following examples illustrate the application of 
the exceptions to the imposition of the addition to the tax for an 
underpayment of estimated tax, in the case of an individual whose 
taxable year is the calendar year:

    Example 1. A, a married man with one child and a dependent parent, 
files a joint return with his spouse, B, for 1955 on April 15, 1956, 
showing taxable income of $44,000 and a tax of $16,760. A and B had 
filed a joint declaration of estimated tax on April 15, 1955, showing an 
estimated tax of $10,000 which was paid in four equal installments of 
$2,500 each on April 15, June 15, and September 15, 1955, and January 
15, 1956. The balance of $6,760 was paid with the return. A and B have 
an underpayment of estimated tax of $433 (\1/4\ of 70 percent of 
$16,760, less $2,500) for each installment date. The 1954 calendar year 
return of A and B showed a liability of $10,000. Since the total amount 
of estimated tax paid by each installment date equalled the amount that 
would have been required to be paid on or before each of such dates if 
the estimated tax were the tax shown on the return for the preceding 
year, the exception described in paragraph (a)(1) of this section 
applies and no addition to the tax will be imposed.
    Example 2. Assume the same facts as in example (1), except that the 
joint return of A and B for 1954 showed taxable income of $32,000 and a 
tax liability of $10,400. Assume further that only two personal 
exemptions under section 151 appeared on the 1954 return. The exception 
described in paragraph (a)(1) of this section would not apply. However, 
A and B are entitled to four exemptions under section 151 for 1955. 
Taxable income for 1954 based on four exemptions, but otherwise on the 
basis of the facts shown on the 1954 return, would be $30,800. The tax 
on such amount in the case of a joint return would be $9,836. Since the 
total amount of estimated tax paid by each installment date exceeds the 
amount which would have been required to be paid on or before each of 
such dates if the estimated tax were $9,836, the exception described in 
paragraph (a)(4) of this section applies and no addition to the tax will 
be imposed.
    Example 3. C, who is self-employed (other than as a farmer or 
fisherman), has annualized taxable income of $6,900 for the period 
January 1, 1967, through August 31, 1967, the income tax on which is 
$1,171. For the same period his net earnings from self-employment are 
$5,000 and his wages are $2,000. The estimated tax payments made by C 
for 1967 on or before September 15, 1967, total $1,200. For the purposes 
of the exception described in paragraph (a)(2) of this section, the 
adjusted self-employment income is $3,600, computed as follows:

(1) Net earnings from self-employment..........................   $5,000
(2) $6,600 minus annualized wages ($6,600-3,000 ($2,000 x 12 /     3,600
 8))...........................................................
(3) Lesser of (1) or (2).......................................    3,600
 


The tax on C's adjusted self-employment income would be $230.40 ($3,600 
x 6.4 percent). Since the total amount of estimated tax paid on or 
before September 15, 1967, exceeds $1,121.12, that is, 80 percent of 
$1,401.40 ($1,171 + 230.40), the exception described in paragraph (a)(2) 
of this section applies and no addition to tax will be imposed.
    Example 4. D, who is self-employed (other than as a farmer or 
fisherman), has actual taxable income of $3,800 for the period January 
1, 1967, through August 31, 1967, the income tax on which is $586. For 
the same period his net earnings from self-employment are $5,000 and his 
wages are $2,000. The estimated tax payments made by D for 1967 on or 
before September 15, 1967, total $840. For the purposes of the exception 
described in paragraph (a)(3) of this section, the actual self-
employment income for this period is $4,600, computed as follows:

(1) Net earnings from self-employment..........................   $5,000
(2) $6,600 minus wages ($6,600-2,000)..........................    4,600
(3) Lesser of (1) or (2).......................................    4,600
 


The tax on D's actual self-employment income would be $294.40 ($4,600 x 
6.4 percent). Since the total amount of estimated tax paid by September 
15, 1967, exceeds $792.36, that is, 90 percent of $880.40 ($586 + 
294.40), the exception described in paragraph (a)(3) of this section 
applies and no addition to tax will be imposed.
    Example 5. E and F, his spouse, filed a joint return for the 
calendar year 1967, showing a tax liability of $10,000. The liability, 
attributable primarily to income received during the last quarter of the 
year, included both income and self-employment tax. Their aggregate 
payments of estimated tax on or before September 15, 1967, total $1,350, 
representing three installments of $450 paid on each of the first three 
installment dates prescribed for the taxable year. Since each 
installment paid, $450, was less then $2,000 (\1/4\ of 80 percent of 
$10,000), there was an underpayment on each of the installment dates. 
Assume that the exceptions described in paragraph (a) (1) and (4) of 
this section do not apply. Actual taxable income for the three months 
ending March 31, 1967, was $2,000 and for the five months ending May 31, 
1967, was $4,500. Actual self-employment income, for the same periods, 
was $2,000 and $4,000, respectively. Since the amounts paid by the April 
15 and June 15 installment dates, $450 and $900, respectively, exceed 
$376.20 and $873.90, respectively (90 percent of the income tax on the 
actual taxable income of $2,000 and $4,500, respectively, determined on 
the basis of a joint return, and the self-

[[Page 565]]

employment tax on the actual self-employment income of $2,000 and 
$4,000, respectively), the exception described in paragraph (a)(3) of 
this section applies and no addition to the tax will be imposed for the 
underpayments on the April 15 and June 15 installment dates. For the 
eight months ending August 31, 1967, actual taxable income, assuming E 
and F did not elect to use the standard deduction, was $7,500; net 
earnings from self-employment were $6,000 and wages were $2,700. Since 
the total amount paid by the September 15 installment date, $1,350, was 
less than $1,381.14 (90 percent of the income tax on the actual taxable 
income of $7,500 determined on the basis of a joint return and the self-
employment tax on actual self-employment income of $3,900 ($6,600-
2,700)), the exception described in paragraph (a)(3) of this section 
does not apply to the September 15 installment. Furthermore, the 
exception described in paragraph (a)(2) of this section does not apply, 
as illustrated by the following computation:

(1) Income tax:
    Taxable income for the period ending Aug. 31, 1967        $13,050.00
     (without deduction for personal exemptions) on an
     annual basis ($8,700 x 12 / 8).........................
  Deduction for two personal exemptions.....................    1,200.00
                                                             -----------
                                                               11,850.00
    Tax on $11,850 (on the basis of a joint return).........    2,227.00
(2) Self-employment tax:
    Net earnings from self-employment.......................    6,000.00
    Adjusted self-employment income ($6,600-4,050 annualized    2,550.00
     wages ($2,700 x 12 / 8))...............................
    Tax on adjusted self-employment income ($2,550 x 6.4          163.20
     percent)...............................................
(3) Total tax ($2,227.00 + 163.20)..........................    2,390.20
(4) \3/4\ of 80 percent of $2,390.20........................    1,434.12
Amount paid by Sept. 15, 1967...............................    1,350.00
 


An addition to the tax will thus be imposed for the underpayment of 
$1,550 ($2,000-450) on the September 15 installment.
    Example 6. Assume the same facts as in example (5) and assume 
further that adjusted gross income for the eight months ending August 
31, 1967, was $9,200 and the amount of deductions (other than the 
deduction for personal exemptions) not allowable in determining adjusted 
gross income aggregate only $500. If E and F elect, they may use the 
standard deduction in computing the tax for purposes of the exceptions 
described in paragraph (a) (2) and (3) of this section. Taxable income 
for purposes of the exception described in paragraph (a)(3) of this 
section would be reduced to $7,080 ($9,200 less $1,200 for two personal 
exemptions and $920 for the standard deduction). The income tax thereon 
is $1,205.20; income tax and self-employment tax total $454.80 
($1,205.20 + 249.60 ($3,900 x 6.4 percent)). Since the amount paid by 
the September 15 installment date, $1,350, exceeds $1,309.32 (90 percent 
of $1,454.80), the exception described in paragraph (a)(3) of this 
section applies. However, the exception described in paragraph (a)(2) of 
this section does not apply, as illustrated by the following 
computation:

Adjusted gross income for period ending Aug. 31, 1967.......   $9,200.00
Adjusted gross income annualized ($9,200 x 12 / 8)..........   13,800.00
Taxable income annualized ($13,800 minus $1,200 for two        11,600.00
 personal exemptions and $1,000 for the standard deduction).
Tax on $11,600 (on basis of joint return)...................    2,172.00
Self-employment tax on adjusted self-employment income            163.20
 ($2,550 x 6.4 percent)
Total tax ($2,172.00 + 163.20...............................    2,335.20
\3/4\ of 80 percent of $2,335.20............................    1,401.12
Amount paid by Sept. 15, 1967...............................    1,350.00
 

    Example 7. G was a married individual, 73 years of age, who filed a 
joint return with his wife, H, for the calendar year 1956. H, who was 70 
years of age, had no income during the year. G had taxable income in the 
amount of $7,000 for the eight-month period ending on August 31, 1956, 
which included $2,000 of dividend income (after excluding $50 under 
section 116) and $900 of rental income. The $7,000 figure also reflected 
a deduction of $2,400 for personal exemptions ($600 x 4), since G and H 
are both over 65 years of age. The application of the exception 
described in paragraph (a)(2) of this section to an underpayment of 
estimated tax on the September 15 installment date may be illustrated by 
the following computation:

Taxable income for the period ending Aug. 31, 1956 (without   $14,100.00
 deduction for personal exemptions) on an annual basis
 ($9,400 x 12 / 8)..........................................
Deduction for personal exemptions...........................    2,400.00
                                                             -----------
Taxable income on an annual basis...........................   11,700.00
Tax (on the basis of a joint return)........................    2,642.00
Dividends received for 8-month period.......................    2,050.00
Less: Amount excluded from gross income under section 116...       50.00
                                                             -----------
Dividends included in gross income..........................    2,000.00
Dividend income annualized ($2,000 x 12 / 8)................    3,000.00
Dividends received credit under section 34 (4 percent of          120.00
 $3,000)....................................................
                                                             -----------
Tax less dividends received credit..........................    2,522.00
Retirement income (as defined in section 37(c)) includes:
  Dividend income (to extent included in gross income)......    2,000.00
  Rental income.............................................      900.00
                                                             -----------
Total retirement income.....................................    2,900.00
Limit on amount of retirement income under section 37(d)....    1,200.00
Retirement income credit under section 37 (20 percent of          240.00
 $1,200)....................................................
                                                             -----------
Tax less credits under section 34 and section 37............    2,282.00
Amount determined under the exception described in paragraph    1,198.05
 (a)(2) of this section (\3/4\ of 70 percent of $2,282).....
 

    Example 8. C, an unmarried individual for whom another taxpayer is 
entitled to a deduction under section 151(e), has adjusted

[[Page 566]]

gross income of $4,000 for the period January 1, 1977, through August 
31, 1977. All of C's income is non-exempt interest. For the same period 
C, who is entitled to one personal exemption, has itemized deductions 
amounting to $300. C is entitled to no credits other than the general 
tax credit. C filed a declaration of estimated tax on April 15, 1977, 
and on or before September 15, 1977, makes estimated tax payments for 
1977 which total $460. For purposes of determining whether the exception 
described in paragraph (a)(2) of this section applies, the following 
computations are necessary:

Adjusted gross income for the period ending Aug. 31,           $6,000.00
 1977, on an annual basis ($4,000 x 12 / 8)..........
Itemized deductions for the period ending Aug. 31,                450.00
 1977, on an annual basis ($300 x 12 / 8)............
Unused zero bracket amount computation
 required under sec. 63(e)(1)(D):
    Zero bracket amount.................    $2,200.00
    Annualized itemized deductions......       450.00
                                         -------------
      Unused zero bracket amount........     1,750.00
    Annualized adjusted gross income.................           6,000.00
    Plus: unused zero bracket amount.................           1,750.00
                                         --------------
      Annualized tax table income....................           7,750.00
Tax from tables......................................             757.00
Amount specified in paragraph (a)(2) of this section             $454.20
 (\3/4\ x 80 pct. x $757)............................
 

    The exception described in paragraph (a)(2) applies, and no addition 
to tax will be imposed.
    Example 9. An unmarried taxpayer entitled to one exemption, has 
adjusted gross income of $16,000 and itemized deductions of $2,000 for 
the period for the period January 1, 1977, through August 31, 1977. D 
has no net earnings from self-employment and is entitled to no credits 
other than the general tax credit. D files a declaration of estimated 
tax on April 15, 1977, and on or before September 15, 1977, makes 
estimated tax payments for 1977 which total $3,000. For purposes of 
determining whether the exception in paragraph (a)(2) of this section 
applies, the following computations are necessary:

Adjusted gross income for the period ending Aug. 31, 1977,       $24,000
 on an annual basis ($16,000 x 12 / 8).....................
Itemized deductions for the period ending Aug. 31, 1977, on        3,000
 an annual basis ($2,000 x 12 / 8).........................
    Annualized itemized deductions................   $3,000
    Minus zero bracket amount.....................    2,200
                                                   ---------
      Excess itemized deductions..................      800
    Annualized adjusted gross income.......................       24,000
    Minus excess itemized deductions.......................          800
                                                   ----------
      Annualized tax table income..........................       23,200
    Minus: Personal exemption..............................          750
                                                   ----------
      Annualized taxable income............................       22,450
Tax under sec. 1(c) on annualized taxable income...........        5,325
Minus: general tax credit..................................          180
                                                   ----------
      Total................................................        5,145
Amount specified in paragraph (a)(2) of this section (\3/4\        3,087
 x 80 pct. x $5,145).......................................
 

    The exception described in paragraph (a)(2) does not apply.

    (d) Determination of taxable income for installment periods--(1) In 
general. (i) In determining the applicability of the exceptions 
described in paragraph (a) (2) and (3) of this section, there must be an 
accurate determination of the amount of income and deductions for the 
calendar months in the taxable year preceding the installment date as of 
which the determination is made, that is, for the period terminating 
with the last day of the third, fifth, or eighth month of the taxable 
year. For example, a taxpayer distributes year-end bonuses to his 
employees but does not determine the amount of the bonuses until the 
last month of the taxable year. He may not deduct any portion of such 
year-end bonuses in determining his taxable income for any installment 
period other than the final installment period for the taxable year, 
since deductions are not allowable until paid or accrued, depending on 
the taxpayer's method of accounting.
    (ii) If a taxpayer on an accrual method of accounting wishes to use 
either of the exceptions described in paragraphs (a) (2) and (3) of this 
section, he must establish the amount of income and deductions for each 
applicable period. If his income is derived from a business in which the 
production, purchase, or sale of merchandise is an income-producing 
factor requiring the use of inventories, he will be unable to determine 
accurately the amount of his taxable income for the applicable period 
unless he can establish, with reasonable accuracy, his cost of goods 
sold for the applicable installment period. The cost of goods sold for 
such period shall be considered, unless a more exact determination is 
available, as such part of the cost of goods sold during the entire 
taxable year as the gross receipts from sales for such installment 
period is of gross receipts from sales for the entire taxable year.

[[Page 567]]

    (2) Members of partnerships. The provisions of this subparagraph 
shall apply in determining the applicability of the exceptions described 
in paragraphs (a) (2) and (3) of this section to an underpayment of 
estimated tax by a taxpayer who is a member of a partnership.
    (i) For purposes of determining taxable income, there shall be taken 
into account:
    (A) The partner's distributive share of partnership items set forth 
under section 702,
    (B) The amount of any guaranteed payments under section 707(c), and
    (C) Gains or losses on partnership distributions which are treated 
as gains or losses on sales of property.
    (ii) For purposes of determining net earnings from self-employment 
(for taxable years beginning after December 31, 1966) there shall be 
taken into account:
    (A) The partner's distributive share of income or loss, described in 
section 702(a)(9), subject to the special rules set forth in section 
1402(a) and Sec. Sec. 1.1402(a)-1 to 1.1402(a)-16, inclusive, and
    (B) The amount of any guaranteed payments under section 707(c), 
except for payments received from a partnership not engaged in a trade 
or business within the meaning of section 1402(c) and Sec. 1.1402(c)-1.


In determining a partner's taxable income and, for taxable years 
beginning after December 31, 1966, net earnings from self-employment, 
for the months in his taxable year which precede the month in which the 
installment date falls, the partner shall take into account items set 
forth in sections 702 and 1402(a) for any partnership taxable year 
ending with or within his taxable year to the extent that such items are 
attributable to months in such partnership taxable year which precede 
the month in which the installment date falls. For special rules used in 
computing a partner's net earnings from self-employment in the case of 
the termination of his taxable year as a result of death, see section 
1402(f) and Sec. 1.1402(f)-1. In addition, a partner shall include in 
his taxable income and, for taxable years beginning after December 31, 
1966, net earnings from self-employment, for the months in his taxable 
year which precede the month in which the installment date falls 
guaranteed payments from the partnership to the extent that such 
guaranteed payments are includible in his taxable income for such 
months. See section 706(a), section 707(c), paragraph (c) of Sec. 
1.707-1 and section 1402(a).
    (iii) The provisions of subdivision (i) (A) and (B) of this 
subdivision (ii) of this subparagraph may be illustrated by the 
following examples:

    Example 1. A, whose taxable year is the calendar year, is a member 
of a partnership whose taxable year ends on January 31. A must take into 
account, in determining his taxable income for the installment due on 
April 15, 1973, all of his distributive share of partnership items 
described in section 702 and the amount of any guaranteed payments made 
to him which were deductible by the partnership in the partnership 
taxable year beginning on February 1, 1972, and ending on January 31, 
1973. A must take into account, in determining his net earnings from 
self-employment, his distributive share of partnership income or loss 
described in section 702(a)(9), subject to the special rules set forth 
in section 1402(a) and Sec. Sec. 1.1402(a)-1 to 1.1402(a)-16, 
inclusive.
    Example 2. Assume that the taxable year of the partnership of which 
A, a calendar year taxpayer, is a member ends on June 30. A must take 
into account in the determination of his taxable income and net earnings 
from self-employment for the installment due on April 15, 1973, his 
distributive share of partnership items for the period July 1, 1972, 
through March 31, 1973; for the installment due on June 15, 1973, he 
must take into account such amounts for the period July 1, 1972, through 
May 31, 1973; and for the installment due on September 15, 1973, he must 
take into account such amounts for the entire partnership taxable year 
of July 1, 1972, through June 30, 1973 (the date on which the 
partnership taxable year ends).
    (3) Beneficiaries of estates and trusts. In determining the 
applicability of the exceptions described in paragraph (a) (2) and (3) 
of this section as of any installment date, the beneficiary of an estate 
or trust must take into account his distributable share of income from 
the estate or trust for the applicable period (whether or not actually 
distributed) if the trust or estate is required to distribute income to 
him currently. If the estate or trust is not required to distribute 
income currently, only the amounts actually distributed to the 
beneficiary during such period must be taken into account. If the 
taxable year

[[Page 568]]

of the beneficiary and the taxable year of the estate or trust are 
different, there shall be taken into account the beneficiary's 
distributable share of income, or the amount actually distributed to him 
as the case may be, during the months in the taxable year of the estate 
or trust ending within the taxable year of the beneficiary which precede 
the month in which the installment date falls. See subparagraph (2) of 
this paragraph for examples of a similar rule which is applied when a 
partner and the partnership of which he is a member have different 
taxable years.
    (e) Special rule in case of change from joint return or separate 
return for the preceding taxable year--(1) Joint return to separate 
returns. In determining the applicability of the exceptions described in 
paragraph (a) (1) and (4) of this section to an underpayment of 
estimated tax, a taxpayer filing a separate return who filed a joint 
return for the preceding taxable year shall be subject to the following 
rule: The tax:
    (i) Shown on the return for the preceding taxable year, or
    (ii) Based on the tax rates and personal exemptions for the current 
taxable year but otherwise determined on the basis of the facts shown on 
the return for the preceding taxable year, and the law applicable to 
such year,


shall be that portion of the tax which bears the same ratio to the whole 
of the tax as the amount of the tax for which the taxpayer would have 
been liable bears to the sum of the taxes for which the taxpayer and his 
spouse would have been liable had each spouse filed a separate return 
for the preceding taxable year. For rules with respect to the allocation 
of joint payments of estimated tax, see Sec. 1.6654-2(e)(5).
    (2) Examples. The rule in paragraph (i) of this paragraph may be 
illustrated by the following examples:

    Example 1. H and W filed a joint return for the calendar year 1955 
showing taxable income of $20,000 and a tax of $5,280. Of the $20,000 
taxable income, $18,000 was attributable to H, and $2,000 was 
attributable to W. H and W filed separate returns for 1956. The tax 
shown on the return for the preceding taxable year, for purposes of 
determining the applicability of the exception described in paragraph 
(a)(1) of this section to an underpayment of estimated tax by H for 
1956, is determined as follows:

Taxable income of H for 1955............................         $18,000
Tax on $18,000 (on basis of separate return)............           6,200
Taxable income of W for 1955............................           2,000
Tax on $2,000 (on basis of separate return).............             400
Aggregate tax of H and W (on basis of separate returns).           6,600
Portion of 1955 tax shown on joint return attributable             4,960
 to H (6200/6600 x 5280)................................
 

    Example 2. Assume the same facts as in example (1) and that H and W 
file a joint declaration of estimated tax for 1956 and pay estimated tax 
in amounts determined on the basis of their eligibility for three rather 
than two exemptions for 1956. H and W ultimately file separate income 
tax returns for 1956. Assume further that the exception described in 
paragraph (a)(1) of this section does not apply. The tax based on the 
tax rates and personal exemptions for 1956 but otherwise determined on 
the basis of the facts shown on the return for 1955 and the law 
applicable to 1955, for purposes of determining the applicability of the 
exception described in paragraph (a)(4) of this section to an 
underpayment of estimated tax by H for 1956, is determined as follows:

Taxable income of H and W for 1955 based on additional           $19,400
 personal exemption for 1956................................
Tax on 1955 income based on joint return rate for 1956......       5,076
Portion of 1955 tax attributable to H (computed as in          5900/6300
 example (1) but allowing benefit of additional exemption to
 H).........................................................
Portion of tax attributable to H based on tax rates and           $4,754
 personal exemptions for 1956 but otherwise on facts on 1955
 return ($5900/6300 x $5,076)...............................
 

    Example 3. Assume that H and W had the same taxable income in 1972 
as in 1955, and that they filed a joint return for 1972 and separate 
returns for 1973. Assume further that H's taxable income for 1972 
included net earnings from self-employment in excess of the $9,000 
maximum base for the self-employment tax for 1972, and that the joint 
return filed by H and W for 1972 showed tax under Chapter 1 (other than 
section 56) and tax under Chapter 2 totaling $5,055. The tax shown on 
the return for 1972, for purposes of determining the applicability of 
the exception described in paragraph (a)(1) of this section to an 
underpayment of estimated tax by H for 1973, is determined as follows:

Taxable income of H for 1972............................         $18,000
Chapter 1 tax (other than section 56 tax) on $18,000 (on           5,170
 basis of separate return)..............................
Self-employment income of H for 1972....................           9,000
Chapter 2 tax on $9,000.................................            $675
                                                         ---------------
Total of such taxes.....................................          $5,845
Taxable income of W for 1972............................           2,000
Chapter 1 tax (other than section 56 tax) on $2,000 (on              310
 basis of separate return)..............................
                                                         ---------------
Aggregate tax on H and W (on basis of separate returns).          $6,155

[[Page 569]]

 
Portion of 1972 tax shown on joint return attributable         $4,800.40
 to H (5845/6155 x $5,055)..............................
 

    (3) Separate return to joint return. In the case of a taxpayer who 
files a joint return for the taxable year with respect to which there is 
an underpayment of estimated tax and who filed a separate return for the 
preceding taxable year:
    (i) The tax shown on the return for the preceding taxable year, for 
purposes of determining the applicability of the exception described in 
paragraph (a)(1) of this section, shall be the sum of both the tax shown 
on the return of the taxpayer and the tax shown on the return of the 
taxpayer's spouse for such preceding year, and
    (ii) The facts shown on both the taxpayer's return and the return of 
his spouse for the preceding taxable year shall be taken into account 
for purposes of determining the applicability of the exception described 
in paragraph (a)(4) of this section.
    (4) Example. The rules described in subparagraph (3) of this 
paragraph may be illustrated by the following example:

    Example. H and W filed separate income tax returns for the calendar 
year 1954 showing tax liabilities of $2,640 and $350, respectively. In 
1956 they married and participated in the filing of a joint return for 
that year. In the filing of a joint return for that year. Thus, for the 
purpose of determining the applicability of the exceptions described in 
paragraph (a)(1) and (4) of this section to an underpayment of estimated 
tax for the year 1955, the tax shown on the return for the preceding 
taxable year is $2,990 ($2,640 plus $350).


(Secs. 6015, 6154, 6654, 6655, and 7805, Internal Revenue Code of 1954 
(96 Stat. 2395 and 2396, 68A Stat. 917; 26 U.S.C. 6015, 6154, 6654, 
6655, and 7805))

    (5) Joint payments of estimated tax--(i) In general. A husband and 
wife may make a joint payment of estimated tax even though they are not 
living together. However, a joint payment of estimated tax may not be 
made if the husband and wife are separated under a decree of divorce or 
of separate maintenance. A joint payment of estimated tax may not be 
made if the taxpayer's spouse is a nonresident alien (including a 
nonresident alien who is a bona fide resident of Puerto Rico or a 
possession to which section 931 applies during the entire taxable year), 
unless an election is in effect for the taxable year under section 
6013(g) or (h) and the regulations. In addition, a joint payment of 
estimated tax may not be made if the taxpayer's spouse has a taxable 
year different from that of the taxpayer. If a joint payment of 
estimated tax is made, the amount estimated as the income tax imposed by 
chapter 1 of the Internal Revenue Code must be computed on the aggregate 
estimated taxable income of the spouses (see section 6013(d)(3) and 
Sec. 1.2-1), whereas, if applicable, the amount estimated as the self-
employment tax imposed by chapter 2 of the Internal Revenue Code must be 
computed on the separate estimated self-employment income of each 
spouse. See sections 1401 and 1402 and Sec. 1.6017-1(b)(1). The 
liability with respect to the estimated tax, in the case of a joint 
payment, shall be joint and several.
    (ii) Application to separate returns. (A) Although a husband and 
wife may make a joint payment of estimated tax, they, nevertheless, can 
file separate returns. If they make a joint payment of estimated tax and 
file separate returns for the same taxable year with respect to which 
the joint payment was made, the payment made on account of the estimated 
tax for that taxable year may be treated as a payment on account of the 
tax liability of either the husband or wife for the taxable year, or may 
be divided between them in such manner as they may agree.
    (B) In the event the husband and wife fail to agree to a division of 
the estimated tax payment, such payment shall be allocated between them 
in accordance with the following rule. The portion of such payment to be 
allocated to a taxpayer shall be that portion of the aggregate of all 
such payments as the amount of tax imposed by chapter 1 of the Internal 
Revenue Code shown on the separate return of the taxpayer (plus, if 
applicable, the amount of tax imposed by chapter 2 of the Internal 
Revenue Code shown on the return of the taxpayer) bears to the sum of 
the taxes imposed by chapter 1 of the Internal Revenue Code shown on the 
separate returns of the taxpayer and the spouse (plus, if applicable, 
the sum of the taxes imposed by chapter 2

[[Page 570]]

of the Internal Revenue Code shown on the separate returns of the 
taxpayer and the spouse).
    (6) Example. The rule described in paragraph (e)(5) of this section 
may be illustrated by the following example:

    Example. (i) H and W make a joint payment of estimated tax of 
$19,500 for the taxable year. H and W subsequently file separate returns 
for the taxable year showing tax imposed by chapter 1 of the Internal 
Revenue Code in the amount of $11,500 and $8,000, respectively. In 
addition, H's return shows a tax imposed by chapter 2 of the Internal 
Revenue Code in the amount of $500. H and W fail to agree to a division 
of the estimated tax paid. The amount of the aggregate estimated tax 
payments allocated to H is determined as follows:
    (A) Chapter 1 tax shown on H's return--$11,500
    (B) Plus: Amount of tax imposed by chapter 2 shown on H's return--
$500
    (C) Total taxes imposed by chapter 1 and by chapter 2 shown on H's 
return--$12,000
    (D) Amount of tax imposed by chapter 1 shown on W's return--$8,000
    (E) Total taxes imposed by chapter 1 and by chapter 2 on both H's 
and W's--$20,000 returns
    (F) Proportion of taxes shown on H's return to total amount--
($12,000/$20,000) 60% of taxes shown on both H's and W's returns
    (G) Amount of estimated tax payments allocated to H (60% of 
$19,500)--$11,700
    (ii) Accordingly, H's return would show a balance due in the amount 
of $300 ($12,000 taxes shown less $11,700 estimated tax allocated).

    (7) Death of spouse. (i) A joint payment of estimated tax may not be 
made after the death of either the husband or wife. However, if it is 
reasonable for a surviving spouse to assume that there will be filed a 
joint return for himself and the deceased spouse for his taxable year 
and the last taxable year of the deceased spouse, he may, in making a 
separate payment of estimated tax for his taxable year which includes 
the period comprising such last taxable year of his spouse, estimate the 
amount of the tax imposed by chapter 1 of the Internal Revenue Code on 
his and his spouse's taxable income on an aggregate basis and compute 
his estimated tax with respect to chapter 1 tax in the same manner as 
though a joint return had been filed.
    (ii) If a husband and wife make a joint payment of estimated tax and 
thereafter one spouse dies, no further payments of joint estimated tax 
liability are required from the estate of the decedent. The surviving 
spouse, however, shall be liable for the payment of any subsequent 
installments of the joint estimated tax. For the purpose of making an 
amended payment of estimated tax by the surviving spouse, and the 
allocation of payments made pursuant to a joint payment of estimated tax 
between the surviving spouse and the legal representative of the 
decedent in the event a joint return is not filed, the payment of 
estimated tax may be divided between the decedent and the surviving 
spouse in such proportion as the surviving spouse and the legal 
representative of the decedent may agree.
    (iii) If the surviving spouse and the legal representative of the 
decedent fail to agree to a division of a payment, such payment shall be 
allocated in accordance with the following rule. The portion of such 
payment to be allocated to the surviving spouse shall be that portion of 
the aggregate amount of such payments as the amount of tax imposed by 
chapter 1 of the Internal Revenue Code shown on the separate return of 
the surviving spouse (plus, if applicable, the amount of tax imposed by 
chapter 2 of the Internal Revenue Code shown on the return of the 
surviving spouse) bears to the sum imposed by chapter 1 of the Internal 
Revenue Code shown on the separate returns of the surviving spouse and 
of the decedent (plus, if applicable, the sum of the taxes imposed by 
chapter 2 of the Internal Revenue Code shown on the returns of the 
surviving spouse and of the decedent); and the balance of such payments 
shall be allocated to the decedent. This rule may be illustrated by 
analogizing the surviving spouse described in this rule to H in the 
example contained in paragraph (e)(6) of this section and the decedent 
in this rule to W in that example.
    (f) Effective/applicability date. Paragraph (a)(1)(ii) of this 
section applies to any taxable year beginning in 2009 and

[[Page 571]]

does not apply to any taxable years beginning before or after 2009.

[T.D. 7427, 41 FR 34029, Aug. 12, 1976, as amended by T.D. 7577, 43 FR 
59359, Dec. 20, 1978; T.D. 7585, 44 FR 1105, Jan. 4, 1979; T.D. 8016, 50 
FR 11855, Mar. 26, 1985; 50 FR 18244, Apr. 30, 1985; T.D. 8996, 67 FR 
35012, May 17, 2002; T.D. 9224, 70 FR 52300, Sept. 2, 2005; T.D. 9480, 
75 FR 9102, Mar. 1, 2010; T.D. 9613, 78 FR 13222, Feb. 27, 2013]



Sec. 1.6654-3  Short taxable years of individuals.

    (a) In general. The provisions of section 6654, with certain 
modifications relating to the application of section 6654(d), which are 
explained in paragraph (b) of this section, are applicable in the case 
of a short taxable year.
    (b) Rules as to application of section 6654(d). (1) In any case in 
which the taxable year for which an underpayment of estimated tax exists 
is a short taxable year due to a change in annual accounting periods, in 
determining the tax:
    (i) Shown on the return for the preceding taxable year (for purposes 
of section 6654(d)(1)), or
    (ii) Based on the personal exemptions and rates for the current 
taxable year but otherwise on the basis of the facts shown on the return 
for the preceding taxable year, and the law applicable to such year (for 
purposes of section 6654(d)(4)),


the tax will be reduced by multiplying it by the number of months in the 
short taxable year and dividing the resulting amount by 12.
    (2) If the taxable year for which an underpayment of estimated tax 
exists is a short taxable year due to a change in annual accounting 
periods, in annualizing the taxable income for the months in the taxable 
year preceding an installment date, for purposes of section 
6654(d)(1)(C), the personal exemptions allowed as deductions under 
section 151 shall be reduced to the same extent that they are reduced 
under section 443(c) in computing the tax for a short taxable year.
    (3) If ``the preceding taxable year'' referred to in section 
6654(d)(4) was a short taxable year, for purposes of determining the 
applicability of the exception described in section 6654(d)(4), the tax, 
computed on the basis in the facts shown on the return for the preceding 
year, shall be the tax computed on the annual basis in the manner 
described in section 443(b)(1) (prior to its reduction in the manner 
described in the last sentence thereof). If the tax rates or the 
taxpayer's status with respect to personal exemptions for the taxable 
year with respect to which the underpayment occurs differ from such 
rates or status applicable to the preceding taxable year, the tax 
determined in accordance with this subparagraph shall be recomputed to 
reflect the rates and status applicable to the year with respect to 
which the underpayment occurs.

[T.D. 6500, 25 FR 12149, Nov. 26, 1960, as amended by T.D. 7427, 41 FR 
34033, Aug. 12, 1976; T.D. 9224, 70 FR 52301, Sept. 2, 2005]



Sec. 1.6654-4  [Reserved]



Sec. 1.6654-5  Payments of estimated tax.

    (a) In general. A payment of estimated tax by an individual shall be 
determined on Form 1040-ES. For the purpose of determining the estimated 
tax, the amount of gross income which the taxpayer can reasonably expect 
to receive or accrue, depending upon the method of accounting upon which 
taxable income is computed, and the amount of the estimated allowable 
deductions and credits to be taken into account in computing the amount 
of estimated tax, shall be determined upon the basis of the facts and 
circumstances existing at the time prescribed for determining the 
estimated tax, as well as those reasonably to be anticipated for the 
taxable year. If, therefore, the taxpayer is employed at the date 
prescribed for making an estimated tax payment at a given wage or 
salary, the taxpayer should presume, in the absence of circumstances 
indicating the contrary, for the purpose of the estimated tax payment 
that such employment will continue to the end of the taxable year at the 
wage or salary received by the taxpayer as of such date. In the case of 
income other than wages and salary, the regularity in the payment of 
income, such as dividends, interest, rents, royalties, and income 
arising from estates and trusts is a factor to be taken into 
consideration. Thus, if the taxpayer owns shares of

[[Page 572]]

stock in a corporation, and dividends have been paid regularly for 
several years upon the stock, the taxpayer should, in the absence of 
information indicating a change in the dividend policy, include the 
prospective dividends from the corporation for the taxable year as well 
as those actually received in such year prior to determining the 
estimated tax. In the case of a taxpayer engaged in business on his own 
account, there shall be made an estimate of gross income and deductions 
and credits in the light of the best available information affecting the 
trade, business, or profession.
    (b) Computation of estimated tax. In computing the estimated tax the 
taxpayer should take into account the taxes, credits, and other amounts 
listed in Sec. 1.6654-1(a)(4).

[T.D. 9224, 70 FR 52301, Sept. 2, 2005]



Sec. 1.6654-6  Nonresident alien individuals.

    (a) In general. A nonresident alien individual is required to make a 
payment of estimated tax if that individual's gross income meets the 
requirements of section 6654 and Sec. 1.6654-1. In making the 
determination under section 6654 as to whether the amount of the gross 
income of a nonresident alien individual is such as to require making a 
payment of estimated income tax, only the filing status relating to a 
single individual (other than a head of household) or to a married 
individual not entitled to file a joint return shall apply, unless an 
election is in effect 1 for the taxable year under section 6013(g) or 
(h) and the regulations.
    (b) Determination of gross income. To determine the gross income of 
a nonresident alien individual who is not, or does not expect to be, a 
bona fide resident of Puerto Rico or a possession to which section 931 
applies during the entire taxable year, see section 872 and Sec. Sec. 
1.872-1 and 1.872-2. To determine the gross income of a nonresident 
alien individual who is, or expects to be, a bona fide resident of 
Puerto Rico or a possession to which section 931 applies during the 
entire taxable year, see section 876 and the regulations. For rules for 
determining whether an individual is a bona fide resident of a United 
States possession (including Puerto Rico), see section 937 and the 
regulations.

[T.D. 9224, 70 FR 52301, Sept. 2, 2005]



Sec. 1.6654-7  Applicability.

    Section 6654 is applicable only with respect to taxable years 
beginning after December 31, 1954. Section 294(d) of the Internal 
Revenue Code of 1939 shall continue in force with respect to taxable 
years beginning before January 1, 1955.

[T.D. 6500, 25 FR 12150, Nov. 26, 1960. Redesignated by T.D. 7282, 38 FR 
19028, July 17, 1973. Redesignated by T.D. 9224, 70 FR 52301, Sept. 2, 
2005]



Sec. 1.6655-0  Table of contents.

    This section lists the table of contents for Sec. Sec. 1.6655-1 
through 1.6655-7.

    Sec. 1.6655-1 Addition to the tax in the case of a corporation.

    (a) In general.
    (b) Amount of underpayment.
    (c) Period of the underpayment.
    (d) Amount of required installment.
    (1) In general.
    (2) Exception.
    (e) Large corporation required to pay 100 percent of current year 
tax.
    (1) In general.
    (2) May use last year's tax for first installment.
    (f) Required installment due dates.
    (1) Number of required installments.
    (2) Time for payment of installments.
    (i) Calendar year.
    (ii) Fiscal year.
    (iii) Short taxable year.
    (iv) Partial month.
    (g) Definitions.
    (h) Special rules for consolidated returns.
    (i) Overpayments applied to subsequent taxable year's estimated tax.
    (1) In general.
    (2) Subsequent examinations.
    (j) Examples.
    (k) Effective/applicability date.

          Sec. 1.6655-2 Annualized income installment method.

    (a) In general.
    (b) Determination of annualized income installment--in general.
    (c) Special rules.
    (1) Applicable percentage.
    (2) Partial month.
    (3) Annualization period not a short taxable year.
    (d) Election of different annualization periods.
    (e) 52-53 week taxable year.

[[Page 573]]

    (f) Determination of taxable income for an annualization period.
    (1) In general.
    (i) Items of income.
    (ii) Items of deduction.
    (iii) Losses.
    (2) Certain deductions required to be allocated in a reasonably 
accurate manner.
    (i) In general.
    (ii) Application of the reasonably accurate manner requirement to 
certain charitable contributions, recurring items, and 12-month rule 
items.
    (iii) Reasonably accurate manner defined.
    (iv) Special rule for certain real property tax liabilities.
    (v) Examples.
    (3) Special rules.
    (i) Advance payments under Rev. Proc. 2004-34.
    (ii) Extraordinary items.
    (A) In general.
    (B) De minimis extraordinary items.
    (C) Special rules for net operating loss deductions and section 
481(a) adjustments.
    (iii) Credits.
    (A) Current year credits.
    (B) Credit carryovers.
    (iv) Depreciation and amortization.
    (A) Estimated annual depreciation and amortization.
    (B) Safe harbors.
    (1) Proportionate depreciation allowance.
    (2) 90 percent of preceding year's depreciation.
    (3) Safe harbor operational rules.
    (C) Short taxable years.
    (v) Distributive share of items
    (A) Member of partnership.
    (B) Treatment of subpart F income and income under section 936(h).
    (1) General rule.
    (2) Prior year safe harbor.
    (i) General rule.
    (ii) Special rule for noncontrolling shareholder.
    (C) Dividends from closely held real estate investment trust.
    (1) General rule.
    (2) Closely held real estate investment trust.
    (D) Other passthrough entities.
    (vi) Alternative minimum taxable income exemption amount.
    (vii) Examples.
    (g) Items that substantially affect taxable income but cannot be 
determined accurately by the installment due date.
    (1) In general.
    (2) Example.
    (h) Effective/applicability date.

          Sec. 1.6655-3 Adjusted seasonal installment method.

    (a) In general.
    (b) Limitation on application of section.
    (c) Determination of amount.
    (d) Special rules.
    (1) Base period percentage.
    (2) Filing month.
    (3) Application of the rules related to the annualized income 
installment method to the adjusted seasonal installment method.
    (4) Alternative minimum tax.
    (e) Example.
    (f) Effective/applicability date.

                   Sec. 1.6655-4 Large corporations.

    (a) Large corporation defined.
    (b) Testing period.
    (c) Computation of taxable income during testing period.
    (1) Short taxable year.
    (2) Computation of taxable income in taxable year when there occurs 
a transaction to which section 381 applies.
    (d) Members of controlled group.
    (1) In general.
    (2) Aggregation.
    (3) Allocation rule.
    (4) Controlled group members.
    (e) Effect on a corporation's taxable income of items that may be 
carried back or carried over from any other taxable year.
    (f) Consolidated returns. [Reserved]
    (g) Example.
    (h) Effective/applicability date.

                   Sec. 1.6655-5 Short taxable year.

    (a) In general.
    (b) Exception to payment of estimated tax.
    (c) Installment due dates.
    (1) In general.
    (i) Taxable year of at least four months but less than twelve 
months.
    (ii) Exceptions.
    (2) Early termination of taxable year.
    (i) In general.
    (ii) Exception.
    (d) Amount due for required installment.
    (1) In general.
    (2) Tax shown on the return for the preceding taxable year.
    (3) Applicable percentage.
    (4) Applicable percentage for installment period in which taxpayer 
does not reasonably expect that the taxable year will be an early 
termination year.
    (e) Examples.
    (f) 52 or 53 week taxable year.
    (g) Use of annualized income or seasonal installment method.
    (1) In general.
    (2) Computation of annualized income installment.
    (3) Annualization period for final required installment.
    (4) Examples.
    (h) Effective/applicability date.

                  Sec. 1.6655-6 Methods of accounting.

    (a) In general.
    (b) Accounting method changes.

[[Page 574]]

    (c) Examples.
    (d) Effective/applicability date.

Sec. 1.6655-7 Addition to tax on account of excessive adjustment under 
                              section 6425.

[T.D. 9347, 72 FR 44348, Aug. 7, 2007, as amended by T.D. 9870, 84 FR 
33692, July 15, 2019]



Sec. 1.6655-1  Addition to the tax in the case of a corporation.

    (a) In general. Section 6655 imposes an addition to the tax under 
chapter 1 of the Internal Revenue Code in the case of any underpayment 
of estimated tax by a corporation. An addition to tax due to the 
underpayment of estimated taxes is determined by applying the 
underpayment rate established under section 6621 to the amount of the 
underpayment, for the period of the underpayment. This addition to the 
tax is in addition to any applicable criminal penalties and is imposed 
whether or not there was reasonable cause for the underpayment.
    (b) Amount of underpayment. The amount of the underpayment for any 
required installment is the excess of--
    (1) The required installment; over
    (2) The amount, if any, of the installment paid on or before the 
last date prescribed for such payment.
    (c) Period of the underpayment. The period of the underpayment of 
any required installment runs from the date the installment was required 
to be paid to the 15th day of the 3rd month following the close of the 
taxable year, or to the date such underpayment is paid, whichever is 
earlier. For purposes of determining the period of the underpayment a 
payment of estimated tax will be credited against unpaid required 
installments in the order in which such installments are required to be 
paid.
    (d) Amount of required installment--(1) In general. Except as 
otherwise provided in this section and Sec. Sec. 1.6655-2 through 
1.6655-7, the amount of any required installment is 25 percent of the 
lesser of--
    (i) 100 percent of the tax shown on the return for the taxable year 
(or, if no return is filed, 100 percent of the tax for such year); or
    (ii) 100 percent of the tax shown on the return for the preceding 
taxable year.
    (2) Exception. This paragraph (d)(1)(ii) does not apply if the 
preceding taxable year was not a taxable year of 12 months or the 
corporation did not file a return for the preceding taxable year showing 
a liability for tax.
    (e) Large corporation required to pay 100 percent of current year 
tax--(1) In general. Except as provided in paragraph (e)(2) of this 
section, paragraph (d)(1)(ii) of this section does not apply in the case 
of a large corporation (as defined in Sec. 1.6655-4).
    (2) May use last year's tax for first installment. Paragraph (e)(1) 
of this section does not apply for purposes of determining the amount of 
the 1st required installment for any taxable year. Any reduction in such 
1st installment by reason of the preceding sentence is recaptured by 
increasing the amount of the next required installment determined under 
paragraph (d)(1)(i) of this section by the amount of such reduction and, 
if the next required installment is reduced by use of the annualized 
income installment method under Sec. 1.6655-2 or the adjusted seasonal 
installment method under Sec. 1.6655-3, by increasing subsequent 
required installments determined under paragraph (d)(1)(i) of this 
section to the extent that the reduction has not previously been 
recaptured.
    (f) Required installment due dates--(1) Number of required 
installments. Unless otherwise provided, corporations must make 4 
required installments for each taxable year.
    (2) Time for payment of installments--(i) Calendar year. Unless 
otherwise provided, in the case of a calendar year taxpayer, the due 
dates of the required installments are as follows:

1st April 15
2nd June 15
3rd September 15
4th December 15

    (ii) Fiscal year. In the case of a taxpayer other than a calendar 
year taxpayer, the due dates of the required installments are as 
follows:

1st 15th day of 4th month of the taxable year
2nd 15th day of 6th month of the taxable year
3rd 15th day of 9th month of the taxable year

[[Page 575]]

4th 15th day of 12th month of the taxable year

    (iii) Short taxable year. See Sec. 1.6655-5 for rules regarding 
required installments for corporations with a short taxable year.
    (iv) Partial month. Except as otherwise provided, for purposes of 
determining the due date of any required installment, a partial month is 
treated as a full month.
    (g) Definitions. (1) The term tax as used in this section and 
Sec. Sec. 1.6655-2 through 1.6655-7 means the excess of--
    (i) The sum of--
    (A) The tax imposed by section 11, section 1201(a), or subchapter L 
of chapter 1 of the Internal Revenue Code, whichever is applicable;
    (B) The tax imposed by section 55; plus
    (C) The tax imposed by section 887; over
    (ii) The credits against tax provided by part IV of subchapter A of 
chapter 1 of the Internal Revenue Code.
    (2)(i) In the case of a foreign corporation subject to taxation 
under section 11, section 1201(a), or subchapter L of chapter 1 of the 
Internal Revenue Code, the tax imposed by section 881 is treated as a 
tax imposed by section 11.
    (ii) In the case of a partnership that is treated, pursuant to 
regulations issued under section 1446(f)(2), as a corporation for 
purposes of this section, the tax imposed by section 1446 is treated as 
a tax imposed by section 11.
    (iii) Unless otherwise provided in the Internal Revenue Code or 
Treasury regulations, for purposes of the definition of ``tax'' as used 
in this section, a recapture of tax, such as a recapture provided by 
section 50(a)(1)(A), and any other similar provision, is not considered 
to be a tax imposed by section 11.
    (iv) For the purposes of paragraph (d) of this section, the return 
for the preceding taxable year is the Federal income tax return for such 
taxable year that is required by section 6012(a)(2). However, if an 
amended Federal income tax return has been filed before the due date of 
an installment, then the return for the preceding taxable year is the 
Federal income tax return as amended. If an amended Federal income tax 
return has been filed on or after the due date for an installment, then 
the return for the preceding taxable year does not include for such 
installment period the Federal income tax return as amended subsequent 
to the due date for such installment. Paragraph (d) of this section will 
apply without regard to whether the taxpayer's Federal income tax return 
for the preceding taxable year is filed in a timely manner.
    (h) Special rules for consolidated returns For special rules 
relating to the determination of the amount of the underpayment in the 
case of a corporation whose income is included in a consolidated return, 
see Sec. 1.1502-5(b).
    (i) Overpayments applied to subsequent taxable year's estimated 
tax--(1) In general. If a taxpayer elects under the provisions of 
sections 6402(b) and 6513(d) and the regulations to apply an overpayment 
in year one against the estimated tax liability for year two, the 
overpayment will be applied to the required installment payments for 
year two in the order due and to the extent necessary to satisfy such 
installments, similar to the manner in which an actual overpayment of 
one installment is carried forward to the next installment. No interest 
is accrued or paid on an overpayment if the election to apply the 
overpayment against estimated tax is made.
    (2) Subsequent examinations. If a deficiency is determined in an 
examination of a return for a taxable year that originally reflected an 
overpayment that was applied against estimated tax for the succeeding 
taxable year, interest on the deficiency will not begin to accrue on an 
amount applied until that amount is used to satisfy a required estimated 
tax payment in such taxable year. Regardless of whether the taxpayer 
anticipated the application of such overpayment from the prior taxable 
year in calculating and paying its required estimated tax installment 
liabilities for the current taxable year, the subsequently determined 
underpayment and interest computation thereon will not change the 
taxpayer's original election to apply the overpayment against the 
estimated tax liability of the succeeding taxable year. Any changes to 
the usage of the original overpayment from the prior taxable year are 
hypothetical only and solely

[[Page 576]]

for the purpose of computing deficiency interest. Overpayment interest 
will not be impacted. For further guidance, see Rev. Rul. 99-40 (1999-2 
CB 441), (see Sec. 601.601(d)(2)(ii)(b) of this chapter).
    (j) Examples. The method prescribed in paragraphs (d) through (g) of 
this section is illustrated by the following examples:

    Example 1. (i) X, a calendar year corporation, estimates its tax 
liability for its taxable year ending December 31, 2009, will be 
$85,000. X is not a large corporation as defined in section 6655(g)(2) 
and Sec. 1.6655-4. X reported a liability of $74,900 on its return for 
the taxable year ended December 31, 2008, with no credits against tax. X 
paid four installments of estimated tax, each in the amount of $18,725 
(25 percent of $74,900), on April 15, 2009, June 15, 2009, September 15, 
2009, and December 15, 2009, respectively. X reported a tax liability of 
$88,900 on its return due March 15, 2010. X had a $5,000 credit against 
tax for tax year 2009 as provided by part IV of subchapter A of chapter 
1 of the Internal Revenue Code. X did not underpay its estimated tax for 
tax year 2009 for any of the four installments, determined as follows:
    (A) Tax as defined in paragraph (g) of this section for 2009 
($88,900-$5,000) = $83,900
    (B) Tax as defined in paragraph (g) of this section for 2008 = 
$74,900
    (C) 100% of the lesser of this paragraph (j), Example 1 (i)(A) or 
(i)(B) = $74,900
    (D) Amount of estimated tax required to be paid on or before each 
installment date (25% of $74,900) = $18,725
    (E) Deduct amount paid on or before each installment date = $18,725
    (F) Amount of underpayment for each installment date = $0
    (ii) [Reserved]
    Example 2. (i) Facts. Y, a calendar year corporation, estimates its 
tax liability for its taxable year ending December 31, 2009, will be 
$70,000. Y is not a large corporation as defined in section 6655(g)(2) 
and Sec. 1.6655-4. Y reported a Federal income tax liability of $90,000 
for its taxable year ending December 31, 2008. Y paid no installment of 
estimated tax on or before April 15, 2009, June 15, 2009, or September 
15, 2009, but made a payment of $63,000 on December 15, 2009. On March 
15, 2010, Y filed its income tax return showing a tax of $70,000. Y had 
no credits against tax for tax year 2009. Of the $63,000 paid by Y on 
December 15, 2009, $17,500 is applied to each of the first three 
installments due on April 15, June 15, and September 15, 2009, and the 
remaining $10,500 is applied to the fourth installment. Y has an 
underpayment of estimated tax for each of the first three installments 
of $17,500 and for the fourth installment of $7,000. The addition to tax 
under section 6655(a) is computed as follows:
    (A) Tax as defined in paragraph (g) of this section for 2009 = 
$70,000
    (B) Tax as defined in paragraph (g) of this section for 2008 = 
$90,000
    (C) 100% of the lesser of this paragraph (j), Example 2 (i)(A) or 
(i)(B) = $70,000
    (D) Amount of estimated tax required to be paid on or before each 
installment date (25% of $70,000) = $17,500
    (E) Amount paid on or before the first, second, and third 
installment dates = $0
    (F) Amount paid on or before the fourth installment date = $63,000
    (G) Amount of underpayment for each of the first, second, and third 
installment dates = $17,500
    (H) Amount of underpayment for the fourth installment date = $7,000
    (ii) Addition to tax. Assuming that neither the annualized income 
installment method nor the adjusted seasonal installment method 
described in Sec. Sec. 1.6655-2 and 1.6655-3 would result in a lower 
payment for any installment period, and the addition to tax is computed 
under section 6621(a)(2) at the rate of 8 percent per annum for the 
applicable periods of underpayment, the addition to tax is determined as 
follows:
    (A) First installment (underpayment period 4-16-09 through 12-15-
09), computed as 244/365 x $17,500 x 8% = $936
    (B) Second installment (underpayment period 6-16-09 through 12-15-
09), computed as 183/365 x $17,500 x 8% = $702
    (C) Third installment (underpayment period 9-16-09 through 12-15-
09), computed as 91/365 x $17,500 x 8% = $349
    (D) Fourth installment (underpayment period 12-16-09 through 3-15-
10), computed as 90/365 x $7,000 x 8% = $138
    (E) Total of this paragraph (j), Example 2 (ii)(A) through (D) = 
$2,125

    (k) Effective/applicability date. This section applies to taxable 
years beginning after September 6, 2007.

[T.D. 9347, 72 FR 44349, Aug. 7, 2007]



Sec. 1.6655-2  Annualized income installment method.

    (a) In general. In the case of any required installment, if the 
corporation establishes that the annualized income installment 
determined under this section, or the adjusted seasonal installment 
determined under Sec. 1.6655-3, is less than the amount determined 
under Sec. 1.6655-1--
    (1) The amount of such required installment is the annualized income 
installment (or, if less, the adjusted seasonal installment); and

[[Page 577]]

    (2) Any reduction in a required installment resulting from the 
application of this section will be recaptured by increasing the amount 
of the next required installment determined under Sec. 1.6655-1 by the 
amount of such reduction (and, if the next required installment is 
similarly reduced, by increasing subsequent required installments to the 
extent that the reduction has not previously been recaptured).
    (b) Determination of annualized income installment--in general. In 
the case of any required installment, the annualized income installment 
is the excess (if any) of--
    (1) The product of the applicable percentage and the tax (after 
reducing the annualized tax by the amount of any allowable credits) for 
the taxable year computed by annualizing the taxable income and 
alternative minimum taxable income--
    (i) For the first 3 months of the taxable year, in the case of the 
first required installment;
    (ii) For the first 3 months of the taxable year, in the case of the 
second required installment;
    (iii) For the first 6 months of the taxable year, in the case of the 
third required installment; and
    (iv) For the first 9 months of the taxable year, in the case of the 
fourth required installment; over
    (2) The aggregate amount of any prior required installments for the 
taxable year.
    (c) Special rules--(1) Applicable percentage. Except as otherwise 
provided in Sec. 1.6655-5(d) with respect to short taxable years--

------------------------------------------------------------------------
                                                         The applicable
  In the case of the following required installments     percentage is
------------------------------------------------------------------------
1st..................................................                 25
2nd..................................................                 50
3rd..................................................                 75
4th..................................................                100
------------------------------------------------------------------------

    (2) Partial month. Except as otherwise provided, for purposes of 
paragraph (b) of this section a partial month is treated as a month.
    (3) Annualization period not a short taxable year. An annualization 
period is not treated as a short taxable year for purposes of 
determining the taxable income of an annualization period.
    (d) Election of different annualization periods. (1) If the taxpayer 
timely files Form 8842, ``Election to Use Different Annualization 
Periods for Corporate Estimated Tax,'' in accordance with section 
6655(e)(2)(C)(iii), and elects Option 1--
    (i) Paragraph (b)(1)(i) of this section will be applied by using the 
language ``2 months'' instead of ``3 months'';
    (ii) Paragraph (b)(1)(ii) of this section will be applied by using 
the language ``4 months'' instead of ``3 months'';
    (iii) Paragraph (b)(1)(iii) of this section will be applied by using 
the language ``7 months'' instead of ``6 months''; and
    (iv) Paragraph (b)(1)(iv) of this section will be applied by using 
the language ``10 months'' instead of ``9 months''.
    (2) If the taxpayer timely files Form 8842, in accordance with 
section 6655(e)(2)(C)(iii), and elects Option 2--
    (i) Paragraph (b)(1)(ii) of this section will be applied by using 
the language ``5 months'' instead of ``3 months'';
    (ii) Paragraph (b)(1)(iii) of this section will be applied by using 
the language ``8 months'' instead of ``6 months''; and
    (iii) Paragraph (b)(1)(iv) of this section will be applied by using 
the language ``11 months'' instead of ``9 months''.
    (3) The application of the annualized income installment method is 
illustrated by the following example:

    Example. (i) ABC, a calendar year corporation, had a taxable year of 
less than twelve months for tax year 2008 and no credits against tax for 
tax year 2009. ABC made an estimated tax payment of $15,000 on the 
installment dates of April 15, 2009, June 15, 2009, September 15, 2009, 
and December 15, 2009, respectively. Assume that, under paragraph (d)(1) 
of this section, ABC elected Option 1 by timely filing Form 8842, in 
accordance with section 6655(e)(2)(C)(iii), and determined that its 
taxable income for the first 2, 4, 7 and 10 months was $25,000, $64,000, 
$125,000, and $175,000 respectively. The income for each period is 
annualized as follows:
$25,000 x 12/2 = $150,000
$64,000 x 12/4 = $192,000
$125,000 x 12/7 = $214,286
$175,000 x 12/10 = $210,000
    (ii)(A) To determine whether the installment payment made on April 
15, 2009, equals or exceeds the amount that would have been

[[Page 578]]

required to have been paid if the estimated tax were equal to 100 
percent of the tax computed on the annualized income for the 2-month 
period, the following computation is necessary:
    (1) Annualized income for the 2 month period = $150,000
    (2) Tax on this paragraph (d)(3), Example (ii)(A)(1) = $41,750
    (3) 100% of this paragraph (d)(3), Example (ii)(A)(2) = $41,750
    (4) 25% of this paragraph (d)(3), Example (ii)(A)(3) = $10,438
    (B) Because the total amount of estimated tax that was timely paid 
on or before the first installment date ($15,000) exceeds the amount 
required to be paid on or before this date if the estimated tax were 100 
percent of the tax determined by placing on an annualized basis the 
taxable income for the first 2-month period ($10,438), the exception 
described in paragraphs (a) and (b) of this section applies, and no 
addition to tax will be imposed for the installment due on April 15, 
2009.
    (iii)(A) To determine whether the installment payments made on or 
before June 15, 2009, equal or exceed the amount that would have been 
required to have been paid if the estimated tax were equal to 100 
percent of the tax computed on the annualized income for the 4-month 
period, the following computation is necessary:
    (1) Annualized income for the 4 month period = $192,000
    (2) Tax on this paragraph (d)(3), Example (iii)(A)(1) = $58,130
    (3) 100% of this paragraph (d)(3), Example (iii)(A)(2) = $58,130
    (4) 50% of this paragraph (d)(3), Example (iii)(A)(3) less $10,438 
(amount due with the first installment) = $18,627
    (B) Because the total amount of estimated tax actually paid on or 
before the second installment date ($19,562 ($15,000 second required 
installment payment plus $4,562 overpayment of first required 
installment)) exceeds the amount required to be paid on or before this 
date if the estimated tax were 100 percent of the tax determined by 
placing on an annualized basis the taxable income for the first 4-month 
period ($18,627), the exception described in paragraphs (a) and (b) of 
this section applies, and no addition to tax will be imposed for the 
installment due on June 15, 2009.
    (iv)(A) To determine whether the installment payments made on or 
before September 15, 2009, equal or exceed the amount that would have 
been required to have been paid if the estimated tax were equal to 100 
percent of the tax computed on the annualized income for the 7-month 
period, the following computation is necessary:
    (1) Annualized income for the 7 month period = $214,286
    (2) Tax on this paragraph (d)(3), Example (iv)(A)(1) = $66,821
    (3) 100% of this paragraph (d)(3), Example (iv)(A)(2) = $66,821
    (4) 75% of this paragraph (d)(3), Example (iv)(A)(3) less $29,065 
(amount due with the first and second installment) = $21,051
    (B) Because the total amount of estimated tax actually paid on or 
before the third installment date ($15,935 ($15,000 third required 
installment payment plus $935 overpayment of second required 
installment)) does not equal or exceed the amount required to be paid on 
or before this date if the estimated tax were 100 percent of the tax 
determined by placing on an annualized basis the taxable income for the 
first 7-month period ($21,051), the exception described in paragraphs 
(a) and (b) of this section does not apply, and an addition to tax will 
be imposed with respect to the underpayment of the September 15, 2009, 
installment unless another exception applies to this installment 
payment.
    (v)(A) To determine whether the installment payments made on or 
before December 15, 2009, equal or exceed the amount that would have 
been required to have been paid if the estimated tax were equal to 100 
percent of the tax computed on the annualized income for the 10-month 
period, the following computation is necessary:
    (1) Annualized income for the 10 month period = $210,000
    (2) Tax on this paragraph (d)(3), Example (v)(A)(1) = $65,150
    (3) 100% of this paragraph (d)(3), Example (v)(A)(2) = $65,150
    (4) 100% of this paragraph (d)(3), Example (v)(A)(3) less $50,116 
(amount due with the first, second and third installment) = $15,034
    (B) Because the total amount of estimated tax payments made on or 
before the fourth installment date that is available to be applied to 
the estimated tax due for the fourth installment ($9,884 ($15,000 fourth 
required installment payment less $5,116 underpayment for the third 
installment of estimated tax ($21,051 third installment of estimated tax 
due less $15,935 payments available to be applied to the third 
installment of estimated tax))) does not equal or exceed the amount 
required to be paid on or before this date if the estimated tax were 100 
percent of the tax determined by placing on an annualized basis the 
taxable income for the first 10-month period ($15,034), the exception 
described in paragraphs (a) and (b) of this section does not apply, and 
an addition to tax will be imposed with respect to the underpayment of 
the December 15, 2009, installment unless another exception applies to 
this installment payment.
    (vi) Assuming that no other exceptions apply and the addition to tax 
is computed under section 6621(a)(2) at the rate of 8 percent per annum 
for the applicable periods of

[[Page 579]]

underpayment, the amount of the addition to tax is as follows:
    (A) First installment (no underpayment) = $0
    (B) Second installment (no underpayment) = $0
    (C) Third installment (underpayment period 9-16-09 through 12-15-
09), computed as \91/365\ x $5,116 x 8% = $102
    (D) Fourth installment (underpayment period 12-16-09 through 3-15-
10), computed as \90/365\ x $5,150 x 8% = $102
    (E) Total of this paragraph (d)(3), Example (vi)(A) through (D) = 
$204

    (e) 52-53 week taxable year. (1) Generally, except as provided in 
the alternative rule in paragraph (e)(4) of this section, in the case of 
a taxpayer whose taxable year constitutes 52 or 53 weeks in accordance 
with section 441(f), the rules prescribed by Sec. 1.441-2 are 
applicable in determining--
    (i) Whether a taxable year is a taxable year of 12 months; and
    (ii) When the 2-, 3-, 4-, 5-, 6-, 7-, 8-, 9-, 10-, or 11-month 
period (whichever is applicable) commences and ends for purposes of 
paragraphs (b)(1), (d)(1) and (d)(2) of this section.
    (2) If a taxpayer employs four 13-week periods or thirteen 4-week 
accounting periods and the end of any accounting period employed by the 
taxpayer does not correspond to the end of the 2-, 3-, 4-, 5-, 6-, 7-, 
8-, 9-, 10-, or 11-month period (whichever is applicable), then, 
provided the taxpayer has at least one full 4-week or 13-week accounting 
period, as appropriate, within the applicable period, annualized taxable 
income for the applicable period is--
    (i) [(x/(y*13))*z], in the case of a taxpayer using four 13-week 
periods, if--
    (A) x = Taxable income for the number of full 13-week periods in the 
applicable period;
    (B) y = The number of full 13-week periods in the applicable period; 
and
    (C) z = The number of weeks in the taxable year; or
    (ii) [(x/(y*4))*z], in the case of a taxpayer using thirteen 4-week 
periods, if--
    (A) x = Taxable income for the number of full 4-week periods in the 
applicable period;
    (B) y = The number of full 4-week periods in the applicable period; 
and
    (C) z = The number of weeks in the taxable year.
    (3) If a taxpayer employs four 13-week periods and the taxpayer does 
not have at least one 13-week period within the applicable 2-, 3-, 4-, 
5-, 6-, 7-, 8-, 9-, 10-, or 11-month period, the taxpayer is permitted 
to determine annualized taxable income for the applicable period based 
upon--
    (i) The taxable income for the number of weeks in the applicable 
period; or
    (ii) The taxable income for the full 13-week periods that end before 
the due date of the required installment.
    (4) As an alternative to using the 52/53 week taxable year rules 
provided in paragraphs (e)(1), (e)(2), and (e)(3) of this section, a 
taxpayer whose taxable year constitutes 52 or 53 weeks in accordance 
with section 441(f) may base its annualization period on the month that 
ends closest to the end of its applicable 4-week period or 13-week 
period that ends within the applicable annualization period. This 
alternative may only be used if it is used for determining annualization 
periods for all required installments for the taxable year.
    (5) The following examples illustrate the rules of this paragraph 
(e):

    Example 1. Corporation ABC, an accrual method taxpayer, uses a 52/53 
week year-end ending on the last Friday in December and uses four 
thirteen-week periods. For its year beginning December 28, 2007, ABC 
uses the annualized income installment method under section 
6655(e)(2)(A)(i) to calculate all of its required installments. For 
purposes of computing its first and second required installments, the 
first 3 months of A's taxable year under paragraph (b)(1)(i) of this 
section will end on March 28th, the thirteenth Friday of ABC's taxable 
year. For purposes of its third required installment, the first 6 months 
of ABC's taxable year will end on June 27th, the twenty-sixth Friday of 
ABC's taxable year. For purposes of its fourth required installment, the 
first 9 months of ABC's taxable year will end on September 26th, the 
thirty-ninth Friday of ABC's taxable year.
    Example 2. Same facts as Example 1 except that ABC uses thirteen 
four-week periods and there are 52 weeks during ABC's taxable year 
beginning December 28, 2007, and ending December 26, 2008. For purposes 
of computing ABC's first and second required installments, ABC's 
annualized taxable income for the first three months will be the taxable 
income

[[Page 580]]

for the first three four-week periods of ABC's taxable year (December 
28, 2007, through March 21, 2008) divided by 12 (number of full four-
week periods in the first three months (3) multiplied by 4) and 
multiplied by 52 (the number of weeks in the taxable year). For purposes 
of computing ABC's third required installment, ABC's annualized taxable 
income for the first six months will be the taxable income for the first 
six four-week periods of ABC's taxable year (December 28, 2007, through 
June 13, 2008) divided by 24 and multiplied by 52. For purposes of 
computing ABC's fourth required installment, ABC's annualized taxable 
income for the first nine months will be the taxable income for the 
first nine four-week periods of ABC's taxable year (December 28, 2007, 
through September 5, 2008) divided by 36 and multiplied by 52.
    Example 3. Same facts as Example 1 except that ABC uses the 
alternative method under paragraph (e)(4) of this section for computing 
its required installments for 2008. For purposes of computing its first 
and second required installments, the first three months of ABC's 
taxable year under paragraph (b)(1)(i) of this section will end on March 
31, 2008, the month that ends closest to the end of ABC's applicable 
thirteen-week period for the first and second required installments. For 
purposes of ABC's third required installment, the first six months of 
ABC's taxable year will end on June 30, 2008, the month that ends 
closest to the end of ABC's applicable thirteen-week period for the 
third required installment. For purposes of ABC's fourth required 
installment, the first nine months of ABC's taxable year will end on 
September 30, 2008, the month that ends closest to the end of ABC's 
applicable thirteen-week period for the fourth required installment.

    (f) Determination of taxable income for an annualization period--(1) 
In general. This paragraph (f) applies for purposes of determining the 
applicability of the exception described in paragraphs (a) and (b) of 
this section (relating to the annualization of income) and the exception 
described in Sec. 1.6655-3 (relating to annualization of income for 
corporations with seasonal income). An item of income, deduction, gain 
or loss is to be taken into account in determining the taxable income 
and alternative minimum taxable income (and applicable tax and 
alternative minimum tax) for an annualization period in the manner 
provided in this paragraph (f). An item may not be taken into account in 
determining taxable income for any annualization period unless the item 
is properly taken into account by the last day of that annualization 
period and the item is properly taken into account in determining the 
taxpayer's taxable income and alternative minimum taxable income (and 
applicable tax and alternative minimum tax) for the taxable year that 
includes the annualization period.
    (i) Items of income. An item of income is taken into account in the 
annualization period in which the item is properly includible under the 
method of accounting employed by the taxpayer with respect to the item 
and in accordance with the appropriate provision of the Internal Revenue 
Code (for example, section 451 for accrual method taxpayers, section 453 
for installment sales or section 460 for long-term contracts).
    (ii) Items of deduction. An item of deduction is taken into account 
in the annualization period in which the item is properly deductible 
under the method of accounting employed by the taxpayer with respect to 
the item and in accordance with the appropriate provision of the 
Internal Revenue Code (for example, under the cash receipts and 
disbursements method of accounting, the deduction must be paid under 
Sec. 1.461-1(a)(1) and be otherwise deductible in computing taxable 
income; under an accrual method of accounting, the deduction must be 
incurred under Sec. 1.461-1(a)(2) and be otherwise deductible in 
computing taxable income). Section 170(a)(2) and Sec. 1.170A-11(b) 
(charitable contributions by accrual method corporations) and Sec. 
1.461-5 (recurring item exception) may not be taken into consideration 
by an accrual method taxpayer in any annualization period in determining 
whether an item of deduction has been incurred under Sec. 1.461-1(a)(2) 
during that annualization period.
    (iii) Losses. An item of loss is to be taken into account during the 
annualization period in which events have occurred that permit the loss 
to be taken into account under the appropriate provision of the Internal 
Revenue Code.
    (2) Certain deductions required to be allocated in a reasonably 
accurate manner--(i) In general. The following deductions allowed for a 
taxable year must be allocated throughout the taxable

[[Page 581]]

year in a reasonably accurate manner (as defined in paragraph 
(f)(2)(iii) of this section), regardless of the annualization period in 
which the item is paid or incurred:
    (A) Real property tax deductions.
    (B) Employee and independent contractor bonus compensation 
deductions (including the employer's share of employment taxes related 
to such compensation).
    (C) Deductions under sections 404 (deferred compensation) and 419 
(welfare benefit funds).
    (D) Items allowed as a deduction for the taxable year by reason of 
section 170(a)(2) and Sec. 1.170A-11(b) (certain charitable 
contributions by accrual method corporations), Sec. 1.461-5 (recurring 
item exception) or Sec. 1.263(a)-4(f) (12-month rule).
    (E) Items of deduction designated by the Secretary by publication in 
the Internal Revenue Bulletin (see Sec. 601.601(d)(2)(ii)(b) of this 
chapter).
    (ii) Application of the reasonably accurate manner requirement to 
certain charitable contributions, recurring items, and 12-month rule 
items. For purposes of paragraph (f)(2)(i)(D) of this section, the total 
amount of the item deducted in the computation of taxable income for the 
taxable year must be allocated in a reasonably accurate manner, 
notwithstanding the fact that section 170(a)(2) and Sec. 1.170A-11(b), 
Sec. 1.461-5, or Sec. 1.263(a)-4(f) applies to only a portion of the 
total amount of the item deducted for the taxable year. For example, if 
a portion of a taxpayer's rebate liabilities are deducted in the 
computation of taxable income under the recurring item exception, all 
rebate liabilities deducted in the computation of taxable income for the 
taxable year must be allocated in a reasonably accurate manner.
    (iii) Reasonably accurate manner defined. (A) An item is allocated 
throughout the taxable year in a reasonably accurate manner if the item 
is allocated ratably throughout the taxable year or if the allocation 
provides a reasonably accurate estimate of taxable income for the 
taxable year based upon the facts known as of the end of the 
annualization period. In determining that an allocation of an item 
provides a reasonably accurate estimate of taxable income for the 
taxable year, relevant considerations include--
    (1) The extent to which the allocation is consistent with the 
taxpayer's accounting for the item on its non-tax books and records;
    (2) The extent to which the allocable portion of the item becomes 
fixed and determinable (under Sec. 1.461-1(a)(2)) during the applicable 
annualization period; and
    (3) The extent to which the allocation, if compared to the ratable 
allocation of the item, results in a better matching of the item of 
deduction to revenue, earnings, the use of property or the provision of 
services occurring during the annualization period.
    (B) None of the relevant considerations above override the general 
requirement that the allocation must be done in a reasonably accurate 
manner based upon the facts known as of the end of the annualization 
period. For example, the fact that a liability for an annual expense 
becomes fixed and determinable during an annualization period will not 
establish that allocating all of the expense to that annualization 
period has been done in a reasonably accurate manner if the facts known 
as of the end of the annualization period indicate otherwise.
    (iv) Special rule for certain real property tax liabilities. 
Notwithstanding paragraph (f)(2)(iii) of this section, real property tax 
liabilities for which an election under section 461(c) is in effect must 
be allocated ratably throughout the taxable year for purposes of this 
section.
    (v) Examples. Unless otherwise stated, the following examples assume 
that the taxpayer uses the 3-3-6-9 annualization period:

    Example 1. (i) Corporation ABC, a calendar year taxpayer, uses an 
accrual method of accounting and the annualized income installment 
method under section 6655(e)(2)(A)(i) to calculate all of its required 
installment payments for its 2008 taxable year. ABC has adopted a plan 
under which ABC pays an annual bonus to its employees. As of March 31, 
2008, ABC estimates that it will pay a year-end bonus of $500,000 to its 
employees if earnings remain constant throughout the tax year. ABC does 
not pay any of the estimated bonus liability as of March 31, 2008. On 
October 31, 2008, ABC declares a $600,000 bonus to its employees which 
is paid out on November

[[Page 582]]

15, 2008, and properly deducted in ABC's December 31, 2008, tax year. No 
other bonus liabilities are incurred by ABC during the tax year.
    (ii) Under the general rule provided in paragraph (f)(2)(i) of this 
section, ABC is required to allocate its employee bonus liability in a 
reasonably accurate manner for annualization purposes. Under paragraph 
(f)(2)(iii) of this section, ABC's employee bonus liability will be 
deemed to be allocated in a reasonably accurate manner if the item is 
allocated ratably throughout the taxable year. Therefore, ABC is 
permitted to recognize a $150,000 bonus deduction (one quarter of the 
$600,000 bonus liability properly recognized by ABC in the tax year 
ending December 31, 2008) in the first annualization period ending March 
31, 2008.
    Example 2. (i) Corporation ABC, a calendar year taxpayer, uses an 
accrual method of accounting and the annualized income installment 
method under section 6655(e)(2)(A)(i) to calculate all of its required 
installment payments for its 2008 taxable year. ABC has adopted a plan 
under which ABC pays an annual bonus to its employees. ABC's employee 
bonus plan generally calls for an annual bonus equal to 2% of earnings. 
A bonus reserve for this amount is reported each quarter in ABC's non-
tax books and records. ABC's quarterly revenues throughout the year are 
$10,000,000; $6,000,000; $7,000,000; and $7,000,000 respectively. As of 
March 31, 2008, ABC estimates that it will pay a year-end bonus of 
$800,000 ($10,000,000 x 4 x 2%) to its employees if earnings remain 
constant throughout the year. ABC does not pay any of the estimated 
bonus payment as of March 31, 2008. On December 31, 2008, ABC declares a 
$600,000 bonus to its employees which is paid out on January 15, 2009, 
and properly deducted in ABC's December 31, 2008, tax year.
    (ii) Under the general rule provided in paragraph (f)(2)(i) of this 
section, ABC must allocate its employee bonus liability in a reasonably 
accurate manner for annualization purposes. Under paragraph (f)(2)(iii) 
of this section, ABC's employee bonus liability will be deemed to be 
allocated in a reasonably accurate manner if the allocation provides a 
reasonable estimate of taxable income based upon the facts known as of 
the end of the annualization period. Based upon its earnings activities 
and other information available as of March 31, 2008, ABC estimated that 
its total deduction for employee bonuses for the taxable year ending 
December 31, 2008, would be $800,000 ($10,000,000 first quarter earnings 
x 4 x 2%). Allocating $200,000 ($10,000,000 x 2%) of ABC's annual bonus 
liability of $600,000 to ABC's first quarter based upon earnings during 
the quarter represents a better matching of ABC's bonus expense to 
earnings in the quarter as compared to allocating $150,000 to ABC's 
first quarter under a ratable accrual method and is consistent with the 
allocation provided in ABC's non-tax books and records. Accordingly, 
allocating ABC's employee bonus deductions based upon ABC's earnings 
will be considered allocated in a reasonably accurate manner.
    Example 3. (i) Corporation ABC, a calendar year taxpayer, uses an 
accrual method of accounting and the annualized income installment 
method under section 6655(e)(2)(A)(i) to calculate all of its required 
installment payments for its 2008 taxable year. ABC has adopted a plan 
under which ABC pays a bonus to its employees each quarter based upon 
earnings for that quarter. On March 31, 2008, ABC pays out $2,000,000 to 
its employees as a quarterly bonus based upon the earnings of ABC for 
the period January 1, 2008, through March 31, 2008. The $2,000,000 bonus 
is recognized as an expense on ABC's audited financial statements in the 
quarter ending March 31, 2008. As of March 31, 2008, ABC anticipates 
that its earnings will continue throughout the year resulting in future 
quarterly bonus payments in 2008 similar to the $2,000,000 first quarter 
payment.
    (ii) Under the general rule provided in paragraph (f)(2)(i) of this 
section, ABC is required to allocate its employee bonus liability in a 
reasonably accurate manner for annualization purposes. Under paragraph 
(f)(2)(iii) of this section , ABC's employee bonus liability will be 
deemed to be allocated in a reasonably accurate manner if the item is 
allocated ratably throughout the taxable year. Therefore, ABC may 
recognize a $500,000 bonus deduction (one quarter of the $2,000,000 
bonus liability properly recognized by ABC in the tax year ending 
December 31, 2008) in the first annualization period ending March 31, 
2008 (as well as one quarter of any additional bonus liability properly 
recognized by ABC in the tax year ending December 31, 2008).
    (iii) In addition, paragraph (f)(2)(iii) of this section provides 
that an allocation will be considered reasonable if the allocation 
provides an accurate estimate of taxable income for the taxable year 
based upon the facts known as of the end of the annualization period. 
Based upon its earnings activities and other information available as of 
March 31, 2008, ABC estimates that its total deduction for employee 
bonuses for the taxable year ending December 31, 2008, would be 
$8,000,000. In addition, the $2,000,000 bonus liability became fixed and 
determinable during the first quarter. Allocating $2,000,000 to ABC's 
first quarter earnings is also consistent with ABC's non-tax books and 
records and represents a better matching of ABC's bonus expense to 
earnings in the quarter as compared to a ratable accrual. Accordingly, 
allocating ABC's bonus liability based upon earnings will be considered 
a reasonably accurate manner for estimated tax purposes.

[[Page 583]]

    Example 4. (i) Corporation ABC, a calendar year taxpayer, uses an 
accrual method of accounting with the recurring item exception and the 
annualized income installment method under section 6655(e)(2)(A)(i) to 
calculate all of its required installment payments for its 2009 taxable 
year. ABC regularly incurs rebate obligations related to the sale of its 
products. Rebate coupons that are received and validated by ABC are 
generally paid in the following month. During the tax year ending 
December 31, 2009, ABC received, validated and paid $400,000 in rebates. 
In addition, as of the end of December 31, 2009, ABC had received and 
validated $100,000 in rebate claims that were paid in January of 2010 
and deducted in ABC's December 31, 2009, tax year under the recurring 
item exception. Therefore, ABC properly recognized a $500,000 rebate 
liability deduction on ABC's December 31, 2009, tax return.
    (ii) Under the rule provided in paragraph (f)(2)(ii) of this 
section, an item must be allocated in a reasonably accurate manner if 
any portion of the item is deducted under the recurring item exception. 
Therefore, ABC will be required to allocate its entire $500,000 rebate 
liability deduction in a reasonably accurate manner as defined in 
paragraph (f)(2)(iii) of this section.

    (3) Special rules--(i) Advance payments under Rev. Proc. 2004-34. An 
advance payment for which the taxpayer uses the Deferral Method provided 
in section 5.02 of Rev. Proc. 2004-34 (2004-1 CB 991), (see Sec. 
601.601(d)(2)(ii)(b) of this chapter) is includible in computing taxable 
income for an annualization period in accordance with that method of 
accounting, except that any amount not included in computing taxable 
income by the end of the taxable year succeeding the taxable year of 
receipt is includible in computing taxable income on the last day of 
such succeeding taxable year.
    (ii) Extraordinary items--(A) In general. In general, extraordinary 
items must be taken into account after annualizing the taxable income 
for the annualization period. For purposes of the preceding sentence an 
extraordinary item is any item identified in Sec. 1.1502-
76(b)(2)(ii)(C)(1), (2), (3), (4), (7), and (8), a net operating loss 
carryover, a section 481(a) adjustment, net gain or loss from the 
disposition of 25 percent or more of the fair market value of a 
taxpayer's business assets during a taxable year, and any other item 
designated by the Secretary by publication in the Internal Revenue 
Bulletin (see Sec. 601.601(d)(2)(ii)(b) of this chapter).
    (B) De minimis extraordinary items. A taxpayer may treat any de 
minimis extraordinary item, other than a net operating loss carryover or 
section 481(a) adjustment, as an item under the general rule of 
paragraph (f)(1) of this section rather than an extraordinary item as 
provided for in paragraph (f)(3)(ii) of this section. A de minimis 
extraordinary item is any item identified in paragraph (f)(3)(ii)(A) of 
this section resulting from a transaction in which the total 
extraordinary items resulting from such transaction is less than 
$1,000,000.
    (C) Special rule for net operating loss deductions and section 
481(a) adjustments. For purposes of paragraph (f)(3)(ii) of this 
section, a taxpayer must treat a net operating loss deduction and 
section 481(a) adjustment as extraordinary items arising on the first 
day of the tax year in which the item is taken into account in 
determining taxable income. Notwithstanding the preceding sentence, a 
taxpayer may choose to treat the portion of a section 481(a) adjustment 
recognized during the tax year of the accounting method change as an 
extraordinary item arising on the date the Form 3115, ``Application for 
Change in Accounting Method,'' requesting the change was filed with the 
national office of the Internal Revenue Service.
    (iii) Credits--(A) Current year credits. With respect to a current 
year credit, the items upon which the credit is computed are annualized, 
the amount of the credit is computed based on the annualized items, and 
the amount of the credit is deducted from the annualized tax. For 
example, for an annualization period consisting of three months in a 
full 12-month taxable year, the items upon which the credit is based 
that are taken into account for the three month period are multiplied by 
four, the credit is determined based on the annualized amount of the 
items, and the credit reduces the annualized tax.
    (B) Credit carryovers. Any credit carryover to the current taxable 
year is taken into account in computing an annualized income installment 
only after annualizing the taxable income

[[Page 584]]

for the annualization period and computing the applicable tax, and 
before applying the applicable percentage.
    (iv) Depreciation and amortization--(A) Estimated annual 
depreciation and amortization. In general, in determining taxable income 
for any annualization period, a proportionate amount of the taxpayer's 
estimated annual depreciation and amortization (depreciation) expense 
may be taken into account. For purposes of the preceding sentence, 
estimated annual depreciation expense is the estimated depreciation 
expense to be properly taken into account in determining the taxpayer's 
taxable income for the taxable year. In determining the estimated annual 
depreciation expense, a taxpayer may take into account purchases, sales 
or other dispositions, changes in use, additional first-year 
depreciation and expense deductions and section 179 or any similar 
provision, and other events that, based on all the relevant information 
available as of the last day of the annualization period (such as 
capital spending budgets, financial statement data and projections, or 
similar reports that provide evidence of the taxpayer's capital spending 
plans for the current taxable year), are reasonably expected to occur or 
apply during the taxable year.
    (B) Safe harbors--(1) Proportionate depreciation allowance. In 
determining taxable income for any annualization period, in lieu of the 
rule provided in paragraph (f)(3)(iv)(A) of this section a taxpayer may 
take into account a proportionate amount of the depreciation and 
amortization (depreciation) expense, including special depreciation and 
expense deductions such as those provided for in section 168(k) and 
section 179 or any similar provision, allowed for the taxable year 
from--
    (i) Assets that were in service on the last day of the prior taxable 
year, are in service on the first day of the current taxable year, and 
that have not been disposed of during the annualization period;
    (ii) Assets placed in service during the annualization period and 
have not been disposed of during that period; and
    (iii) Assets that were in service on the last day of the prior 
taxable year and that are disposed of during the annualization period.
    (2) 90 percent of preceding year's depreciation. In determining 
taxable income for any annualization period, in lieu of the general rule 
provided in paragraph (f)(3)(iv)(A) of this section, a proportionate 
amount of 90 percent of the amount of depreciation and amortization 
(depreciation) expense taken on the taxpayer's Federal income tax return 
for the preceding taxable year may be taken into account. If the 
taxpayer's preceding taxable year is less than 12 months (a short 
taxable year), the amount of depreciation expense taken into account is 
annualized by multiplying the depreciation and amortization for the 
short taxable year by 12, and dividing the result by the number of 
months in the short taxable year.
    (3) Safe harbor operational rules. If a taxpayer selects one of the 
two safe harbors provided in paragraph (f)(3)(iv)(B)(1) or paragraph 
(f)(3)(iv)(B)(2) of this section, the taxpayer must use that safe harbor 
for all depreciation expenses within the annualization period for the 
annualized income installment. However, a taxpayer may use either the 
method provided for in paragraph (f)(3)(iv)(A) of this section or a 
method provided for in this paragraph (f)(3)(iv)(B) of this section for 
each annualized income installment during the taxable year. For example, 
a taxpayer may use the safe harbor provided in paragraph 
(f)(3)(iv)(B)(1) of this section for its first annualized income 
installment and may use the general rule provided in paragraph 
(f)(3)(iv)(A) of this section for its second annualized income 
installment.
    (C) Short taxable years. If the taxable year is, or will be, a short 
taxable year (based on all relevant information available as of the last 
day of the annualization period), annual depreciation expense is 
computed using the rules applicable for computing depreciation during a 
short taxable year for purposes of determining the annual depreciation 
expense to be allocated to an annualization period. For this purpose, 
the rules applicable for computing depreciation during a short taxable 
year are applied on the basis of

[[Page 585]]

the date the taxable year is expected to end based on all relevant 
information available as of the last day of the annualization period. 
See Rev. Proc. 89-15 (1989-1 CB 816) for computing depreciation expense 
under section 168 (see Sec. 601.601(d)(2)(ii)(b) of this chapter). An 
annualization period is not treated as a short taxable year for purposes 
of determining the depreciation expense for an annualization period. See 
paragraph (c)(3) of this section.
    (v) Distributive share of items--(A) Member of partnership. In 
determining a partner's distributive share of partnership items that 
must be taken into account during an annualization period, the rules set 
forth in Sec. 1.6654-2(d)(2) are applicable.
    (B) Treatment of subpart F income and income under section 936(h)--
(1) General rule. Any amounts required to be included in gross income 
under section 936(h) or section 951(a), and credits properly allocable 
thereto, are taken into account in computing any annualized income 
installment in a manner similar to the manner under which partnership 
inclusions, and credits properly allocable thereto, are taken into 
account in accordance with paragraph (f)(3)(v)(A) of this section.
    (2) Prior year safe harbor--(i) General rule. If a taxpayer elects 
to have the safe harbor in this paragraph (f)(3)(v)(B)(2) apply for any 
taxable year, then paragraph (f)(3)(v)(B)(1) of this section does not 
apply; and, for purposes of computing any annualized income installment 
for the taxable year, the taxpayer is treated as having received ratably 
during the taxable year items of income and credit described in 
paragraph (f)(3)(v)(B)(1) of this section in an amount equal to 115 
percent of the amount of such items shown on the return of the taxpayer 
for the preceding taxable year (the second preceding taxable year in the 
case of the first and second required installments for such taxable 
year).
    (ii) Special rule for noncontrolling shareholder. If a taxpayer 
making the election under paragraph (f)(3)(v)(B)(2)(i) of this section 
is a noncontrolling shareholder of a corporation, paragraph 
(f)(3)(v)(B)(2)(i) of this section is applied with respect to items of 
such corporation by substituting ``100 percent'' for ``115 percent''. 
For purposes of paragraph (f)(3)(v)(B)(2)(ii) of this section, the term 
noncontrolling shareholder means, with respect to any corporation, a 
shareholder that, as of the beginning of the taxable year for which the 
installment is being made, does not own within the meaning of section 
958(a), and is not treated as owning within the meaning of section 
958(b), more than 50 percent by vote or value of the stock in the 
corporation.
    (C) Dividends from closely held real estate investment trust--(1) 
General rule. Any dividend received from a closely held real estate 
investment trust by any person that owns, after the application of 
section 856(d)(5), 10 percent or more by vote or value of the stock or 
beneficial interests in the trust is taken into account in computing 
annualized income installments in a manner similar to the manner under 
which partnership income inclusions are taken into account.
    (2) Closely held real estate investment trust. For purposes of 
paragraph (f)(3)(v)(C)(1) of this section, the term closely held real 
estate investment trust means a real estate investment trust with 
respect to which 5 or fewer persons own, after the application of 
section 856(d)(5), 50 percent or more by vote or value of the stock or 
beneficial interests in the trust.
    (D) Other passthrough entities. A taxpayer's distributive share of 
items from a passthrough entity, other than those described in 
paragraphs (f)(3)(v)(A) and (f)(3)(v)(C) of this section, is taken into 
account in computing any annualized income installment in a manner 
similar to the manner under which partnership items are taken into 
account under paragraph (f)(3)(v)(A) of this section.
    (vi) Alternative minimum taxable income exemption amount. The 
alternative minimum taxable income exemption amount provided by section 
55(d)(2) is applied after the alternative minimum taxable income for the 
annualization period is annualized.
    (vii) Examples. The provisions of this paragraph (f) are illustrated 
by the following examples. Unless otherwise stated, the following 
examples assume that the taxpayer uses the 3-3-6-9 annualization period.


[[Page 586]]


    Example 1. Expense paid or incurred in the installment period. 
Corporation ABC, a calendar year taxpayer, uses an accrual method of 
accounting and the annualized income installment method under section 
6655(e)(2)(A)(i) to calculate all of its required installment payments 
for its 2008 taxable year. ABC has licensed technology from Corporation 
XYZ. Pursuant to the license agreement, ABC pays a license fee to XYZ 
equal to $.01 for every dollar of gross receipts earned by ABC. For 
2008, ABC projects gross receipts of $200,000,000, of which $100,000,000 
is earned by March 31, 2008. Pursuant to paragraph (f)(1) of this 
section, a license fee expense of $1,000,000 ($100,000,000 x $.01) is 
incurred by March 31, 2008, and may be taken into account for purposes 
of determining the taxable income to be annualized in computing ABC's 
first annualized income installment.
    Example 2. Expense not paid or incurred in the installment period. 
Same facts as Example 1 except that ABC does not earn any gross receipts 
by March 31, 2008. In accordance with paragraph (f)(1) of this section, 
because the license fee expense was not incurred under Sec. 1.461-
1(a)(2) by the last day of the annualization period, no license fee 
expense is taken into account for purposes of determining the taxable 
income to be annualized in computing ABC's first annualized income 
installment, which is based on the income and deductions from the first 
three months of the taxable year.
    Example 3. Bad debt expense. Corporation ABC, a calendar year 
taxpayer, uses an accrual method of accounting and the annualized income 
installment method under section 6655(e)(2)(A)(i) to calculate all of 
its required installment payments for its 2008 taxable year. As of 
December 31, 2007, ABC had a $100,000 account receivable due from XYZ 
related to the sale of goods from ABC to XYZ during 2007. On March 30, 
2008, ABC determined that its receivable from XYZ was worthless under 
section 166 and the regulations. No other receivables were determined to 
be worthless between January 1, 2008, and March 31, 2008. In accordance 
with paragraph (f)(1) of this section, a $100,000 bad debt write-off is 
taken into account for purposes of determining the taxable income to be 
annualized in computing ABC's first annualized income installment.
    Example 4. Bad debt expense. Same facts as Example 3 except that ABC 
determines that the receivable from XYZ was worthless under section 166 
and the regulations on April 10, 2008. As of March 31, 2008, ABC had not 
determined that any receivables were worthless under section 166 and the 
regulations. In accordance with paragraph (f)(1) of this section, the 
$100,000 bad debt expense attributable to the receivable from XYZ is not 
taken into account for purposes of determining the taxable income to be 
annualized in computing ABC's first annualized income installment, which 
is based on the income and deductions from the first three months of the 
taxable year, because the receivable from XYZ became worthless after the 
last day of the annualization period.
    Example 5. Employer deductions under section 404 and 419. (i) 
Corporation ABC, a calendar year taxpayer, uses an accrual method of 
accounting and uses the annualized income installment method under 
section 6655(e)(2)(A)(i) to calculate all of its required installment 
payments for its 2008 taxable year. On March 1, 2008, the board of 
directors of ABC makes a binding, irrevocable commitment to fund a 
minimum contribution of $10,000,000 to ABC's qualified retirement plan 
by March 14, 2009. ABC remits a $1,000,000 payment to the retirement 
plan on March 1, 2008, and a $9,000,000 payment on March 3, 2009. ABC 
does not incur any other related retirement plan deductions during its 
2008 taxable year.
    (ii) Under the rule provided in paragraph (f)(2)(i) of this section, 
ABC's employer deduction for payment made to the qualified plan must be 
allocated throughout the tax year for estimated tax purposes in a 
reasonably accurate manner. Therefore, ABC will not be permitted to 
allocate the $10,000,000 deduction to its first installment period. 
Under paragraph (f)(2)(iii) of this section, ABC's qualified plan 
deduction will be deemed to be allocated in a reasonably accurate manner 
if the item is allocated ratably throughout the taxable year. Therefore, 
ABC will be permitted to allocate $2,500,000 of its qualified plan 
deduction in its first installment period.
    Example 6. Prepaid expense. (i) Corporation ABC, a calendar year 
taxpayer, uses an accrual method of accounting and does not capitalize 
qualifying costs under the exception provided for in Sec. 1.263(a)-
4(f). ABC uses the annualized income installment method under section 
6655(e)(2)(A)(i) to calculate all of its required installment payments 
for its 2008 taxable year. On July 1, 2008, ABC purchases an annual 
business license from State X which permits ABC to operate its business 
in State X from July 1, 2008, through June 30, 2009. An annual payment 
of $12,000 is due on July 1, 2008, and ABC pays the fee on this date. 
ABC has not elected out of the 12-month rule provided by Sec. 1.263(a)-
4(f) and therefore ABC is not required to capitalize any amount paid for 
the license and will recognize a $12,000 deduction for the tax year 
ending December 31, 2008, with respect to this license.
    (ii) Under the rule provided in paragraph (f)(2)(ii) of this 
section, ABC's $12,000 business license expense must be allocated in a 
reasonably accurate manner because ABC utilizes the 12-month rule 
exception provided for in the Sec. 1.263(a)-4(f). Under paragraph 
(f)(2)(iii) of this section, ABC's deduction

[[Page 587]]

will be deemed to be allocated in a reasonably accurate manner if the 
item is allocated ratably throughout the taxable year. Therefore, ABC 
will be permitted to allocate $3,000 of its business license deduction 
in its first installment period.
    Example 7. Real property tax liability. (i) Corporation ABC, a 
calendar year taxpayer, uses an accrual method of accounting and the 
annualized income installment method under section 6655(e)(2)(A)(i) to 
calculate all of its required installment payments for its 2008 taxable 
year. ABC owns real property in State Y and uses the real property in 
its trade or business. ABC incurs a $400,000 deduction for State Y real 
estate taxes during ABC's December 31, 2008, taxable year. ABC has 
elected to recognize its real property taxes ratably under section 
461(c).
    (ii) Under the rule provided in paragraph (f)(2)(i) of this section, 
ABC's $400,000 real property tax liabilities must be allocated in a 
reasonably accurate manner. However, paragraph (f)(2)(iv) of this 
section provides that with respect to real property taxes for which an 
election has been made under section 461(c), ratable accrual is the only 
method which will be considered a reasonably accurate method. Therefore, 
ABC will be required to allocate its $400,000 real property taxes 
ratably for estimated tax purposes and thus $100,000 will be allocated 
to the ABC's first annualized income installment.
    Example 8. NOL (Net Operating Loss) deduction. Corporation ABC, a 
calendar year taxpayer, uses an accrual method of accounting and the 
annualized income installment method under section 6655(e)(2)(A)(i) to 
calculate all of its required installment payments for its 2008 taxable 
year. ABC has a net operating loss carryover to 2008 of $2,000,000. 
ABC's taxable income from January 1, 2008, through March 31, 2008, 
without regard to any net operating loss deduction, is $1,500,000 (pre-
NOL taxable income). Under the special rule for net operating loss 
deductions provided in paragraph (f)(3)(ii) of this section, the NOL 
deduction is treated as an extraordinary item incurred on the first day 
of ABC's December 31, 2008, tax year. Therefore, the NOL deduction is 
taken into account after annualization for purposes of determining ABC's 
first annualized income installment.
    Example 9. Advance payment. (i) Corporation ABC, a calendar year 
taxpayer, uses an accrual method of accounting and the annualized income 
installment method under section 6655(e)(2)(A)(i) to calculate all of 
its required installment payments for its 2008 and 2009 taxable years. 
ABC is in the business of giving dancing lessons and receives advance 
payments. For Federal income tax purposes, ABC uses the Deferral Method 
provided in section 5.02 of Rev. Proc. 2004-34 for the advance payments 
it receives for dance lessons. On November 1, 2008, ABC receives an 
advance payment of $2,400 for a 2-year contract commencing on November 
1, 2008, and providing for up to 24 individual, 1-hour lessons. ABC 
provides 2 lessons in 2008, 12 lessons in 2009, and 10 lessons in 2010. 
ABC recognizes $200 in revenues in its financial statements for the last 
quarter of 2008. ABC recognizes $300 in revenues in its financial 
statements for each quarter of 2009 for a total of $1,200 in 2009. ABC 
recognizes the remaining $1,000 in revenues in its financial statements 
during 2010. For tax purposes, ABC recognizes $200 into revenue in 2008 
and $2,200 into revenue in 2009 under Rev. Proc. 2004-34. See Sec. 
601.601(d)(2)(ii)(b).
    (ii) Pursuant to paragraph (f)(3)(i)(B) of this section, ABC is not 
required to take into account any of the advance payment for purposes of 
computing any required installment payment for ABC's 2008 taxable year 
because no part of the $2,400 advance payment was recognized as income 
in ABC's financial statements during the first nine months of ABC's 2008 
taxable year. In 2009, ABC must take into account $300 of revenue for 
purposes of computing its first and second required installment 
payments, $600 of revenue for purposes of computing its third required 
installment payment and $900 for purposes of computing its fourth 
required installment payment. Pursuant to paragraph (f)(3)(i)(B) of this 
section, the remaining deferred revenue is recognized on December 31, 
2009, for purposes of computing ABC's annualized income installments for 
2009.
    Example 10. Section 481(a) adjustment. Corporation ABC, a calendar 
year taxpayer, uses an accrual method of accounting and the annualized 
income installment method under section 6655(e)(2)(A)(i) to calculate 
all of its required installment payments for its 2008 taxable year. On 
December 20, 2008, ABC files a Form 3115 requesting permission to change 
its method of accounting. The requested change results in a negative 
section 481(a) adjustment of $80,000. ABC subsequently receives the 
consent of the Commissioner to make the change and therefore, the 
negative $80,000 section 481(a) adjustment is properly recognized in 
ABC's tax return for the year ending December 31, 2008. Under paragraph 
(f)(3)(ii) of this section ABC is permitted to recognize the negative 
$80,000 section 481(a) adjustment as an extraordinary item occurring on 
January 1, 2008 (the first day of ABC's December 31, 2008, tax year), or 
December 20, 2008 (the date ABC filed the Form 3115). ABC chooses to 
recognize the negative $80,000 section 481(a) adjustment as an 
extraordinary item occurring in January 1, 2008. Accordingly, $80,000 of 
the negative section 481(a) adjustment is taken into account after 
annualization for purposes of determining ABC's first annualized income 
installment. In addition, under Sec. 1.6655-6(b), ABC is required to 
use its new method of accounting as of January 1, 2008 for estimated

[[Page 588]]

tax purposes, consistent with the recognition of the section 481(a) 
adjustment for estimated tax purposes. Therefore, ABC will be required 
to use the new method of accounting in determining taxable income to be 
annualized in computing ABC's first annualized income installment.
    Example 11. Section 481(a) adjustment. Corporation ABC, a calendar 
year taxpayer, uses an accrual method of accounting and uses the 
annualized income installment method under section 6655(e)(2)(A)(i) to 
calculate all of its required installment payments for its 2008 taxable 
year. On June 15, 2008, ABC files a Form 3115 requesting permission to 
change its method of accounting. The requested change results in a 
positive section 481(a) adjustment of $240,000. ABC subsequently 
receives the consent of the Commissioner to make the change and 
therefore, $60,000 of the section 481(a) adjustment (one quarter of the 
positive $240,000 section 481(a) adjustment) is properly recognized in 
ABC's tax return for the year ending December 31, 2008. Under paragraph 
(f)(3)(ii) of this section, ABC is permitted to recognize the positive 
$60,000 section 481(a) adjustment as an extraordinary item occurring on 
January 1, 2008 (the first day of ABC's December 31, 2008, tax year), or 
June 15, 2008 (the date ABC filed the Form 3115). ABC chooses to 
recognize the positive $60,000 section 481(a) adjustment as an 
extraordinary item occurring on June 15, 2008. Accordingly, the $60,000 
positive section 481(a) adjustment is not taken into account for 
purposes of determining ABC's first annualized income installment. 
However, in all futures years any portion of the section 481(a) 
adjustment related to this change in method of accounting will be 
treated as an extraordinary item occurring on the first day of the tax 
year under paragraph (f)(3)(ii) of this section. In addition, under 
Sec. 1.6655-6(b), ABC is required to use its new method of accounting 
as of June 15, 2008 for estimated tax purposes, consistent with the 
recognition of the section 481(a) adjustment for estimated tax purposes. 
Therefore, ABC will be required to use the new method of accounting (as 
of the beginning of the tax year) for purposes of determining taxable 
income to be annualized in computing ABC's third and fourth annualized 
income installments (which are based upon annualization periods that 
include June 15, 2008.)
    Example 12. Extraordinary item. Corporation ABC, a calendar year 
taxpayer, uses an accrual method of accounting and the annualized income 
installment method under section 6655(e)(2)(A)(i) to calculate all of 
its required installment payments for its 2008 taxable year. On May 10, 
2008, ABC reaches a settlement agreement with XYZ over a tort action 
filed by ABC. As a result, ABC receives a payment of $10,000,000 on June 
15, 2006, that is recognized as income by ABC. The settlement of a tort 
action is an extraordinary item defined in paragraph (f)(3)(ii)(A) of 
this section. Accordingly, the $10,000,000 of income will be taken into 
account by ABC on May 10, 2008, for purposes of computing ABC's 
annualized income installments for 2008. Therefore, the $10,000,000 
settlement will only be taken into account in computing ABC's third and 
fourth annualized income installments (which are based upon 
annualization periods that include May 10, 2008). In addition, the 
$10,000,000 settlement income will be taken into account as an 
extraordinary item of income after annualization for purposes of 
determining ABC's third and fourth annualized installment payments.
    Example 13. Credit carryover. Corporation ABC, a calendar year 
taxpayer, uses an accrual method of accounting and the annualized income 
installment method under section 6655(e)(2)(A)(i) to calculate all of 
its required installment payments for its 2008 taxable year. ABC 
projects its annualized tax for its 2008 taxable year, based on 
annualizing ABC's taxable income for its first annualization period from 
January 1, 2008, through March 31, 2008, to be $1,500,000 before 
reduction for any credits. ABC has an unused section 38 credit from 2007 
for increasing research activities from 2007 of $500,000 that is carried 
over to 2008. For purposes of determining ABC's first annualized income 
installment, ABC's annualized tax for 2008 is $1,000,000, determined as 
the tax for the taxable year computed by placing on an annualized basis 
ABC's taxable income from its first annualization period from January 1, 
2008, through March 31, 2008 ($1,500,000) reduced by the $500,000 credit 
carryover from 2007. Therefore, ABC's first required installment payment 
for 2008 is $250,000 ($1,000,000 x 25%).
    Example 14. Current year credit. Corporation ABC, a calendar year 
taxpayer, uses an accrual method of accounting and the annualized income 
installment method under section 6655(e)(2)(A)(i) to calculate all of 
its required installment payments for its 2008 taxable year. ABC 
projects its annualized tax for its 2008 taxable year, based on 
annualizing ABC's taxable income for its first annualization period from 
January 1, 2008, through March 31, 2008, to be $2,000,000 before 
reduction for any credits. ABC has historically earned a section 41 
credit for increasing research activities and, for 2008, ABC estimates 
that it will earn a credit for increasing research activities under 
section 41 of $1,200,000. However, pursuant to paragraph (f)(3)(iii) of 
this section, if ABC were to annualize all components involved in 
computing the current year credit based on ABC's activity from January 
1, 2008, through March 31, 2008, ABC would generate a credit of 
$1,600,000 for 2008. For purposes of determining ABC's first annualized 
income installment, ABC's annualized tax for 2008 is

[[Page 589]]

$400,000, determined as the tax for the 2008 taxable year ($2,000,000) 
computed by placing on an annualized basis ABC's taxable income from its 
first annualization period January 1, 2008, through March 31, 2008, 
reduced by a $1,600,000 current year section 41 credit from increasing 
research activities. Therefore, ABC's first required installment payment 
for 2008 is $100,000 ($400,000 x 25%).
    Example 15. Current year credit. Same facts as Example 14 except 
that ABC does not begin any research activities until April 3, 2008, and 
will not incur any research expenses described in paragraph (f)(1)(ii) 
of this section. As a result, if ABC were to annualize all components 
involved in computing the current year credit based on ABC's activity 
from January 1, 2008, through March 31, 2008, ABC would generate no 
section 41 research credit for purposes of determining its first 
annualized income installment. Pursuant to paragraph (f)(3)(iii) of this 
section, ABC cannot take into account any credit for its first 
annualization period because ABC did not incur any qualified research 
expenses by the last day of the first annualization period. Accordingly, 
for purposes of determining ABC's first annualized income installment, 
ABC's annualized tax for its first annualization period January 1, 2008, 
through March 31, 2008, is $2,000,000. Therefore, ABC's first required 
installment payment for 2008 is $500,000 ($2,000,000 x 25%).
    Example 16. Depreciation and amortization expense. Corporation ABC, 
a calendar year taxpayer that began business on January 2, 2007, adopted 
an accrual method of accounting and will use the annualized income 
installment method under section 6655(e)(2)(A)(i) to calculate all of 
its required installment payments for its 2008 taxable year. On January 
2, 2007, ABC purchased and placed in service a tangible depreciable 
asset that costs $50,000 and is 5-year property under section 168(e). 
ABC depreciates its 5-year property placed in service in 2007 under the 
general depreciation system using the 200-percent declining balance 
method, a 5-year recovery period, and the half year convention. On 
January 2, 2008, ABC purchased and placed in service qualified Gulf 
Opportunity Zone property (GO Zone property) that costs $30,000 and is 
5-year property under section 168(e). ABC will depreciate its 5-year 
property placed in service in 2008 under the general depreciation system 
using the 200-percent declining balance method, a 5-year recovery 
period, and the half-year convention. ABC will deduct the 50% additional 
first year depreciation deduction under section 1400N(d) with respect to 
the GO Zone property. For tax year 2007, ABC takes a depreciation 
deduction under section 168 of $10,000 ($50,000 x 20% = $10,000). ABC 
does not anticipate being subject to the mid-quarter convention for the 
2008 taxable year, does not anticipate making any depreciation elections 
for any class of property, does not anticipate making a section 179 
election, does not anticipate any sales or other dispositions of 
depreciable property, and no events have occurred, nor does ABC know, 
based on all relevant information available as of the due date of ABC's 
first required installment for 2008, of any event that will occur to 
cause ABC's 2008 taxable year to be a short taxable year. The optional 
amounts of depreciation expense ABC may take into account for its first 
annualized income installment for its 2008 taxable year are determined 
as follows:
    (i) General rule--Estimated annual depreciation. In accordance with 
the general rule provided in paragraph (f)(3)(iv)(A) of this section, 
ABC may take a depreciation expense of $8,500 ($34,000 x \3/12\ = 
$8,500) into account in computing ABC's January 1, 2008, through March 
31, 2008, taxable income. ABC's estimated annual depreciation expense 
for 2008 of $34,000 is computed as follows: $15,000 for the 50% 
additional first year depreciation deduction under section 1400N(d) 
($30,000 x 50% = $15,000) plus annual depreciation of $16,000 ($40,000 x 
40% = $16,000) and $3,000 ($15,000 x 20% = $3,000). Under paragraphs 
(c)(3) and (f)(3)(iv)(C) of this section, ABC may not consider its first 
annualization period to be a short taxable year for purposes of 
determining the depreciation allowance for such annualization period.
    (ii) Safe Harbor--Proportionate depreciation allowance. In 
accordance with the safe harbor provided in paragraph (f)(3)(iv)(B)(1) 
of this section, ABC may take a depreciation expense of $8,500 ($34,000 
x \3/12\ = $8,500) into account in computing ABC's January 1, 2008, 
through March 31, 2008, taxable income based on annual depreciation 
expense for 2008 of $34,000, computed as follows: $15,000 for the 50% 
additional first year depreciation deduction under section 1400N(d) 
($30,000 x 50% = $15,000) plus annual depreciation of $16,000 ($40,000 x 
40% = $16,000) and $3,000 ($15,000 x 20% = $3,000). Under paragraphs 
(c)(3) and (f)(3)(iv)(C) of this section, ABC may not consider its first 
annualization period to be a short taxable year for purposes of 
determining the depreciation allowance for such annualization period.
    (iii) Safe Harbor--90 percent of preceding year's depreciation. In 
accordance with the safe harbor in paragraph (f)(3)(iv)(B)(2) of this 
section, ABC may take a depreciation expense of $2,250 ($10,000 prior 
year's depreciation x 90% = $9,000 x \3/12\ = $2,250) into account in 
computing ABC's January 1, 2008, through March 31, 2008, taxable income. 
Under paragraphs (c)(3) and (f)(3)(iv)(C) of this section, ABC may not 
consider its first annualization period to be a short taxable year for 
purposes of determining the depreciation allowance for such 
annualization period.


[[Page 590]]


    (g) Items that substantially affect taxable income but cannot be 
determined accurately by the installment due date--(1) In general. In 
determining the applicability of the annualization exceptions described 
in paragraphs (a) and (b) of this section and Sec. 1.6655-3, reasonable 
estimates may be made from existing data for items that substantially 
affect income if the amount of such items cannot be determined 
accurately by the installment due date. This paragraph (g) applies only 
to the inflation index for taxpayers using the dollar-value LIFO (last-
in, first-out) inventory method, adjustments required under section 
263A, the computation of a taxpayer's section 199 deduction, 
intercompany adjustments for taxpayers that file consolidated returns, 
the liquidation of a LIFO layer at the installment date that the 
taxpayer reasonably believes will be replaced at the end of the year, 
deferred gain on a qualifying conversion or exchange of property under 
sections 1031 and 1033 that the taxpayer reasonably believes will be 
replaced with qualifying replacement property, and any other item 
designated by the Secretary by publication in the Internal Revenue 
Bulletin (see Sec. 601.601(d)(2)(ii)(b) of this chapter).
    (2) Example. The following example illustrates the rules of this 
paragraph (g):

    Example. Section 199 deduction. Corporation ABC, a calendar year 
taxpayer, uses an accrual method of accounting and the annualized income 
installment method under section 6655(e)(2)(A)(i) to calculate all of 
its required installment payments for its 2008 taxable year. ABC engages 
in production activities that generate qualified production activities 
income (QPAI), as defined in Sec. 1.199-1(c), and projects taxable 
income of $50,000 for its first annualization period from January 1, 
2008, through March 31, 2008, without taking into account the section 
199 deduction. During its first annualization period from January 1, 
2008, through March 31, 2008, ABC incurs W-2 wages allocable to domestic 
production gross receipts pursuant to section 199(b)(2) of $10,000. 
Pursuant to paragraph (g)(1) of this section, ABC is permitted to take 
into account its estimated section 199 deduction before annualizing 
taxable income based on the lesser of its estimated QPAI or taxable 
income and W-2 wages for its first installment period for 2008. For the 
first installment period in 2008, ABC is permitted to recognize a 
deduction under section 199 of $3,000 ($50,000 x .06 = $3,000) subject 
to the wage limitation of $5,000 (50 percent of $10,000 of W-2 wages 
incurred during the first installment period). Accordingly, ABC's 
annualized income for the first installment for 2008 is $188,000 
(($50,000-$3,000) x 1\2/3\ = $188,000). The tax on $188,000 is $56,570 
and ABC's first required installment for 2008 is $14,143 ($56,570 x .25 
= $14,143).

    (h) Effective/applicability date. This section applies to taxable 
years beginning after September 6, 2007.

[T.D. 9347, 72 FR 44349, Aug. 7, 2007; 72 FR 53684, Sept. 20, 2007; 72 
FR 54350, Sept. 25, 2007, as amended by T.D. 9870, 84 FR 33692, July 15, 
2019]



Sec. 1.6655-2T  Safe harbor for certain installments of tax due 
before July 1, 1987 (temporary).

    (a) Applicability--(1) Safe harbor. The safe harbor provided by 
paragraph (b) of this section applies only to installment payments of 
corporate estimated tax required to be made before July 1, 1987, for 
taxable years beginning in 1987.
    (2) Subsequent payment. The requirement that a corporation using the 
safe harbor provided by this section make a timely subsequent 
installment payment in accordance with paragraph (c) of this section 
applies with respect to the corporation's first installment payment 
(``the subsequent installment payment'') of estimated tax required to be 
made after the last payment computed under the safe harbor rule.
    (3) Section inapplicable to new corporation. This section shall not 
apply in the case of any corporation whose first taxable year began 
after December 31, 1986.
    (b) Safe harbor for use of annualization exception--(1) In general. 
A corporation computing an installment payment of estimated tax using 
the annualization exception provided in section 6655(d)(3) will not be 
subject to an addition to tax under section 6655 with respect to an 
installment payment of estimated tax that satisfies the requirements of 
this paragraph (b), except as provided in paragraph (c) of this section. 
For purposes of this paragraph (b)--
    (i) A corporation shall assume that its annualized taxable income 
for the current year equals or exceeds 120 percent of the taxable income 
shown on

[[Page 591]]

its return for the preceding taxable year, and
    (ii) The term ``tax'' as used in section 6655(d)(3) shall be defined 
by reference to section 6655(f) without regard to section 6655(f)(1) (B) 
and (C) (that is, without regard to the alternative minimum tax imposed 
by section 55 or the environmental tax imposed by section 59A).
    (2) Special rules for determining taxable income for preceding year. 
For purposes of paragraph (b)(1)(i) of this section, the taxable income 
shown on the return of the corporation for its preceding taxable year 
shall be--
    (i) Adjusted to eliminate any net operating loss deduction taken 
into account in that preceding year, and
    (ii) Annualized, if that preceding year was of less than 12 months.
    (3) Credits taken into account--(i) In general. In computing the 
amount of an installment payment under paragraph (b)(1) of this section, 
the corporation may take into account any credits against tax that are 
permitted to be taken into account under section 6655(d)(3) for the 
current taxable year.
    (ii) Foreign tax credit. For purposes of paragraph (b)(3)(i) of this 
section, the amount of foreign tax credit that is permitted to be taken 
into account for the current taxable year is equal to the foreign tax 
credit allowed for the preceding taxable year multiplied by the fraction 
specified in the following sentence. The numerator of the fraction is 
the highest tax rate applicable for the taxable year under section 11, 
as adjusted under section 15, and the denominator is 46 percent. This 
alternative computation of the foreign tax credit is applicable only for 
purposes of computing a safe harbor installment payment under paragraph 
(b) of this section and cannot be applied for other estimated tax 
purposes.
    (4) Net operating loss carryover. A corporation that has a net 
operating loss carryover as of the first day of the taxable year for 
which the estimated tax is being paid may use that carryover to reduce 
the annualized taxable income referred to in paragraph (b)(1)(i) of this 
section. For example, if a corporation with a net operating loss 
carryover of $3,000 had taxable income of $10,000 in 1986, it may use 
the carryover to reduce its annualized taxable income to $9,000, 
(($10,000 x 120%) - 3,000).
    (c) Corporation must bring aggregate payments to required level 
through timely subsequent installment--(1) In general. A corporation 
using the safe harbor provided by paragraph (b) of this section shall 
make a timely subsequent installment payment of estimated tax in an 
amount sufficient to satisfy the requirements of either paragraph (c)(3) 
or paragraph (c)(4) of this section.
    (2) Applicable percentage. For purposes of this paragraph (c), the 
applicable percentage is--
    (i) 45 percent (50 percent x 90 percent), if the subsequent 
installment payment is the second installment payment for the taxable 
year, or
    (ii) 67.5 percent (75 percent x 90 percent), if the subsequent 
installment payment is the third installment payment for the taxable 
year.
    (3) Annualization exception. The subsequent installment payment of a 
corporation satisfies the requirements of this paragraph (c)(3) if the 
amount of the payment is sufficient to satisfy the requirements of 
section 6655(d)(3) with respect to all applicable taxes specified in 
section 6655(f). Thus, the corporation must determine its annualized 
taxable income under section 6655(d)(3)(A) (ii) or (iii), whichever is 
applicable, and compute the resulting tax. The resulting tax shall 
include the alternative minimum tax under section 55 and the 
environmental tax under section 59A and may take credits into account to 
the extent permitted under section 6655(d)(3). The sum of this 
subsequent installment payment and the earlier installment payment or 
payments of the corporation must equal or exceed the applicable 
percentage of the tax so computed. In determining whether the 
corporation has satisfied the requirements of section 6655(d)(3)(A) (ii) 
or (iii) with respect to the subsequent installment, the safe harbor 
provided in paragraph (b)(1) of this section shall not apply.
    (4) Installment payments equal to applicable percentage of tax shown 
on return. The subsequent installment payment of a corporation satisfies 
the requirement of this paragraph (c)(4) if the sum

[[Page 592]]

of that payment and the earlier installment payment or payments of the 
corporation equals or exceeds the applicable percentage of the tax shown 
on the return of the corporation for the taxable year to which the 
installment payments relate. The tax shown on the return includes all 
taxes specified in section 6655(f).
    (5) Consequence of corporation's failure to satisfy requirements for 
subsequent installment--(i) In general. If a corporation fails to 
satisfy the requirements set out in this paragraph (c), the corporation 
shall lose the benefit of the safe harbor provided by paragraph (b)(1) 
of this section.
    (ii) Limit on penalty. The aggregate underpayment penalty with 
respect to any installment payment or payments for which a corporation 
loses the benefit of the safe harbor under paragraph (c)(5)(i) of this 
section shall be limited to the ``shortfall penalty amount.'' The 
shortfall penalty amount is the penalty that would be imposed under 
section 6655(a) if there were an underpayment of the subsequent 
installment payment equal to the excess of--
    (A) The amount required to be paid, as determined under this 
paragraph (c), on or before the due date of the subsequent installment 
payment, over
    (B) The amount actually paid on or before such date with respect to 
the subsequent installment payment.


For purposes of this determination, the period of the underpayment shall 
run from the due date of the subsequent installment payment until the 
earlier of the dates specified in section 6655(c) (1) or (2).
    (iii) Example. The provisions of this paragraph (c)(5) may be 
illustrated by the following example:

    Example. Corporation M, which uses the calendar year as its taxable 
year, relies on the safe harbor provided by paragraph (b) of this 
section for its first two installment payments of estimated tax for 
1987. M is required by this paragraph (c) to make a timely subsequent 
installment payment of $1,000,000 by September 15, 1987, but M's actual 
installment payment by that date is only $990,000. Because of this 
shortfall, M loses the benefit of the safe harbor and is subject to 
underpayment penalties with respect to the first two installments. The 
aggregate penalties with respect to those two installments, however, 
cannot exceed the amount of the underpayment penalty to which M would be 
subject if there were an underpayment of $10,000 with respect to the 
September 15, 1987, installment payment. Such penalties are independent 
of any penalty that may apply with respect to M's third installment 
payment under the normal rules of section 6655.

    (d) Example. The provisions of this section may be illustrated by 
the following example:

    Example. (i) Corporation X (which is not a life insurance company) 
uses as its taxable year a fiscal year ending on January 31 and is 
required to pay an installment of estimated income tax by May 15, 1987, 
for its taxable year beginning on February 1, 1987. On its return for 
the taxable year ending January 31, 1987, which was a year of 12 months, 
X reported taxable income of $10,000,000 ($9,000,000 of which was 
ordinary income and $1,000,000 of which was net capital gain) and did 
not claim any net operating loss deduction. As of February 1, 1987, X 
has no net operating loss carryforwards and no credit carryforwards. X 
has no credits against tax that are permitted to be taken into account 
under section 6655(d)(3) for 1987. If X uses the safe harbor provided in 
paragraph (b)(1) of this section, X must make by May 15, 1987, an 
installment payment of estimated tax of at least $1,037,836, computed as 
follows:

(1) Taxable income shown on return for taxable year          $10,000,000
 ending on January 31, 1987............................
(2) Annualized taxable income for taxable year ending        $12,000,000
 January 31, 1988, determined pursuant to paragraph
 (b)(1) of this section (Item (1)x120%)................
 
(Note: 120%xordinary income of $9,000,000 = $10,800,000;
120%xnet capital gain of $1,000,000 = $1,200,000)
 
(3) Tax on annualized taxable income (Item 2) using           $4,612,603
 rates under section 11 and 1201, taking into account
 section 15, applicable to the taxable year ending
 January 31, 1988......................................
(4) Amount described in section 6655(d)(3)(A)(i) (Item        $1,037,836
 (3)x22.5%)............................................
 

    (ii) To preclude imposition of an addition to tax under section 6655 
with respect to its May 15, 1987, installment payment, X must make by 
July 15, 1987, a second installment payment of estimated tax sufficient 
to bring its aggregate payments to the minimum level required under 
paragraph (c) of this section.

[[Page 593]]

    (iii) X may satisfy the requirements of paragraph (c)(3) of this 
section by making a second installment payment sufficient to bring X 
within the exception provided in section 6655(d)(3). Thus, if X 
determines under that section that the aggregate of X's installment 
payments of estimated tax by July 15, 1987, must equal at least 
$3,000,000, X may obtain the benefit of the safe harbor provided in 
paragraph (b)(1) of this section with respect to the May 15, 1987, 
installment payment by making a timely second installment payment of 
$1,962,164 ($3,000,000--$1,037,836).
    (iv) Even if X fails to satisfy the requirements of paragraph (c)(3) 
of this section, X may obtain the benefit of the safe harbor for the May 
15, 1987, installment payment if X's second installment payment, when 
aggregated with the first payment, equals at least 45 percent of the tax 
(including the alternative minimum tax under section 55 and the 
environmental tax under section 59A) shown on X's return for X's taxable 
year beginning on February 1, 1987. Thus, if the tax shown on that 
return is $6,000,000, X's second installment payment under paragraph 
(c)(4) of this section must be at least $1,662,164, computed as follows:

45 percent of $6,000,000...............................       $2,700,000
    less first payment.................................        1,037,836
                                                        ----------------
Minimum second installment.............................       $1,662,164
 


[T.D. 8132, 52 FR 10051, Mar. 30, 1987]



Sec. 1.6655-3  Adjusted seasonal installment method.

    (a) In general. In the case of any required installment, the amount 
of the adjusted seasonal installment is the excess (if any) of--
    (1) 100 percent of the amount determined under paragraph (c) of this 
section; over
    (2) The aggregate amount of all prior required installments for the 
taxable year.
    (b) Limitation on application of section. This section applies only 
if the base period percentage (as defined in section 6655(e)(3)(D)(i) 
and paragraph (d)(1) of this section) for any six consecutive months of 
the taxable year equals or exceeds seventy percent.
    (c) Determination of amount. The amount determined under this 
paragraph (c) for any installment will be determined in the following 
manner--
    (1) Take the taxable income for all months during the taxable year 
preceding the filing month;
    (2) Divide such amount by the base period percentage for all months 
during the taxable year preceding the filing month;
    (3) Determine the tax on the amount determined under paragraph 
(c)(2) of this section; and
    (4) Multiply the tax computed under paragraph (c)(3) of this section 
by the base period percentage for the filing month and all months during 
the taxable year preceding the filing month.
    (d) Special rules--(1) Base period percentage. The base period 
percentage for any period of months is the average percent that the 
taxable income for the corresponding months in each of the three 
preceding taxable years bears to the taxable income for the three 
preceding taxable years. If there is no taxable income for the 
corresponding months, taxable income for this purpose is zero.
    (2) Filing month. The term filing month means the month in which the 
installment is required to be paid.
    (3) Application of the rules related to the annualized income 
installment method to the adjusted seasonal installment method. The 
rules governing the computation of taxable income (and resulting tax) 
for purposes of determining any required installment payment of 
estimated tax under the annualized income installment method under Sec. 
1.6655-2 apply to the computation of taxable income (and resulting tax) 
for purposes of determining any required installment payment of 
estimated tax under the adjusted seasonal installment method.
    (4) Alternative minimum tax. The amount determined under paragraph 
(c) of this section must properly take into account the amount of any 
alternative minimum tax under section 55 that would apply for the period 
of the computation. The amount of any alternative minimum tax that would 
apply is determined by applying to alternative minimum taxable income, 
tentative minimum tax, and alternative minimum tax, the rules described 
in paragraph (c) of this section for taxable income and tax.
    (e) Example. The provisions of this section may be illustrated by 
the following example:

    Example. (i) X, a corporation that reports on a calendar year basis, 
expects to have an estimated tax liability of $1,200,000 for its

[[Page 594]]

taxable year ending December 31, 2009. On its 2008 tax return, X reports 
a tax liability of $652,800. X pays four installments of estimated tax, 
each in the amount of $250,000, $250,000, $250,000, and $450,000 on 
April 15, 2009, June 15, 2009, September 15, 2009, and December 15, 
2009, respectively. X reports a tax liability of $1,152,600 on its 
return due March 15, 2010, with no credits against tax. Under the 
general provision of section 6655(b) and section 6655(d), there was an 
underpayment in the amount of $76,300 for the second installment through 
September 15, 2009, and $114,450 for the third installment through 
December 15, 2009, determined as follows:
    (A) Tax as defined in section 6655(g) = $1,152,600
    (B) 100% of this paragraph (e), Example (i)(A) = $1,152,600
    (C) Amount of estimated tax required to be paid on or before the 
first installment (25% of $652,800) = $163,200
    (D) Deduction of amount timely paid on or before the first 
installment due date under the general rule of section 6655(b) = 
$250,000
    (E) Amount of overpaid estimated tax for the first installment date 
= $86,800
    (F) Amount of estimated tax required to be paid on or before the 
second installment (25% of $1,152,600 plus the recapture amount under 
section 6655(d)(2)(B) of $124,950 (25% of $1,152,600 less $163,200)) = 
$413,100
    (G) Deduction of amount paid on or before the due date of the second 
installment less amount applied towards the first installment under the 
general rule of section 6655(b) ($250,000 paid in each of the first and 
second installments less this paragraph (e), Example (i)(C)) = $336,800
    (H) Amount of underpayment for the second installment date = $76,300
    (I) Amount of estimated tax required to be paid on or before the 
third installment (25% of $1,152,600) = $288,150
    (J) Deduction of amount paid on or before the due date of the third 
installment less amount applied towards the first and second 
installments under the general rule of section 6655(b) ($250,000 paid in 
each of the first, second, and third installments less this paragraph 
(e), Example (i)(C) less this paragraph (e), Example (i)(F)) = $173,700
    (K) Amount of underpayment for the third installment date = $114,450
    (L) Amount of estimated tax required to be paid on or before the 
fourth installment (25% of $1,152,600) = $288,150
    (M) Deduction of amount paid on or before the due date of the fourth 
installment less amount applied towards the first, second, and third 
installments under the general rule of section 6655(b) ($250,000 paid in 
each of the first, second, and third installments plus $450,000 paid in 
the fourth installment less this paragraph (e), Example (i)(C) less this 
paragraph (e), Example (i)(F) less this paragraph (e), Example (i)(I)) = 
$335,550
    (N) Amount of overpaid estimated tax for the fourth installment date 
= $47,400
    (ii) X wants to determine if it qualifies for the adjusted seasonal 
installment method. X determines that its monthly taxable income for the 
preceding three taxable years and for the current taxable year 2009 is 
as follows:

--------------------------------------------------------------------------------------------------------------------------------------------------------
   January      February      March        April         May          June         July        August     September     October    November    December
--------------------------------------------------------------------------------------------------------------------------------------------------------
2006:
  $100,000      $90,000      $80,000      $70,000      $60,000      $20,000      $10,000      $10,000      $10,000     $10,000     $10,000     $10,000
2007:
   200,000      170,000      170,000      130,000      125,000       45,000       21,000       19,000       20,000      20,000      20,000      20,000
2008:
   410,000      350,000      330,000      270,000      240,000       80,000       40,000       40,000       40,000      40,000      40,000      40,000
2009:
   600,000      680,000      650,000      560,000      460,000      170,000       70,000       60,000       50,000      40,000      30,000      20,000
--------------------------------------------------------------------------------------------------------------------------------------------------------

    (iii) X must initially determine if its base period percentage for 
the same 6 consecutive months of the 3 preceding taxable years equals or 
exceeds 70 percent (see section 6655(e)(3) and paragraphs (b) and (c) of 
this section). By using its taxable income for the first 6 months of 
2006, 2007, and 2008, X qualifies for the adjusted seasonal installment 
method because its base period percentage is 87.5 percent (which exceeds 
70 percent) computed as follows:
    (A) Taxable income for first 6 months of 2006 = $420,000
    (B) Total taxable income for 2006 = $480,000
    (C) Divide this paragraph (e), Example (iii)(A) by this paragraph 
(e), Example (iii)(B) = .875
    (D) Taxable income for first 6 months of 2007 = $840,000
    (E) Total taxable income for 2007 = $960,000
    (F) Divide this paragraph (e), Example (iii)(D) by this paragraph 
(e), Example (iii)(E) = .875
    (G) Taxable income for first 6 months of 2008 = $1,680,000
    (H) Total taxable income for 2008 = $1,920,000
    (I) Divide this paragraph (e), Example (iii)(G) by this paragraph 
(e), Example (iii)(H) = .875

[[Page 595]]

    (J) Add this paragraph (e), Example (iii)(C), (F), and (I) = $2.625
    (K) Divide this paragraph (e), Example (iii)(J) by 3 = .875
    (iv) To determine the amount of the first installment under the 
rules of section 6655(e)(3) and paragraph (a) of this section, the 
following computation is necessary:
    (A) Taxable income for first 3 months of 2009 = $1,930,000
    (B) Taxable income for first 3 months of 2006 ($270,000) divided by 
total taxable income for 2006 ($480,000) = .5625
    (C) Taxable income for first 3 months of 2007 ($540,000) divided by 
total taxable income for 2007 ($960,000) = .5625
    (D) Taxable income for first 3 months of 2008 ($1,090,000) divided 
by total taxable income for 2008 ($1,920,000) = .5677
    (E) Add this paragraph (e), Example (iv)(B), (C), and (D) and divide 
by 3 = .5642
    (F) Divide this paragraph (e), Example (iv)(A) by this paragraph 
(e), Example (iv)(E) = $3,420,773
    (G) Determine the tax on this paragraph (e), Example (iv)(F) = 
$1,163,049
    (H) Taxable income for first 4 months of 2006 ($340,000) divided by 
total taxable income for 2006 ($480,000) = .7083
    (I) Taxable income for first 4 months of 2007 ($670,000) divided by 
total taxable income for 2007 ($960,000) = .6979
    (J) Taxable income for first 4 months of 2008 ($1,360,000) divided 
by total taxable income for 2008 (1,920,000) = .7083
    (K) Add this paragraph (e), Example (iv)(H), (I), and (J) and divide 
by 3 = .7048
    (L) Multiply this paragraph (e), Example (iv)(G) by this paragraph 
(e), Example (iv)(K) = $819,717
    (M) 100% of this paragraph (e), Example (iv)(L) = $819,717
    (N) Amount of all prior required installments for 2009 = $0
    (O) Amount of adjusted seasonal installment for the first 
installment payment (this paragraph (e), Example (iv)(M) less this 
paragraph (e), Example (iv)(N)) = $819,717
    (v) To determine the amount of the second installment under the 
rules of section 6655(e)(3) and paragraph (a) of this section, the 
following computation is necessary:
    (A) Taxable income for first 5 months of 2009 = $2,950,000
    (B) Taxable income for first 5 months of 2006 ($400,000) divided by 
total taxable income for 2006 ($480,000) = .8333
    (C) Taxable income for first 5 months of 2007 ($795,000) divided by 
total taxable income for 2007 ($960,000) = .8281
    (D) Taxable income for first 5 months of 2008 ($1,600,000) divided 
by total taxable income for 2008 ($1,920,000) = .8333
    (E) Add this paragraph (e), Example (v)(B), (C), and (D) and divide 
by 3 = .8316
    (F) Divide this paragraph (e), Example (v)(A) by this paragraph (e), 
Example (v)(E) = $3,547,379
    (G) Determine the tax on this paragraph (e), Example (v)(F) = 
$1,206,109
    (H) Taxable income for first 6 months of 2006 ($420,000) divided by 
total taxable income for 2006 ($480,000) = .875
    (I) Taxable income for first 6 months of 2007 ($840,000) divided by 
total taxable income for 2007 ($960,000) = .875
    (J) Taxable income for first 6 months of 2008 ($1,680,000) divided 
by total taxable income for 2008 ($1,920,000) = .875
    (K) Add this paragraph (e), Example (v)(H), (I), and (J) and divide 
by 3 = .875
    (L) Multiply this paragraph (e), Example (v)(G) by this paragraph 
(e), Example (v)(K) = $1,055,345
    (M) 100% of this paragraph (e), Example (v)(L) = $1,055,345
    (N) Amount of all prior required installments for 2009 = $163,200
    (O) Amount of adjusted seasonal installment for the second 
installment payment (this paragraph (e), Example (v)(M) less this 
paragraph (e), Example (v)(N)) = $892,145
    (vi) To determine the amount of the third installment under the 
rules of section 6655(e)(3) and paragraph (a) of this section, the 
following computation is necessary:
    (A) Taxable income for first 8 months of 2009 = $3,250,000
    (B) Taxable income for first 8 months of 2006 ($440,000) divided by 
total taxable income for 2006 ($480,000) = .9167
    (C) Taxable income for first 8 months of 2007 ($880,000) divided by 
total taxable income for 2007 ($960,000) = .9167
    (D) Taxable income for first 8 months of 2008 ($1,760,000) divided 
by total taxable income for 2008 ($1,920,000) = .9167
    (E) Add this paragraph (e), Example (vi)(B), (C), and (D) and divide 
by 3 = .9167
    (F) Divide this paragraph (e), Example (vi)(A) by this paragraph 
(e), Example (vi)(E) = $3,545,326
    (G) Determine the tax on this paragraph (e), Example (vi)(F) = 
$1,205,411
    (H) Taxable income for first 9 months of 2006 ($450,000) divided by 
total taxable income for 2006 ($480,000) = .9375
    (I) Taxable income for first 9 months of 2007 ($900,000) divided by 
total taxable income for 2007 ($960,000) = .9375
    (J) Taxable income for first 9 months of 2008 ($1,800,000) divided 
by total taxable income for 2008 ($1,920,000) = .9375
    (K) Add this paragraph (e), Example (vi)(H), (I), and (J) and divide 
by 3 = .9375
    (L) Multiply this paragraph (e), Example (vi)(G) by this paragraph 
(e), Example (vi)(K) = $1,130,073
    (M) 100% of this paragraph (e), Example (vi)(L) = $1,130,073
    (N) Amount of all prior required installments for 2009 = $576,300

[[Page 596]]

    (O) Amount of adjusted seasonal installment for the third 
installment payment (this paragraph (e), Example (vi)(M) less this 
paragraph (e), Example (vi)(N)) = $553,773
    (vii) To determine the amount of the fourth installment under the 
rules of section 6655(e)(3) and paragraph (a) of this section, the 
following computation is necessary:
    (A) Taxable income for first 11 months of 2009 = $3,370,000
    (B) Taxable income for first 11 months of 2006 ($470,000) divided by 
total taxable income for 2006 ($480,000) = .9792
    (C) Taxable income for first 11 months of 2007 ($940,000) divided by 
total taxable income for 2007 ($960,000) = .9792
    (D) Taxable income for first 11 months of 2008 ($1,880,000) divided 
by total taxable income for 2008 ($1,920,000) = .9792
    (E) Add this paragraph (e), Example (vii)(B), (C), and (D) and 
divide by 3 = .9792
    (F) Divide this paragraph (e), Example (vii)(A) by this paragraph 
(e), Example (vii)(E) = $3,441,585
    (G) Determine the tax on this paragraph (e), Example (vii)(F) = 
$1,170,139
    (H) Taxable income for first 12 months of 2006 ($480,000) divided by 
total taxable income for 2006 ($480,000) = 1.0000
    (I) Taxable income for first 12 months of 2007 ($960,000) divided by 
total taxable income for 2007 ($960,000) = 1.0000
    (J) Taxable income for first 12 months of 2008 ($1,920,000) divided 
by total taxable income for 2008 ($1,920,000) = 1.0000
    (K) Add this paragraph (e), Example (vii)(H), (I), and (J) and 
divide by 3 = 1.0000
    (L) Multiply this paragraph (e), Example (vii)(G) by this paragraph 
(e), Example (vi)(K) = $1,170,139
    (M) 100% of this paragraph (e), Example (vii)(L) = $1,170,139
    (N) Amount of all prior required installments for 2009 = $864,450
    (O) Amount of adjusted seasonal installment for the fourth 
installment payment (this paragraph (e), Example (vii)(M) less this 
paragraph (e), Example (vii)(N)) = $305,689
    (viii) Because the total amount of each required estimated tax 
payment determined under section 6655(e)(3) and paragraph (a) of this 
section exceeds the amount of each required estimated tax payment 
determined under section 6655(d) and Sec. 1.6655-1(d) and (e), the 
exception described in section 6655(e) and this section does not apply 
and the addition to the tax with respect to the underpayment for the 
June 15, 2009, and September 15, 2009, installments will be imposed 
unless another exception (for example, see section 6655(e)(2)) applies 
with respect to these installments.

    (f) Effective/applicability date. This section applies to taxable 
years beginning after September 6, 2007.

[T.D. 9347, 72 FR 44358, Aug. 7, 2007]



Sec. 1.6655-4  Large corporations.

    (a) Large corporation defined. The term large corporation means any 
corporation (or a predecessor corporation) that had taxable income of at 
least $1,000,000 for any taxable year during the testing period. For 
purposes of this section, a predecessor corporation is the distributor 
or transferor corporation in a transaction to which section 381 
(relating to carryovers in certain corporate acquisitions) applies.
    (b) Testing period. For purposes of paragraph (a) of this section, 
the term testing period means the 3 taxable years immediately preceding 
the taxable year for which estimated tax is being determined (the 
current taxable year) or, if less, the number of taxable years the 
taxpayer has been in existence.
    (c) Computation of taxable income during testing period--(1) Short 
taxable year. In the case of a corporation (or predecessor corporation) 
that had a short taxable year during the testing period, for purposes of 
determining whether the $1,000,000 amount referred to in paragraph (a) 
of this section is equaled or exceeded, the taxable income for the short 
taxable year is computed by--
    (i) Multiplying the taxable income for the short taxable year by 12; 
and
    (ii) Dividing the resulting amount by the number of months in the 
short taxable year.
    (2) Computation of taxable income in taxable year when there occurs 
a transaction to which section 381 applies. (i) For purposes of 
determining whether an acquiring corporation had taxable income of 
$1,000,000 or more for a taxable year in which a section 381 transaction 
occurs, the acquiring corporation's taxable income will be the sum of--
    (A) The taxable income of the acquiring corporation for its taxable 
year; plus
    (B) The taxable income (or loss) of the distributor or transferor 
corporation for that portion of its taxable year corresponding to the 
acquiring corporation's taxable year up to and including the date of 
distribution or transfer (as defined in Sec. 1.381(b)-1(b)).
    (ii) For purposes of determining whether a transferor or distributor 
corporation had taxable income of $1,000,000 or more for a taxable year 
in

[[Page 597]]

which a section 381 transaction occurs, the distributor or transferor 
corporation's taxable income (or loss) is reduced by the amount of 
taxable income (or loss) that is included in the acquiring corporation's 
taxable income for the taxable year in which the distribution or 
transfer (as defined in Sec. 1.381(b)-1(b)) occurs, as described in 
paragraph (c)(2)(i)(B) of this section.
    (d) Members of controlled group--(1) In general. For purposes of 
applying paragraph (a) of this section, the taxable income of members of 
a controlled group of corporations (as defined in section 1563(a)) must 
be aggregated for each year of the testing period. The provisions of 
this section do not apply to a controlled group for any taxable year in 
which the aggregate taxable income of the members of the controlled 
group is less than $1,000,000.
    (2) Aggregation. For purposes of paragraph (d)(1) of this section, a 
taxable loss of any member of the controlled group for a taxable year 
during the testing period is not taken into account.
    (3) Allocation rule. If the aggregate taxable income of members of a 
controlled group computed pursuant to paragraph (d)(1) of this section 
exceeds $1,000,000 during the testing period, the $1,000,000 amount that 
is relevant for purposes of determining, under paragraph (a)(1) of this 
section, whether a corporation is a large corporation is divided equally 
among the component members of such group (including component members 
excluded pursuant to paragraph (d)(2) of this section) unless all of 
such component members consent to an apportionment plan providing for an 
alternative allocation of such amount. The procedure for making and 
filing this plan will be the same as the procedure used for making and 
filing an apportionment plan under section 1561. See section 1561 and 
the regulations.
    (4) Controlled group members. (i) In the case of any corporation 
that was a member of a controlled group of corporations at any time 
during the testing period but is not a member of such group during the 
taxable year involved, the taxable income of the former member for the 
testing period is determined as if such corporation were not a member of 
a group at any time during that period. With respect to the controlled 
group, the taxable income of its former member will not be taken into 
account in determining such group's taxable income for any taxable year 
during the testing period for purposes of applying paragraph (a)(1) of 
this section.
    (ii) For purposes of paragraph (d)(4)(i) of this section, the 
determination of whether a corporation is a member of a controlled group 
during the testing period is based on whether the corporation was a 
member of the controlled group on the last day of the month preceding 
the due date of the required installment.
    (e) Effect on a corporation's taxable income of items that may be 
carried back or carried over from any other taxable year. In determining 
whether a corporation (or predecessor corporation) is a large 
corporation for its current taxable year, items that could offset 
taxable income during a taxable year included in the testing period (for 
example, those described in sections 172 and 1212) are not to be taken 
into account and the taxable income of a corporation for any taxable 
year during the testing period is determined without regard to items 
carried back or carried over from any other taxable year.
    (f) Consolidated returns. [Reserved]
    (g) Example. The provisions of this section may be illustrated by 
the following example:

    Example. Y Corporation and Z Corporation are calendar year 
taxpayers. In 2008, Z acquires all of the assets of Y in a transaction 
to which section 381 applies. Z's taxable income for both 2006 and 2007 
was less than $1,000,000. Y's taxable income for 2008 is determined 
under paragraph (c)(2) of this section to be $300,000 for that portion 
of Y's taxable year corresponding to Z's taxable year up to and 
including the date of transfer. Z's taxable income for 2008 is $800,000. 
Under the provisions of paragraph (c)(2) of this section, Z's 2008 
taxable income for purposes of determining whether it is a large 
corporation for taxable year 2009 is $1,100,000 ($800,000 + $300,000). 
Thus, Z is a large corporation for the 2009 taxable year. In addition, 
if Z's 2008 taxable income, as determined under paragraph (c)(2) of this 
section, had been less than $1,000,000 but Y's taxable income in 2006 or 
2007 had been $1,000,000 or more, Z would be a large corporation for 
taxable year 2009 because Y is a predecessor corporation.


[[Page 598]]


    (h) Effective/applicability date. This section applies to taxable 
years beginning after September 6, 2007.

[T.D. 9347, 72 FR 44360, Aug. 7, 2007]



Sec. 1.6655-5  Short taxable year.

    (a) In general. Except as otherwise provided in this section, the 
provisions of section 6655 and these regulations are applicable in the 
case of a short taxable year (including an initial taxable year) for 
which a payment of estimated tax is required to be made.
    (b) Exception to payment of estimated tax. In the case of a short 
taxable year, no payment of estimated tax is required if--
    (1) The short taxable year is a period of less than 4 full calendar 
months; or
    (2) The tax shown on the return for such taxable year (or, if no 
return is filed, the tax) is less than $500.
    (c) Installment due dates--(1) In general--(i) Taxable year of at 
least four months but less than twelve months. Except as otherwise 
provided, in the case of a short taxable year, if such year results in a 
taxable year of four or more full calendar months but less than twelve 
full calendar months, the due dates prescribed in Sec. 1.6655-1(f)(2) 
apply.
    (ii) Exceptions. (A) If the date determined under paragraph 
(c)(1)(i) of this section for the first required installment due during 
the taxpayer's short taxable year is earlier than the 15th day of the 
fourth month of the taxpayer's short taxable year, the taxpayer's first 
required installment is due on the first due date otherwise determined 
under paragraph (c)(1)(i) of this section that is on or after the 15th 
day of the fourth month of the short taxable year.
    (B) A taxpayer with an initial short taxable year may make estimated 
tax payments as though it were a calendar year taxpayer until it files 
its tax return for its initial taxable year and will not be subject to 
an addition to tax under section 6655 for making estimated tax payments 
as though it were a calendar year taxpayer for the period beginning with 
its initial short taxable year to the time it files its tax return for 
its initial short taxable year if, when filing its tax return for its 
initial short taxable year, the taxpayer chooses to be a fiscal year 
taxpayer.
    (2) Early termination of taxable year--(i) In general. Except as 
provided in paragraph (c)(2)(ii) of this section, if a taxable year ends 
early (for example, as a result of an acquisition or a change in taxable 
year), the due date for the final required installment is the date that 
would have been the due date of the next required installment if the 
event that gave rise to the short taxable year had not occurred.
    (ii) Exception. If the date determined under paragraph (c)(2)(i) of 
this section is within thirty days of the last day of the short taxable 
year, the due date for the final required installment is the fifteenth 
day of the second month following the month that includes the last day 
of the short taxable year.
    (d) Amount due for required installment--(1) In general. The amount 
due for any required installment determined under section 
6655(d)(1)(B)(i) for a short taxable year is 100% of the required annual 
payment for the short taxable year divided by the number of required 
installments due (as determined under this section) for the short 
taxable year.
    (2) Tax shown on the return for the preceding taxable year. If the 
current taxable year is a short taxable year, the amount due for any 
required installment determined under section 6655(d)(1)(B)(ii) is 
determined in the following manner--
    (i) Take 100% of the tax shown on the return of the corporation for 
the preceding taxable year;
    (ii) Multiply such amount by the number of full calendar months in 
the current short taxable year and divide by 12; and
    (iii) Divide the amount determined under paragraph (d)(2)(ii) of 
this section by the number of required installments due (as determined 
under this section) for the current short taxable year.
    (3) Applicable percentage. In the case of any required installment 
determined under section 6655(e), the applicable percentage under 
section 6655(e)(2)(B)(ii) is--
    (i) 25%, 50%, 75%, and 100% for the first, second, third, and fourth 
(last) required installments, respectively, if

[[Page 599]]

the taxpayer will have four required installments due for the short 
taxable year;
    (ii) 33.33%, 66.67%, and 100% for the first, second, and third 
(last) required installments, respectively, if the taxpayer will have 
three required installments due for the short taxable year;
    (iii) 50% and 100% for the first and second (last) required 
installments, respectively, if the taxpayer will have two required 
installments due for the short taxable year; or
    (iv) 100% for the first (and last) required installment if the 
taxpayer will have one required installment for the short taxable year.
    (4) Applicable percentage for installment period in which taxpayer 
does not reasonably expect that the taxable year will be an early 
termination year. In the case of any required installment determined 
under section 6655(e) in which the taxpayer does not reasonably expect 
that the taxable year will be an early termination year, the applicable 
percentage under section 6655(e)(2)(B)(ii) is the applicable percentage 
provided by paragraph (d)(3)(i) of this section with the remaining 
balance of the estimated tax payment for the year due with the final 
installment.
    (e) Examples. The following examples illustrate the rules of this 
section:

    (1) Example 1. Short year of less than 4 months.
    Corporation A is a calendar year taxpayer that was acquired by 
corporation B, a member of a consolidated group (as defined in Sec. 
1.1502-1(h)) on April 16, 2009, resulting in A having a short taxable 
year from January 1, 2009, through April 16, 2009. Because A has a 
taxable year of less than four full calendar months, no estimated tax 
payments are required by A for the short taxable year.
    (2) Example 2. Initial short year with four required installments.
    Corporation B began business on January 9, 2009, and adopted a 
calendar year as its taxable year. B computes its required installments 
based on 100 percent of the tax shown on the return for the taxable year 
in accordance with section 6655(d)(1)(B)(i). Pursuant to Sec. 1.6655-
1(f)(2)(i), the due dates of B's required installments for B's initial 
taxable year from January 9, 2009, through December 31, 2009, are April 
15, 2009, June 15, 2009, September 15, 2009, and December 15, 2009. 
Pursuant to paragraph (d)(1) of this section, the amount due with each 
required installment is 25% of the required annual payment for B's first 
required installment, 50% of the required annual payment for B's second 
required installment, 75% of the required annual payment for B's third 
required installment, and 100% of the required annual payment for B's 
fourth required installment.
    (3) Example 3. Initial short year with three required installments.
    Corporation C began business on February 12, 2009, and adopted a 
calendar year as its taxable year. C computes its required installments 
based on 100 percent of the tax shown on the return for the taxable year 
in accordance with section 6655(d)(1)(B)(i). Pursuant to Sec. 1.6655-
1(f)(2)(i), the due dates of C's required installments for C's initial 
taxable year from February 12, 2009, through December 31, 2009, are 
April 15, 2009, June 15, 2009, September 15, 2009, and December 15, 
2009. However, in accordance with paragraph (c)(1)(ii)(A) of this 
section, C's first required installment is due June 15, 2009, because 
April 15, 2009, is earlier than the fifteenth day of the fourth month of 
C's taxable year. As a result, C's second required installment is due 
September 15, 2009, and C's third (and last) installment is due December 
15, 2009. Pursuant to paragraph (d)(1) of this section, the amount due 
with each required installment is 33.33% of the required annual payment 
for C's first required installment, 66.67% of the required annual 
payment for C's second required installment, and 100% of the required 
annual payment for C's third (and last) required installment.
    (4) Example 4. Initial short year with two required installments.
    Same facts as Example 3 except C began business on April 10, 2009. 
In accordance with paragraph (c)(1)(ii)(A) of this section, C's first 
required installment is due September 15, 2009, because April 15, 2009, 
and June 15, 2009, are earlier than the fifteenth day of the fourth 
month of C's taxable year. As a result,

[[Page 600]]

C's second (and last) required installment is due December 15, 2009. 
Pursuant to paragraph (d)(1) of this section, the amount due with each 
required installment is 50% of the required annual payment for C's first 
required installment, and 100% of the required annual payment for C's 
second (and last) required installment.
    (5) Example 5. Initial short year for fiscal year taxpayer with two 
required installments.
    Corporation D began business on February 12, 2009, and adopted a 
fiscal year ending October 31 as its taxable year. D computes its 
required installments based on 100 percent of the tax shown on the 
return for the taxable year in accordance with section 6655(d)(1)(B)(i). 
Pursuant to Sec. 1.6655-1(f)(2)(ii), the due dates of D's required 
installments for D's initial taxable year from February 12, 2009, 
through October 31, 2009, are February 15, 2009, April 15, 2009, July 
15, 2009, and October 15, 2009. However, in accordance with paragraph 
(c)(1)(ii)(A) of this section, D's first required installment is due 
July 15, 2009, because February 15, 2009, and April 15, 2009, are 
earlier than the fifteenth day of the fourth month of D's taxable year. 
As a result, D's second (and last) installment is due October 15, 2009. 
Pursuant to paragraph (d)(1) of this section, the amount due with each 
required installment is 50% of the required annual payment for D's first 
required installment, and 100% of the required annual payment for D's 
second (and last) required installment.
    (6)Example 6. Initial short year for fiscal year taxpayer with one 
required installment.
    Same facts as Example 5 except D corporation began business on May 
11, 2009. In accordance with paragraph (c)(1)(ii)(A) of this section, 
D's first (and last) installment is due October 15, 2009, because July 
15, 2009, is earlier than the fifteenth day of the fourth month of D's 
taxable year. Pursuant to paragraph (d)(1) of this section, the amount 
due with D's required installment is 100% of the required annual 
payment, computed as 100% divided by the number of required installments 
due for the short taxable year.
    (7) Example 7. Short termination year with three required 
installments.
    Corporation E is a calendar year taxpayer that computes its required 
installments based on 100 percent of the tax shown on the return for the 
taxable year in accordance with section 6655(d)(1)(B)(i). E computes its 
2009 required installments based on a projected 2009 total tax liability 
of $600,000. On July 31, 2009, E is acquired by corporation F, a member 
of a consolidated group (as defined in Sec. 1.1502-1(h)), resulting in 
E having a short taxable year from January 1, 2009, through July 31, 
2009. E determines that its total tax liability for the short period is 
$350,000. The due dates for E's first and second required installments 
are April 15, 2009, and June 15, 2009, respectively. Pursuant to section 
6655(d)(1)(A), E paid $150,000 with each required installment. Pursuant 
to paragraph (c)(2) of this section, E's third (and last) required 
installment of estimated tax is due on September 15, 2009, and the 
percentage of the required annual payment due with such installment is 
100% pursuant to paragraph (d)(1) of this section. Accordingly, E is 
required to pay $50,000 with its final required installment on September 
15, 2009 ($350,000 total tax liability for the short taxable year less 
prior installment payments of $300,000).
    (8) Example 8. Unexpected short termination year with three required 
installments using the annualization method.
    Same facts as Example 7 except that E uses the annualized income 
installment method under section 6655(e)(2)(A)(i) to calculate all of 
its required installment payments for its 2009 taxable year. In 
addition, E does not reasonably expect until July 28, 2009, that it will 
have a short termination year caused by E being acquired by F on July 
31, 2009. Had E known about its acquisition by F in the first quarter of 
2009, E's applicable percentages for computing the amount of its three 
required installments would be 33.33%, 66.67%, and 100% for the first, 
second, and third (last) required installments, respectively, pursuant 
to paragraph (d)(3)(ii) of this section. However, because E had an 
unexpected short termination year that E was not aware of until after 
its second required installment payment, E's applicable

[[Page 601]]

percentages for computing the amount of its three required installment 
are 25%, 50%, and 100% for the first, second, and third (last) required 
installments, respectively, pursuant to paragraph (d)(4) of this 
section.
    (9) Example 9. Short termination year ending within 30 days of the 
regular final installment due date.
    Same facts as Example 7 except that E is acquired by F on August 31, 
2009. Pursuant to paragraph (c)(2)(ii) of this section, E's third (and 
last) required installment of estimated tax is due on October 15, 2009, 
because September 15, 2009, the date that would have been the due date 
of E's next required installment if F's acquisition of E had not 
occurred, is within thirty days of the last day of E's short taxable 
year, and 100% of the required annual payment is due with such 
installment.
    (10) Example 10. Short termination year ending within 30 days of the 
regular final installment due date.
    Corporation F is a calendar year taxpayer that computes its required 
installments based on 100 percent of the tax shown on the return for the 
taxable year in accordance with section 6655(d)(1)(B)(i). F computes its 
2009 estimated tax payments based on a projected 2009 total tax 
liability of $900,000. On December 3, 2009, F is acquired by corporation 
G, a member of a consolidated group (as defined in Sec. 1.1502-1(h)), 
resulting in F having a short taxable year from January 1, 2009, through 
December 3, 2009. F determined its total tax liability for the short 
period to be $800,000. The due dates for F's first, second, and third 
required installments are April 15, 2009, June 15, 2009, and September 
15, 2009, respectively. Pursuant to section 6655(d)(1)(A), F paid 
$225,000 with each required installment. Pursuant to paragraph 
(c)(2)(ii) of this section, F's fourth (and last) required installment 
of estimated tax is due on February 15, 2010, and the percentage of the 
required annual payment due with such installment is 100% pursuant to 
paragraph (d)(1) of this section. However, because the due date for the 
fourth required installment falls on a legal holiday, F's required 
installment payment will be timely if paid on or before the first 
business day following the actual due date of the fourth required 
installment, that is, February 16, 2010. Accordingly, F is required to 
pay $125,000 with its final required installment on February 16, 2010 
($800,000 total tax liability for the short taxable year less prior 
installment payments of $675,000).
    (11) Example 11. Short termination year using the tax shown on the 
return for the preceding taxable year.
    Corporation G, a calendar year taxpayer, reported a tax liability of 
$75,000 on its return for the taxable year ending December 31, 2008, and 
is not a large corporation as defined in section 6655(g). On July 31, 
2009, G makes a final distribution of its assets, in connection with a 
plan of complete liquidation, resulting in a short taxable year from 
January 1, 2009, through July 31, 2009. To satisfy the requirements of 
the exception described in section 6655(d)(1)(B)(ii) for payments 
determined by reference to the tax shown on the return of the 
corporation for the preceding taxable year, pursuant to paragraph (d)(2) 
of this section, G must pay in a proportionate amount of its 2008 tax 
liability based on the number of months in the current taxable year. 
Accordingly, G must pay $43,750 ($75,000 x \7/12\) through payments of 
estimated tax payments in 2009, with $14,583 due on April 15, 2009, June 
15, 2009, and September 15, 2009.
    (12) Example 12. Short termination year using the tax shown on the 
return for the preceding taxable year.
    Same facts as Example 11 except that G makes a final distribution of 
its assets, in connection with a plan of complete liquidation, on 
October 1, 2009, resulting in a short taxable year from January 1, 2009, 
through October 1, 2009. To satisfy the requirements of the exception 
described in section 6655(d)(1)(B)(ii), G must pay $56,250 ($75,000 x 
\9/12\) through payments of estimated tax in 2009, with $14,063 due on 
April 15, 2009, June 15, 2009, September 15, 2009, and December 15, 
2009, respectively.
    (13) Example 13. Short initial year with three required installments 
resulting in an underpayment.
    (i) Corporation H began business on February 17, 2009, and adopted a 
calendar year. H computes its required installments based on 100 percent 
of the

[[Page 602]]

tax shown on the return for the taxable year in accordance with section 
6655(d)(1)(B)(i). H estimated at the beginning of its short taxable year 
that its estimated tax liability for short taxable year February 17, 
2009, through December 31, 2009, would be $180,000. H paid its first 
required installment of estimated tax of $60,000 on June 15, 2009, its 
second required installment of estimated tax of $60,000 on September 15, 
2009, and its third (and last) required installment of estimated tax of 
$60,000 on December 15, 2009 ($180,000 total estimated tax liability for 
the short taxable year less prior installment payments of $120,000). H 
reported a tax liability of $240,000 on its return for the short period 
February 17, 2009, through December 31, 2009, with no credits against 
tax. There was an underpayment in the amount of $20,000 on the first 
installment date through September 15, 2009, $40,000 on the second 
installment date through December 15, 2009, and $60,000 on the third 
(and last) installment date through March 15, 2010, determined as 
follows:
    (A) Tax as defined in section 6655(d)(1)(B)(i) = $240,000
    (B) 100% of this paragraph (e), Example 13 (A) = $240,000
    (C) Amount of estimated tax required to be paid by the first 
installment date (33.33% of $240,000) = $80,000
    (D) Amount of estimated tax required to be paid by the second 
installment date (66.67% of $240,000 less $80,000 (amount due with first 
installment)) = $80,000
    (E) Amount of estimated tax required to be paid by the third 
installment date (100% of $240,000 less $160,000 (amount due with first 
and second installment)) = $80,000
    (F) Deduction of amount paid on or before the first installment date 
= $60,000
    (G) Amount of underpayment for the first installment date (this 
paragraph (e), Example 13 (i)(C) minus this paragraph (e), Example 13 
(i)(F)) = $20,000
    (H) Deduction of amount available for the second installment date 
($60,000 second installment payment less this paragraph (e), Example 13 
(i)(G) applied towards the first installment underpayment) = $40,000
    (I) Amount of underpayment for the second installment date (this 
paragraph (e), Example 13 (i)(D) minus this paragraph (e), Example 13 
(i)(H)) = $40,000
    (J) Deduction of amount available for the third installment date 
($60,000 third installment payment less this paragraph (e), Example 13 
(i)(I) applied towards the second installment underpayment) = $20,000
    (K) Amount of underpayment for the third installment date (this 
paragraph (e), Example 1 (i)(E) minus this paragraph (e), Example 13 
(i)(J)) = $60,000
    (ii) [Reserved]

    (f) 52 or 53 week taxable year. For purposes of this section a 
taxable year of 52 or 53 weeks is deemed a period of 12 months in the 
case of a corporation that computes its taxable income in accordance 
with the election permitted by section 441(f).
    (g) Use of annualized income or seasonal installment method--(1) In 
general. Regardless of the annual accounting period used by a 
corporation (for example, calendar year, fiscal year) the taxpayer may 
use the method described in Sec. 1.6655-2 (annualized income 
installment method) or Sec. 1.6655-3 (adjusted seasonal installment 
method) to compute its required installments of estimated tax when the 
current taxable year is a short taxable year.
    (2) Computation of annualized income installment. To the extent a 
short taxable year includes an annualization period elected by the 
taxpayer, the taxpayer computes its annualized income installment by 
determining the tax on the basis of such annualized income for the 
annualization period, divided by 12, multiplied by the number of months 
in the short taxable year, and multiplied by the applicable percentage 
for the required installment.
    (3) Annualization period for final required installment. For 
purposes of determining the final required installment (as described in 
paragraph (c)(2) of this section) for a short taxable year, annualized 
taxable income is determined by placing on an annualized basis the 
taxable income for the last complete annualization period that occurs 
within the short taxable year.

[[Page 603]]

    (4) Examples. The provisions of paragraph (g) of this section may be 
illustrated by the following examples:

    Example 1. Corporation X began business on February 12, 2009, and 
adopted a calendar year as its taxable year. X adopts an accrual method 
of accounting and uses the annualized income installment method under 
section 6655(e)(2)(A)(i) to calculate all of its required installment 
payments for its 2009 taxable year. Pursuant to Sec. 1.6655-1(f)(2)(i), 
the due dates of X's required installments for X's initial taxable year 
from February 12, 2009, through December 31, 2009, are April 15, 2009, 
June 15, 2009, September 15, 2009, and December 15, 2009. However, in 
accordance with paragraph (c)(1)(ii)(A) of this section, X's first 
required installment is due June 15, 2009. As a result, X's second 
required installment is due September 15, 2009, and X's third (and last) 
required installment is due December 15, 2009. The amount of X's first 
and second required installments are each based on annualizing X's 
taxable income from February 12, 2009, through April 30, 2009, (the 
first three months of X's taxable year) and X's third (and last) 
required installment is based on annualizing X's taxable income from 
February 12, 2009, through July 31, 2009 (the first six months of X's 
taxable year). Because X will have three required installments due for 
its short taxable year, pursuant to paragraph (d)(3)(ii) of this 
section, the applicable percentage is 33.33% for X's first required 
installment, 66.67% for X's second required installment, and 100% for 
X's third (and last) required installment.
    Example 2. (i) Y, a calendar year corporation, made a final 
distribution of its assets, in connection with a plan of complete 
liquidation, on August 3, 2009. Y filed a timely election to use the 
alternative annualization periods described under section 
6655(e)(2)(C)(i) and determined that its taxable income for the first 2, 
4 and 7 months of the taxable year was $25,000, $50,000 and $140,000. 
The due dates for Y's required installments for its short taxable year 
January 1, 2009, through August 3, 2009, are April 15, 2009, June 15, 
2009, and September 15, 2009. Y made installment payments of $10,000, 
$10,000, and $20,000, respectively, on April 15, 2009, June 15, 2009, 
and September 15, 2009. The taxable income for each period is annualized 
as follows:
$25,000 x 12/2 = $150,000
$50,000 x 12/4 = $150,000
$140,000 x 12/7 = $240,000
    (ii)(A) To determine whether the first required installment equals 
or exceeds the amount that would have been required to have been paid if 
the estimated tax were equal to one hundred percent of the tax computed 
on the annualized income for the 2-month period taking into account the 
number of months in the short taxable year, the following computation is 
necessary:
    (1) Annualized income for the 2 month period = $150,000
    (2) Tax on this paragraph (g)(4), Example 2 (ii)(A)(1) = $41,750
    (3) Tax determined under this paragraph (g)(4), Example 2 (ii)(A)(2) 
divided by 12 multiplied by 7 (the number of months in the short taxable 
year) = $24,354
    (4) 100% of this paragraph (g)(4), Example 2 (ii)(A)(3) = $24,354
    (5) 33.33% of this paragraph (g)(4), Example 2 (ii)(A)(4) = $ 8,117
    (B) Because the total amount of estimated tax that is timely paid on 
or before the first installment date ($10,000) exceeds the amount 
required to be paid on or before this date if the estimated tax were one 
hundred percent of the tax determined by placing on an annualized basis 
the taxable income for the first 2-month period taking into account the 
number of months in the short taxable year, the exception described in 
Sec. 1.6655-2(a) applies and no addition to tax will be imposed for the 
installment due on April 15, 2009.
    (iii)(A) To determine whether the required installments made on or 
before June 15, 2009, equal or exceed the amount that would have been 
required to have been paid if the estimated tax were equal to one 
hundred percent of the tax computed on the annualized income for the 4-
month period taking into account the number of months in the short 
taxable year, the following computation is necessary:
    (1) Annualized income for the 4 month period = $150,000
    (2) Tax on this paragraph (g)(4), Example 2 (iii)(A)(1) = $41,750
    (3) Tax determined under this paragraph (g)(4), Example 2 
(iii)(A)(2) divided by 12 multiplied by 7 (the number of months in the 
short taxable year) = $24,354
    (4) 100% of this paragraph (g)(4), Example 2 (iii)(A)(3) = $24,354
    (5) 66.67% of this paragraph (g)(4), Example 2 (iii)(A)(4) less 
$8,117 (amount due with first installment) = $8,120
    (B) Because the total amount of estimated tax available to apply 
towards the amount due for the second installment ($11,883 ($10,000 paid 
on the second installment date plus $1,883 overpayment of the first 
installment)) exceeds the amount required to be paid on or before this 
date if the estimated tax were one hundred percent of the tax determined 
by placing on an annualized basis the taxable income for the first 4-
month period for the taxable year taking into account the number of 
months in the short taxable year, the exception described in Sec. 
1.6655-2(a) applies and no addition to tax will be imposed for the 
installment due on June 15, 2009.

[[Page 604]]

    (iv)(A) Pursuant to paragraph (c) and (d) of this section, the final 
required installment is due by September 15, 2009, and the applicable 
percentage due for the final required installment is 100%. To determine 
whether the installment payments made on or before September 15, 2009, 
equal or exceed the amount that would have been required to have been 
paid if the estimated tax were equal to one hundred percent of the tax 
computed on the annualized income for the 7-month period taking into 
account the number of months in the short taxable year, the following 
computation is necessary:
    (1) Annualized income for the 7 month period = $240,000
    (2) Tax on this paragraph (g)(4), Example 2 (iv)(A)(1) = $76,850
    (3) Tax determined under this paragraph (g)(4), Example 2 (iv)(A)(2) 
divided by 12 multiplied by 7 (the number of months in the short taxable 
year) = $44,829
    (4) 100% of this paragraph (g)(4), Example 2 (iv)(A)(3) = $44,829
    (5) 100% of this paragraph (g)(4), Example 2 (iv)(A)(4) less $16,237 
(amount due with first and second installment) = $28,592
    (B) Because the total amount of estimated tax available to apply 
towards the amount due for the final installment ($23,763 ($20,000 that 
is timely paid on the third installment date plus $3,763 overpayment of 
the second installment)) does not exceed the amount required to be paid 
on or before this date if the estimated tax were one hundred percent of 
the tax determined by placing on an annualized basis the taxable income 
for the first 7-month period for the taxable year taking into account 
the number of months in the short taxable year, the exception described 
in Sec. 1.6655-2(a) does not apply and an addition to tax will be 
imposed for the final installment due on September 15, 2009, unless 
another exception (for example, see section 6655(e)(3)) applies with 
respect to these installments.

    (h) Effective/applicability date. This section applies to taxable 
years beginning after September 6, 2007.

[T.D. 9347, 72 FR 44361, Aug. 7, 2007, as amended by T.D. 9885, 84 FR 
67045, Dec. 6, 2019]



Sec. 1.6655-6  Methods of accounting.

    (a) In general. In computing any required installment, a corporation 
must use the methods of accounting used in computing taxable income for 
the taxable year for which estimated tax is being determined (the 
current taxable year).
    (b) Accounting method changes. A taxpayer that changes its method of 
accounting with the consent of the Commissioner for the current taxable 
year must use the new method of accounting (as of the beginning of the 
taxable year) in the determination of taxable income for annualization 
periods ending on or after the date the related section 481(a) 
adjustment is treated as arising. See Sec. 1.6655-2(f)(3)(ii)(C) for 
the date a section 481(a) adjustment is treated as arising. If the 
change in method of accounting does not result in a section 481(a) 
adjustment, the taxpayer may choose to use the new method of accounting 
(as of the beginning of the taxable year) in the determination of 
taxable income for all annualization periods during the year of change 
or only those annualization periods ending on or after the date the Form 
3115 ``Application for Change in Accounting Method'' was filed with the 
national office of the Internal Revenue Service. This paragraph (b) only 
applies to the extent a taxpayer changes a method of accounting for the 
taxable year with the consent of the Commissioner. Therefore, a taxpayer 
may be subject to a section 6655 addition to tax for an underpayment of 
estimated tax if an underpayment results from a change in a method of 
accounting the taxpayer anticipates making for the taxable year but for 
which the consent of the Commissioner is not subsequently received.
    (c) Example. The following example illustrates the rules of this 
section:
    (1) Example. Change of accounting method. Corporation ABC, a 
calendar year taxpayer, uses an accrual method of accounting and the 
annualization method under section 6655(e)(2)(A)(i) to calculate all of 
its 2008 required installments. On June 15, 2008, ABC files a Form 3115 
requesting permission to change its method of accounting for future 
litigation reserves for the tax year ending December 31, 2008. On 
February 15, 2009, ABC receives consent from the Commissioner to make 
the change for the tax year ending December 31, 2008. The change results 
in a positive section 481(a) adjustment of $100,000. Under the 
provisions of Sec. 1.6655-2(f)(3)(ii) ABC chooses to treat the section 
481(a) adjustment as arising on the date the Form 3115 is filed with the 
national office of the Internal Revenue Service. Therefore, ABC is 
required to use the new method of accounting (as of the

[[Page 605]]

beginning of the year) in the determination of taxable income for 
annualization periods ending on or after June 15, 2008.
    (2) [Reserved]
    (d) Effective/applicability date. This section applies to taxable 
years beginning after September 6, 2007.

[T.D. 9347, 72 FR 44361, Aug. 7, 2007, as amended by T.D. 9870, 84 FR 
33692, July 15, 2019]



Sec. 1.6655-7  Addition to tax on account of excessive adjustment
under section 6425.

    (a) Section 6655(h) imposes an addition to the tax under chapter 1 
of the Internal Revenue Code in the case of any excessive amount (as 
defined in paragraph (c) of this section) of an adjustment under section 
6425 that is made before the 15th day of the third month following the 
close of a taxable year beginning after December 31, 1967. This addition 
to tax is imposed whether or not there was reasonable cause for an 
excessive adjustment.
    (b) If the amount of an adjustment under section 6425 is excessive, 
there shall be added to the tax under chapter 1 of the Internal Revenue 
Code for the taxable year an amount determined at the annual rate 
referred to in the regulations under section 6621 upon the excessive 
amount from the date on which the credit is allowed or refund paid to 
the 15th day of the third month following the close of the taxable year. 
A refund is paid on the date it is allowed under section 6407.
    (c) The excessive amount is equal to the lesser of the amount of the 
adjustment or the amount by which--
    (1) The income tax liability (as defined in section 6425(c)) for the 
taxable year, as shown on the return for the taxable year; exceeds
    (2) The estimated income tax paid during the taxable year, reduced 
by the amount of the adjustment.
    (d) The computation of the addition to the tax imposed by section 
6425 is made independent of, and does not affect the computation of, any 
addition to the tax that a corporation may otherwise owe for an 
underpayment of an installment of estimated tax.
    (e) The following example illustrates the rules of this section:

    Example. (i) Corporation X, a calendar year taxpayer, had an 
underpayment as defined in section 6655(b), for its fourth installment 
of estimated tax that was due on December 15, 2009, in the amount of 
$10,000. On January 4, 2010, X filed an application for adjustment of 
overpayment of estimated income tax for 2009 in the amount of $20,000.
    (ii) On February 16, 2010, the Internal Revenue Service, in response 
to the application, refunded $20,000 to X. On March 15, 2010, X filed 
its 2009 tax return and made a payment in settlement of its total tax 
liability. Assuming that the addition to tax is computed under section 
6621(a)(2) at a rate of 8% per annum for the applicable periods of 
underpayment, under section 6655(a), X is subject to an addition to tax 
in the amount of $197 (90/365 x $10,000 x 8%) on account of X's December 
15, 2009, underpayment. Under section 6655(h), X is subject to an 
addition to tax in the amount of $118 (27/365 x $20,000 x 8%) on account 
of X's excessive adjustment under section 6425. In determining the 
amount of the addition to tax under section 6655(a) for failure to pay 
estimated income tax, the excessive adjustment under section 6425 is not 
taken into account.

    (f) An adjustment is generally to be treated as a reduction of 
estimated income tax paid as of the date of the adjustment. However, for 
purposes of Sec. Sec. 1.6655-1 through 1.6655-6, the adjustment is to 
be treated as if not made in determining whether there has been any 
underpayment of estimated income tax and, if there is an underpayment, 
the period during which the underpayment existed.
    (g) Effective/applicability date: This section applies to taxable 
years beginning after September 6, 2007.

[T.D. 9347, 72 FR 44365, Aug. 7, 2007]



Sec. 1.6655(e)-1  Time and manner for making election under the 
Omnibus Budget Reconciliation Act of 1993.

    (a) Description. Section 6655(e)(2)(C), as added by section 13225 of 
the Omnibus Budget Reconciliation Act of 1993 (Pub. L. 103-66, 107 Stat. 
486), allows a corporate taxpayer to make an annual election to use a 
different annualization period to determine annualized income for 
purposes of paying any required installment of estimated income tax for 
a taxable year beginning after December 31, 1993.
    (b) Time and manner for making the election. An election under 
section 6655(e)(2)(C) must be made on or before the date required for 
the payment of

[[Page 606]]

the first required installment for the taxable year. For a calendar or 
fiscal year corporation, Form 8842, Election to Use Different 
Annualization Periods for Corporate Estimated Tax, must be filed by the 
15th day of the 4th month of the taxable year for which the election is 
to apply. Form 8842 must be filed with the Internal Revenue Service 
Center where the corporation files its income tax return.
    (c) Revocability of election. The election described in this section 
is irrevocable.
    (d) Effective date. The rules set forth in this section are 
effective December 12, 1996.

[T.D. 8688, 61 FR 65322, Dec. 12, 1996]



Sec. 1.6662-0  Table of contents.

    This section lists the captions that appear in Sec. Sec. 1.6662-1 
through 1.6662-7.

        Sec. 1.6662-1 Overview of the accuracy-related penalty.

                Sec. 1.6662-2 Accuracy-related penalty.

    (a) In general.
    (b) Amount of penalty.
    (1) In general.
    (2) Increase in penalty for gross valuation misstatement.
    (c) No stacking of accuracy-related penalty components.
    (d) Effective dates.
    (1) Returns due before January 1, 1994.
    (2) Returns due after December 31, 1993.
    (3) Special rules for tax shelter items.
    (4) Special rule for reasonable basis.
    (5) Returns filed after December 31, 2002.

     Sec. 1.6662-3 Negligence or disregard of rules or regulations.

    (a) In general.
    (b) Definitions and rules.
    (1) Negligence.
    (2) Disregard of rules or regulations.
    (3) Reasonable basis.
    (c) Exception for adequate disclosure.
    (1) In general.
    (2) Method of disclosure.
    (d) Special rules in the case of carrybacks and carryovers.
    (1) In general.
    (2) Transition rule for carrybacks to pre-1990 years.
    (3) Example.

        Sec. 1.6662-4 Substantial understatement of income tax.

    (a) In general.
    (b) Definitions and computational rules.
    (1) Substantial.
    (2) Understatement.
    (3) Amount of the tax required to be shown on the return.
    (4) Amount of the tax imposed which is shown on the return.
    (5) Rebate.
    (6) Examples.
    (c) Special rules in the case of carrybacks and carryovers.
    (1) In general.
    (2) Understatements for carryback years not reduced by amount of 
carrybacks.
    (3) Tainted items defined.
    (i) In general.
    (ii) Tax shelter items.
    (4) Transition rule for carrybacks to pre-1990 years.
    (5) Examples.
    (d) Substantial authority.
    (1) Effect of having substantial authority.
    (2) Substantial authority standard.
    (3) Determination of whether substantial authority is present.
    (i) Evaluation of authorities.
    (ii) Nature of analysis.
    (iii) Types of authority.
    (iv) Special rules.
    (A) Written determinations.
    (B) Taxpayer's jurisdiction.
    (C) When substantial authority determined.
    (v) Substantial authority for tax returns due before January 1, 
1990.
    (e) Disclosure of certain information.
    (1) Effect of adequate disclosure.
    (2) Circumstances where disclosure will not have an effect.
    (3) Restriction for corporations.
    (f) Method of making adequate disclosure.
    (1) Disclosure statement.
    (2) Disclosure on return.
    (3) Recurring item.
    (4) Carrybacks and carryovers.
    (5) Pass-through entities.
    (g) Items relating to tax shelters.
    (1) In general.
    (i) Noncorporate taxpayers.
    (ii) Corporate taxpayers.
    (A) In general.
    (B) Special rule for transactions occurring prior to December 9, 
1994.
    (iii) Disclosure irrelevant.
    (iv) Cross-reference.
    (2) Tax shelter.
    (i) In general.
    (ii) Principal purpose.
    (3) Tax shelter item.
    (4) Reasonable belief.
    (i) In general.
    (ii) Facts and circumstances; reliance on professional tax advisor.
    (5) Pass-through entities.

   Sec. 1.6662-5 Substantial and gross valuation misstatements under 
                               chapter 1.

    (a) In general.
    (b) Dollar limitation.

[[Page 607]]

    (c) Special rules in the case of carrybacks and carryovers.
    (1) In general.
    (2) Transition rule for carrybacks to pre-1990 years.
    (d) Examples.
    (e) Definitions.
    (1) Substantial valuation misstatement.
    (2) Gross valuation misstatement.
    (3) Property.
    (f) Multiple valuation misstatements on a return.
    (1) Determination of whether valuation misstatements are substantial 
or gross.
    (2) Application of dollar limitation.
    (g) Property with a value or adjusted basis of zero.
    (h) Pass-through entities.
    (1) In general.
    (2) Example.
    (i) [Reserved]
    (j) Transactions between persons described in section 482 and net 
section 482 transfer price adjustments. [Reserved]
    (k) Returns affected.

  Sec. 1.6662-5T Substantial and gross valuation misstatements under 
                         chapter 1 (temporary).

    (a) through (e)(3) [Reserved]
    (e)(4) Tests related to section 482.
    (i) Substantial valuation misstatement.
    (ii) Gross valuation misstatement.
    (iii) Property.
    (f) through (i) [Reserved]
    (j) Transactions between persons described in section 482 and net 
section 482 transfer price adjustments.

Sec. 1.6662-6 Transactions between persons described in section 482 and 
               net section 482 transfer price adjustments.

    (a) In general.
    (1) Purpose and scope.
    (2) Reported results.
    (3) Identical terms used in the section 482 regulations.
    (b) The transactional penalty.
    (1) Substantial valuation misstatement.
    (2) Gross valuation misstatement.
    (3) Reasonable cause and good faith.
    (c) Net adjustment penalty.
    (1) Net section 482 adjustment.
    (2) Substantial valuation misstatement.
    (3) Gross valuation misstatement.
    (4) Setoff allocation rule.
    (5) Gross receipts.
    (6) Coordination with reasonable cause exception under section 
6664(c).
    (7) Examples.
    (d) Amounts excluded from net section 482 adjustments.
    (1) In general.
    (2) Application of a specified section 482 method.
    (i) In general.
    (ii) Specified method requirement.
    (iii) Documentation requirement.
    (A) In general.
    (B) Principal documents.
    (C) Background documents.
    (3) Application of an unspecified method.
    (i) In general.
    (ii) Unspecified method requirement.
    (A) In general.
    (B) Specified method potentially applicable.
    (C) No specified method applicable.
    (iii) Documentation requirement.
    (A) In general.
    (B) Principal and background documents.
    (4) Certain foreign to foreign transactions.
    (5) Special rule.
    (6) Examples.
    (e) Special rules in the case of carrybacks and carryovers.
    (f) Rules for coordinating between the transactional penalty and the 
net adjustment penalty.
    (1) Coordination of a net section 482 adjustment subject to the net 
adjustment penalty and a gross valuation misstatement subject to the 
transactional penalty.
    (2) Coordination of net section 482 adjustment subject to the net 
adjustment penalty and substantial valuation misstatements subject to 
the transactional penalty.
    (3) Examples.
    (g) Effective date.

Sec. 1.6662-7 Omnibus Budget Reconciliation Act of 1993 changes to the 
                        accuracy-related penalty.

    (a) Scope.
    (b) No disclosure exception for negligence penalty.
    (c) Disclosure standard for other penalties is reasonable basis.
    (d) Reasonable basis.

[T.D. 8381, 56 FR 67497, Dec. 31, 1991; T.D. 8381, 57 FR 6165, Feb. 20, 
1992, as amended by T.D. 8519, 59 FR 4794, Feb. 2, 1994; T.D. 8533, 59 
FR 12548, Mar. 17, 1994; T.D. 8551, 59 FR 35031, July 8, 1994; T.D. 
8617, 60 FR 45663, Sept. 1, 1995; T.D. 8656, 61 FR 4879, Feb. 9, 1996; 
T.D. 8656, 61 FR 14248, Apr. 1, 1996; T.D. 8790, 63 FR 66434, Dec. 2, 
1998; T.D. 9109, 68 FR 75127, Dec. 30, 2003]



Sec. 1.6662-1  Overview of the accuracy-related penalty.

    Section 6662 imposes an accuracy-related penalty on any portion of 
an underpayment of tax required to be shown on a return that is 
attributable to one or more of the following:
    (a) Negligence or disregard of rules or regulations;
    (b) Any substantial understatement of income tax;
    (c) Any substantial valuation misstatement under chapter 1;

[[Page 608]]

    (d) Any substantial overstatement of pension liabilities; or
    (e) Any substantial estate or gift tax valuation understatement.


Sections 1.6662-1 through 1.6662-5 address only the first three 
components of the accuracy-related penalty, i.e., the penalties for 
negligence or disregard of rules or regulations, substantial 
understatements of income tax, and substantial (or gross) valuation 
misstatements under chapter 1. The penalties for disregard of rules or 
regulations and for a substantial understatement of income tax may be 
avoided by adequately disclosing certain information as provided in 
Sec. 1.6662-3(c) and Sec. Sec. 1.6662-4(e) and (f), respectively. The 
penalties for negligence and for a substantial (or gross) valuation 
misstatement under chapter 1 may not be avoided by disclosure. No 
accuracy-related penalty may be imposed on any portion of an 
underpayment if there was reasonable cause for, and the taxpayer acted 
in good faith with respect to, such portion. The reasonable cause and 
good faith exception to the accuracy-related penalty is set forth in 
Sec. 1.6664-4.

[T.D. 8381, 56 FR 67498, Dec. 31, 1991, as amended by T.D. 8617, 60 FR 
45664, Sept. 1, 1995]



Sec. 1.6662-2  Accuracy-related penalty.

    (a) In general. Section 6662(a) imposes an accuracy-related penalty 
on any portion of an underpayment of tax (as defined in section 6664(a) 
and Sec. 1.6664-2) required to be shown on a return if such portion is 
attributable to one or more of the following types of misconduct:
    (1) Negligence or disregard of rules or regulations (see Sec. 
1.6662-3);
    (2) Any substantial understatement of income tax (see Sec. 1.6662-
4); or
    (3) Any substantial (or gross) valuation misstatement under chapter 
1 (``substantial valuation misstatement'' or ``gross valuation 
misstatement''), provided the applicable dollar limitation set forth in 
section 6662(e)(2) is satisfied (see Sec. 1.6662-5).


The accuracy-related penalty applies only in cases in which a return of 
tax is filed, except that the penalty does not apply in the case of a 
return prepared by the Secretary under the authority of section 6020(b). 
The accuracy-related penalty under section 6662 and the penalty under 
section 6651 for failure to timely file a return of tax may both be 
imposed on the same portion of an underpayment if a return is filed, but 
is filed late. The fact that a return is filed late, however, is not 
taken into account in determining whether an accuracy-related penalty 
should be imposed. No accuracy-related penalty may be imposed on any 
portion of an underpayment of tax on which the fraud penalty set forth 
in section 6663 is imposed.
    (b) Amount of penalty--(1) In general. The amount of the accuracy-
related penalty is 20 percent of the portion of an underpayment of tax 
required to be shown on a return that is attributable to any of the 
types of misconduct listed in paragraphs (a)(1) through (a)(3) of this 
section, except as provided in paragraph (b)(2) of this section.
    (2) Increase in penalty for gross valuation misstatement. In the 
case of a gross valuation misstatement, as defined in section 6662(h)(2) 
and Sec. 1.6662-5(e)(2), the amount of the accuracy-related penalty is 
40 percent of the portion of an underpayment of tax required to be shown 
on a return that is attributable to the gross valuation misstatement, 
provided the applicable dollar limitation set forth in section 
6662(e)(2) is satisfied.
    (c) No stacking of accuracy-related penalty components. The maximum 
accuracy-related penalty imposed on a portion of an underpayment may not 
exceed 20 percent of such portion (40 percent of the portion 
attributable to a gross valuation misstatement), notwithstanding that 
such portion is attributable to more than one of the types of misconduct 
described in paragraph (a) of this section. For example, if a portion of 
an underpayment of tax required to be shown on a return is attributable 
both to negligence and a substantial understatement of income tax, the 
maximum accuracy-related penalty is 20 percent of such portion. 
Similarly, the maximum accuracy-related penalty imposed on any portion 
of an underpayment that is attributable both to negligence and a gross

[[Page 609]]

valuation misstatement is 40 percent of such portion.
    (d) Effective dates--(1) Returns due before January 1, 1994. Section 
1.6662-3(c) and Sec. Sec. 1.6662-4 (e) and (f) (relating to methods of 
making adequate disclosure) (as contained in 26 CFR part 1 revised April 
1, 1995) apply to returns the due date of which (determined without 
regard to extensions of time for filing) is after December 31, 1991, but 
before January 1, 1994. Except as provided in the preceding sentence and 
in paragraphs (d)(2), (3), and (4) of this section, Sec. Sec. 1.6662-1 
through 1.6662-5 apply to returns the due date of which (determined 
without regard to extensions of time for filing) is after December 31, 
1989, but before January 1, 1994. To the extent the provisions of these 
regulations were not reflected in the statute as amended by the Omnibus 
Budget Reconciliation Act of 1989 (OBRA 1989), in Notice 90-20, 1990-1 
C.B. 328, or in rules and regulations in effect prior to March 4, 1991 
(to the extent not inconsistent with the statute as amended by OBRA 
1989), these regulations will not be adversely applied to a taxpayer who 
took a position based upon such prior rules on a return filed before 
January 1, 1992.
    (2) Returns due after December 31, 1993. Except as provided in 
paragraphs (d)(3), (4) and (5) of this section and the last sentence of 
this paragraph (d)(2), the provisions of Sec. Sec. 1.6662-1 through 
1.6662-4 and Sec. 1.6662-7 (as revised to reflect the changes made to 
the accuracy-related penalty by the Omnibus Budget Reconciliation Act of 
1993) and of Sec. 1.6662-5 apply to returns the due date of which 
(determined without regard to extensions of time for filing) is after 
December 31, 1993. These changes include raising the disclosure standard 
for the penalties for disregarding rules or regulations and for a 
substantial understatement of income tax from not frivolous to 
reasonable basis, eliminating the disclosure exception for the 
negligence penalty, and providing guidance on the meaning of reasonable 
basis. The Omnibus Budget Reconciliation Act of 1993 changes relating to 
the penalties for negligence or disregard of rules or regulations will 
not apply to returns (including qualified amended returns) that are 
filed on or before March 14, 1994, but the provisions of Sec. Sec. 
1.6662-1 through 1.6662-3 (as contained in 26 CFR part 1 revised April 
1, 1995) relating to those penalties will apply to such returns.
    (3) Special rules for tax shelter items. Sections 1.6662-4(g)(1) and 
1.6662-4(g)(4) apply to returns the due date of which (determined 
without regard to extensions of time for filing) is after September 1, 
1995. Except as provided in the last sentence of this paragraph (d)(3), 
Sec. Sec. 1.6662-4(g)(1) and 1.6662-4(g)(4) (as contained in 26 CFR 
part 1 revised April 1, 1995) apply to returns the due date of which 
(determined without regard to extensions of time for filing) is on or 
before September 1, 1995 and after December 31, 1989. For transactions 
occurring after December 8, 1994, Sec. Sec. 1.6662-4(g)(1) and 1.6662-
4(g)(2) (as contained in 26 CFR part 1 revised April 1, 1995) are 
applied taking into account the changes made to section 6662(d)(2)(C) 
(relating to the substantial understatement penalty for tax shelter 
items of corporations) by section 744 of title VII of the Uruguay Round 
Agreements Act, Pub. L. 103-465 (108 Stat. 4809).
    (4) Special rules for reasonable basis. Section 1.6662-3(b)(3) 
applies to returns filed on or after December 2, 1998.
    (5) For returns filed after December 31, 2002. Sections 1.6662-3(a), 
1.6662-3(b)(2) and 1.6662-3(c)(1) (relating to adequate disclosure) 
apply to returns filed after December 31, 2002, with respect to 
transactions entered into on or after January 1, 2003. Except as 
provided in paragraph (d)(1) of this section, Sec. Sec. 1.6662-3(a), 
1.6662-3(b)(2) and 1.6662-3(c)(1) (as contained in 26 CFR part 1 revised 
April 1, 2003) apply to returns filed with respect to transactions 
entered into prior to January 1, 2003.

[T.D. 8381, 56 FR 67498, Dec. 31, 1991, as amended by T.D. 8617, 60 FR 
45664, Sept. 1, 1995; T.D. 8790, 63 FR 66434, Dec. 2, 1998; T.D. 9109, 
68 FR 75127, Dec. 30, 2003]



Sec. 1.6662-3  Negligence or disregard of rules or regulations.

    (a) In general. If any portion of an underpayment, as defined in 
section 6664(a) and Sec. 1.6664-2, of any income tax imposed under 
subtitle A of the Internal Revenue Code that is required to be shown on 
a return is attributable to

[[Page 610]]

negligence or disregard of rules or regulations, there is added to the 
tax an amount equal to 20 percent of such portion. The penalty for 
disregarding rules or regulations does not apply, however, if the 
requirements of paragraph (c)(1) of this section are satisfied and the 
position in question is adequately disclosed as provided in paragraph 
(c)(2) of this section (and, if the position relates to a reportable 
transaction as defined in Sec. 1.6011-4(b) (or Sec. 1.6011-4T(b), as 
applicable), the transaction is disclosed in accordance with Sec. 
1.6011-4 (or Sec. 1.6011-4T, as applicable)), or to the extent that the 
reasonable cause and good faith exception to this penalty set forth in 
Sec. 1.6664-4 applies. In addition, if a position with respect to an 
item (other than with respect to a reportable transaction, as defined in 
Sec. 1.6011-4(b) or Sec. 1.6011-4T(b), as applicable) is contrary to a 
revenue ruling or notice (other than a notice of proposed rulemaking) 
issued by the Internal Revenue Service and published in the Internal 
Revenue Bulletin (see Sec. 601.601(d)(2) of this chapter), this penalty 
does not apply if the position has a realistic possibility of being 
sustained on its merits. See Sec. 1.6694-2(b) of the income tax return 
preparer penalty regulations for a description of the realistic 
possibility standard.
    (b) Definitions and rules--(1) Negligence. The term negligence 
includes any failure to make a reasonable attempt to comply with the 
provisions of the internal revenue laws or to exercise ordinary and 
reasonable care in the preparation of a tax return. ``Negligence'' also 
includes any failure by the taxpayer to keep adequate books and records 
or to substantiate items properly. A return position that has a 
reasonable basis as defined in paragraph (b)(3) of this section is not 
attributable to negligence. Negligence is strongly indicated where--
    (i) A taxpayer fails to include on an income tax return an amount of 
income shown on an information return, as defined in section 6724(d)(1);
    (ii) A taxpayer fails to make a reasonable attempt to ascertain the 
correctness of a deduction, credit or exclusion on a return which would 
seem to a reasonable and prudent person to be ``too good to be true'' 
under the circumstances;
    (iii) A partner fails to comply with the requirements of section 
6222, which requires that a partner treat partnership items on its 
return in a manner that is consistent with the treatment of such items 
on the partnership return (or notify the Secretary of the 
inconsistency); or
    (iv) A shareholder fails to comply with the requirements of section 
6242, which requires that an S corporation shareholder treat subchapter 
S items on its return in a manner that is consistent with the treatment 
of such items on the corporation's return (or notify the Secretary of 
the inconsistency).
    (2) Disregard of rules or regulations. The term disregard includes 
any careless, reckless or intentional disregard of rules or regulations. 
The term ``rules or regulations'' includes the provisions of the 
Internal Revenue Code, temporary or final Treasury regulations issued 
under the Code, and revenue rulings or notices (other than notices of 
proposed rulemaking) issued by the Internal Revenue Service and 
published in the Internal Revenue Bulletin. A disregard of rules or 
regulations is ``careless'' if the taxpayer does not exercise reasonable 
diligence to determine the correctness of a return position that is 
contrary to the rule or regulation. A disregard is ``reckless'' if the 
taxpayer makes little or no effort to determine whether a rule or 
regulation exists, under circumstances which demonstrate a substantial 
deviation from the standard of conduct that a reasonable person would 
observe. A disregard is ``intentional'' if the taxpayer knows of the 
rule or regulation that is disregarded. Nevertheless, a taxpayer who 
takes a position (other than with respect to a reportable transaction, 
as defined in Sec. 1.6011-4(b) or Sec. 1.6011-4T(b), as applicable) 
contrary to a revenue ruling or notice has not disregarded the ruling or 
notice if the contrary position has a realistic possibility of being 
sustained on its merits.
    (3) Reasonable basis. Reasonable basis is a relatively high standard 
of tax reporting, that is, significantly higher than not frivolous or 
not patently improper. The reasonable basis standard

[[Page 611]]

is not satisfied by a return position that is merely arguable or that is 
merely a colorable claim. If a return position is reasonably based on 
one or more of the authorities set forth in Sec. 1.6662-4(d)(3)(iii) 
(taking into account the relevance and persuasiveness of the 
authorities, and subsequent developments), the return position will 
generally satisfy the reasonable basis standard even though it may not 
satisfy the substantial authority standard as defined in Sec. 1.6662-
4(d)(2). (See Sec. 1.6662-4(d)(3)(ii) for rules with respect to 
relevance, persuasiveness, subsequent developments, and use of a well-
reasoned construction of an applicable statutory provision for purposes 
of the substantial understatement penalty.) In addition, the reasonable 
cause and good faith exception in Sec. 1.6664-4 may provide relief from 
the penalty for negligence or disregard of rules or regulations, even if 
a return position does not satisfy the reasonable basis standard.
    (c) Exception for adequate disclosure--(1) In general. No penalty 
under section 6662(b)(1) may be imposed on any portion of an 
underpayment that is attributable to a position contrary to a rule or 
regulation if the position is disclosed in accordance with the rules of 
paragraph (c)(2) of this section (and, if the position relates to a 
reportable transaction as defined in Sec. 1.6011-4(b) (or Sec. 1.6011-
4T(b), as applicable), the transaction is disclosed in accordance with 
Sec. 1.6011-4 (or Sec. 1.6011-4T, as applicable)) and, in case of a 
position contrary to a regulation, the position represents a good faith 
challenge to the validity of the regulation. This disclosure exception 
does not apply, however, in the case of a position that does not have a 
reasonable basis or where the taxpayer fails to keep adequate books and 
records or to substantiate items properly.
    (2) Method of disclosure. Disclosure is adequate for purposes of the 
penalty for disregarding rules or regulations if made in accordance with 
the provisions of Sec. Sec. 1.6662-4(f)(1), (3), (4), and (5), which 
permit disclosure on a properly completed and filed Form 8275 or 8275-R, 
as appropriate. In addition, the statutory or regulatory provision or 
ruling in question must be adequately identified on the Form 8275 or 
8275-R, as appropriate. The provisions of Sec. 1.6662-4(f)(2), which 
permit disclosure in accordance with an annual revenue procedure for 
purposes of the substantial understatement penalty, do not apply for 
purposes of this section.
    (d) Special rules in the case of carrybacks and carryovers--(1) In 
general. The penalty for negligence or disregard of rules or regulations 
applies to any portion of an underpayment for a year to which a loss, 
deduction or credit is carried, which portion is attributable to 
negligence or disregard of rules or regulations in the year in which the 
carryback or carryover of the loss, deduction or credit arises (the 
``loss or credit year'').
    (2) Transition rule for carrybacks to pre-1990 years. A 20 percent 
penalty under section 6662(b)(1) is imposed on any portion of an 
underpayment for a carryback year, the return for which is due (without 
regard to extensions) before January 1, 1990, if--
    (i) That portion is attributable to negligence or disregard of rules 
or regulations in a loss or credit year; and
    (ii) The return for the loss or credit year is due (without regard 
to extensions) after December 31, 1989.
    (3) Example. The following example illustrates the provisions of 
paragraph (d) of this section. This example does not take into account 
the reasonable cause exception under Sec. 1.6664-4.

    Example. Corporation M is a C corporation. In 1990, M had a loss of 
$200,000 before taking into account a deduction of $350,000 that M 
claimed as an expense in careless disregard of the capitalization 
requirements of section 263 of the Code. M failed to make adequate 
disclosure of the item for 1990. M reported a $550,000 loss for 1990 and 
carried back the loss to 1987 and 1988. M had reported taxable income of 
$400,000 for 1987 and $200,000 for 1988, before application of the 
carryback. The carryback eliminated all of M's taxable income for 1987 
and $150,000 of taxable income for 1988. After disallowance of the 
$350,000 expense deduction and allowance of a $35,000 depreciation 
deduction with respect to the capitalized amount, the correct loss for 
1990 was determined to be $235,000. Because there is no underpayment for 
1990, the penalty for negligence or disregard of rules or regulations 
does not apply for 1990. However, as a result of the 1990 adjustments, 
the loss carried back to 1987 is reduced from $550,000 to $235,000. 
After application of the $235,000 carryback, M has taxable income of 
$165,000 for 1987 and $200,000 for 1988. This adjustment

[[Page 612]]

results in underpayments for 1987 and 1988 that are attributable to the 
disregard of rules or regulations on the 1990 return. Therefore, the 20 
percent penalty rate applies to the 1987 and 1988 underpayments 
attributable to the disallowed carryback.

[T.D. 8381, 56 FR 67498, Dec. 31, 1991, as amended by T.D. 8617, 60 FR 
45664, Sept. 1, 1995; T.D. 8790, 63 FR 66434, Dec. 2, 1998; T.D. 9109, 
68 FR 75127, Dec. 30, 2003]



Sec. 1.6662-4  Substantial understatement of income tax.

    (a) In general. If any portion of an underpayment, as defined in 
section 6664(a) and Sec. 1.6664-2, of any income tax imposed under 
subtitle A of the Code that is required to be shown on a return is 
attributable to a substantial understatement of such income tax, there 
is added to the tax an amount equal to 20 percent of such portion. 
Except in the case of any item attributable to a tax shelter (as defined 
in paragraph (g)(2) of this section), an understatement is reduced by 
the portion of the understatement that is attributable to the tax 
treatment of an item for which there is substantial authority, or with 
respect to which there is adequate disclosure. General rules for 
determining the amount of an understatement are set forth in paragraph 
(b) of this section and more specific rules in the case of carrybacks 
and carryovers are set forth in paragraph (c) of this section. The rules 
for determining when substantial authority exists are set forth in Sec. 
1.6662-4(d). The rules for determining when there is adequate disclosure 
are set forth in Sec. 1.6662-4 (e) and (f). This penalty does not apply 
to the extent that the reasonable cause and good faith exception to this 
penalty set forth in Sec. 1.6664-4 applies.
    (b) Definitions and computational rules--(1) Substantial. An 
understatement (as defined in paragraph (b)(2) of this section) is 
``substantial'' if it exceeds the greater of--
    (i) 10 percent of the tax required to be shown on the return for the 
taxable year (as defined in paragraph (b)(3) of this section); or
    (ii) $5,000 ($10,000 in the case of a corporation other than an S 
corporation (as defined in section 1361(a)(1)) or a personal holding 
company (as defined in section 542)).
    (2) Understatement. Except as provided in paragraph (c)(2) of this 
section (relating to special rules for carrybacks), the term 
``understatement'' means the excess of--
    (i) The amount of the tax required to be shown on the return for the 
taxable year (as defined in paragraph (b)(3) of this section), over
    (ii) The amount of the tax imposed which is shown on the return for 
the taxable year (as defined in paragraph (b)(4) of this section), 
reduced by any rebate (as defined in paragraph (b)(5) of this section).
    The definition of understatement also may be expressed as--


Understatement = X - (Y - Z)

where X = the amount of the tax required to be shown on the return; Y = 
          the amount of the tax imposed which is shown on the return; 
          and Z = any rebate.

    (3) Amount of the tax required to be shown on the return. The 
``amount of the tax required to be shown on the return'' for the taxable 
year has the same meaning as the ``amount of income tax imposed'' as 
defined in Sec. 1.6664-2(b).
    (4) Amount of the tax imposed which is shown on the return. The 
``amount of the tax imposed which is shown on the return'' for the 
taxable year has the same meaning as the ``amount shown as the tax by 
the taxpayer on his return,'' as defined in Sec. 1.6664-2(c), except 
that--
    (i) There is no reduction for the excess of the amount described in 
Sec. 1.6664-2(c)(1)(i) over the amount described in Sec. 1.6664-
2(c)(1)(ii), and
    (ii) The tax liability shown by the taxpayer on his return is 
recomputed as if the following items had been reported properly:
    (A) Items (other than tax shelter items as defined in Sec. 1.6662-
4(g)(3)) for which there is substantial authority for the treatment 
claimed (as provided in Sec. 1.6662-4(d)).
    (B) Items (other than tax shelter items as defined in Sec. 1.6662-
4(g)(3)) with respect to which there is adequate disclosure (as provided 
in Sec. 1.6662-4 (e) and (f)).
    (C) Tax shelter items (as defined in Sec. 1.6662-4(g)(3)) for which 
there is substantial authority for the treatment

[[Page 613]]

claimed (as provided in Sec. 1.6662-4(d)), and with respect to which 
the taxpayer reasonably believed that the tax treatment of the items was 
more likely than not the proper tax treatment (as provided in Sec. 
1.6662-4(g)(4)).
    (5) Rebate. The term rebate has the meaning set forth in Sec. 
1.6664-2(e), except that--
    (i) ``Amounts not so shown previously assessed (or collected without 
assessment)'' includes only amounts not so shown previously assessed (or 
collected without assessment) as a deficiency, and
    (ii) The amount of the rebate is determined as if any items to which 
the rebate is attributable that are described in paragraph (b)(4) of 
this section had received the proper tax treatment.
    (6) Examples. The following examples illustrate the provisions of 
paragraph (b) of this section. These examples do not take into account 
the reasonable cause exception under Sec. 1.6664-4:

    Example 1. In 1990, Individual A, a calendar year taxpayer, files a 
return for 1989, which shows taxable income of $18,200 and tax liability 
of $2,734. Subsequent adjustments on audit for 1989 increase taxable 
income to $51,500 and tax liability to $12,339. There was substantial 
authority for an item resulting in an adjustment that increases taxable 
income by $5,300. The item is not a tax shelter item. In computing the 
amount of the understatement, the amount of tax shown on A's return is 
determined as if the item for which there was substantial authority had 
been given the proper tax treatment. Thus, the amount of tax that is 
treated as shown on A's return is $4,176, i.e., the tax on $23,500 
($18,200 taxable income actually shown on A's return plus $5,300, the 
amount of the adjustment for which there was substantial authority). The 
amount of the understatement is $8,163, i.e., $12,339 (the amount of tax 
required to be shown) less $4,176 (the amount of tax treated as shown on 
A's return after adjustment for the item for which there was substantial 
authority). Because the $8,163 understatement exceeds the greater of 10 
percent of the tax required to be shown on the return for the year, 
i.e., $1,234 ($12,339 x .10) or $5,000, A has a substantial 
understatement of income tax for the year.
    Example 2. Individual B, a calendar year taxpayer, files a return 
for 1990 that fails to include income reported on an information return, 
Form 1099, that was furnished to B. The Service detects this omission 
through its document matching program and assesses $3,000 in unreported 
tax liability. B's return is later examined and as a result of the 
examination the Service makes an adjustment to B's return of $4,000 in 
additional tax liability. Assuming there was neither substantial 
authority nor adequate disclosure with respect to the items adjusted, 
there is an understatement of $7,000 with respect to B's return. There 
is also an underpayment of $7,000. (See Sec. 1.6664-2.) The amount of 
the understatement is not reduced by imposition of a negligence penalty 
on the $3,000 portion of the underpayment that is attributable to the 
unreported income. However, if the Services does impose the negligence 
penalty on this $3,000 portion, the Service may only impose the 
substantial understatement penalty on the remaining $4,000 portion of 
the underpayment. (See Sec. 1.6662-2(c), which prohibits stacking of 
accuracy-related penalty components.)

    (c) Special rules in the case of carrybacks and carryovers--(1) In 
general. The penalty for a substantial understatement of income tax 
applies to any portion of an underpayment for a year to which a loss, 
deduction or credit is carried that is attributable to a ``tainted 
item'' for the year in which the carryback or carryover of the loss, 
deduction or credit arises (the ``loss or credit year''). The 
determination of whether an understatement is substantial for a 
carryback or carryover year is made with respect to the return of the 
carryback or carryover year. ``Tainted items'' are taken into account 
with items arising in a carryback or carryover year to determine whether 
the understatement is substantial for that year.
    (2) Understatements for carryback years not reduced by amount of 
carrybacks. The amount of an understatement for a carryback year is not 
reduced on account of a carryback of a loss, deduction or credit to that 
year.
    (3) Tainted items defined--(i) In general. Except in the case of a 
tax shelter item (as defined in paragraph (g)(3) of this section), a 
``tainted item'' is any item for which there is neither substantial 
authority nor adequate disclosure with respect to the loss or credit 
year.
    (ii) Tax shelter items. In the case of a tax shelter item (as 
defined in paragraph (g)(3) of this section), a ``tainted item'' is any 
item for which there is not, with respect to the loss or credit year, 
both substantial authority and a

[[Page 614]]

reasonable belief that the tax treatment is more likely than not the 
proper treatment.
    (4) Transition rule for carrybacks to pre-1990 years. A 20 percent 
penalty under section 6662(b)(2) is imposed on any portion of an 
underpayment for a carryback year, the return for which is due (without 
regard to extensions) before January 1, 1990, if--
    (i) That portion is attributable to one or more ``tainted items'' 
(as defined in paragraph (c)(3) of this section) arising in a loss or 
credit year; and
    (ii) The return for the loss or credit year is due (without regard 
to extensions) after December 31, 1989.


The preceding sentence applies only if the understatement in the 
carryback year is substantial. See Example 2 in paragraph (c)(5) of this 
section.
    (5) Examples. The following examples illustrate the rules of 
paragraph (c) of this section regarding carrybacks and carryovers. These 
examples do not take into account the reasonable cause exception under 
Sec. 1.6664-4.

    Example 1. (i) Corporation N, a calendar year taxpayer, is a C 
corporation. N was formed on January 1, 1987, and timely filed the 
following income tax returns:

                                                  [In dollars]
----------------------------------------------------------------------------------------------------------------
                                                                                      Tax Year
                                                                  ----------------------------------------------
                                                                                                          1990
                                                                      1987       1988         1989      (before
                                                                                                         NOLCO)
----------------------------------------------------------------------------------------------------------------
Taxable income...................................................     30,000     100,000    (300,000)     50,000
Tax liability....................................................      4,575      22,250  ...........      7,500
----------------------------------------------------------------------------------------------------------------

    (ii) During 1990, N files Form 1139, Corporation Application for 
Tentative Refund, to carry back the NOL generated in 1989 (NOLCB). N 
received refunds of $4,575 for 1987 and $22,250 for 1988.
    (iii) For tax year 1990, N carries over $50,000 of the 1989 loss to 
offset $50,000 of income earned in 1990 and reduce taxable income to 
zero. N would have reported $7,500 of tax liability for 1990 if it were 
not for use of the net operating loss carryover (NOLCO). N assumes there 
is a remaining NOLCO of $120,000 to be applied for tax year 1991.
    (iv) In June 1991, the Service completes its examination of the 1989 
loss year return and makes the following adjustment:

Taxable income per 1989 return............................    ($300,000)
Adjustment: Unreported income.............................      310,000
                                                           -------------
Corrected taxable income..................................      $10,000
Corrected tax liability...................................       $1,500
 

    (v) There was not substantial authority for N's treatment of the 
items comprising the 1989 adjustment and N did not make adequate 
disclosure.
    (vi) As a result of the adjustment to the 1989 return, N had an 
understatement of $4,575 for tax year 1987; an understatement of $22,250 
for tax year 1988; an understatement of $1,500 for tax year 1989; and an 
understatement of $7,500 for tax year 1990. Only the $22,250 
understatement for 1988 is a substantial understatement, i.e., it 
exceeds the greater of (a) $2,225 (10 percent of the tax required to be 
shown on the return for the taxable year (.10 x $22,250)) or (b) 
$10,000. The underpayment for 1988 is subject to a penalty rate of 20 
percent.
    Example 2. The facts are the same as in Example 1, except that in 
addition to examining the 1989 return, the Service also examines the 
1987 return and makes an adjustment that results in an understatement. 
(This adjustment is unrelated to the adjustment on the 1987 return for 
the disallowance of the NOLCB from 1989.) If the understatement 
resulting from the adjustment to the 1987 return, when combined with the 
understatement resulting from the disallowance of the NOLCB from 1989, 
exceeds the greater of (a) 10 percent of the tax required to be shown on 
the return for 1987 or (b) $10,000, the underpayment for 1987 will also 
be subject to a substantial understatement penalty. The portion of the 
underpayment attributable to the adjustment unrelated to the 
disallowance of the NOLCB will be subject to a penalty rate of 25 
percent under former section 6661. The portion of the underpayment 
attributable to the disallowance of the NOLCB will be subject to a 
penalty rate of 20 percent under section 6662.
    Example 3. Individual P, a calendar year single taxpayer, files his 
1990 return reporting taxable income of $10,000 and a tax liability of 
$1,504. An examination of the 1990 return results in an adjustment for 
unreported income of $25,000. There was not substantial authority for 
P's failure to report the income, and P did not make adequate disclosure 
with respect to the unreported income. P's correct tax liability for 
1990 is determined to be $7,279, resulting in an understatement of 
$5,775 (the difference between the amount of tax required to be shown on 
the return ($7,279) and the tax shown on the return ($1,504)). Because 
the understatement exceeds the greater of (a) $728 (10 percent of the 
tax required to be shown on the return (.10 x $7,279)) or (b) $5,000, 
the understatement is substantial. Subsequently, P files his 1993 return 
showing a net operating loss. The loss is carried back to his 1990 
return, reducing his taxable income for 1990 to zero. However, the 
amount of the understatement for 1990 is not reduced on account of the 
NOLCB

[[Page 615]]

to that year. P is subject to the 20 percent penalty rate under section 
6662 on the underpayment attributable to the substantial understatement 
for 1990, notwithstanding that the tax required to be shown on the 
return for that year, after application of the NOLCB, is zero.

    (d) Substantial authority--(1) Effect of having substantial 
authority. If there is substantial authority for the tax treatment of an 
item, the item is treated as if it were shown properly on the return for 
the taxable year in computing the amount of the tax shown on the return. 
Thus, for purposes of section 6662(d), the tax attributable to the item 
is not included in the understatement for that year. (For special rules 
relating to tax shelter items see Sec. 1.6662-4(g).)
    (2) Substantial authority standard. The substantial authority 
standard is an objective standard involving an analysis of the law and 
application of the law to relevant facts. The substantial authority 
standard is less stringent than the more likely than not standard (the 
standard that is met when there is a greater than 50-percent likelihood 
of the position being upheld), but more stringent than the reasonable 
basis standard as defined in Sec. 1.6662-3(b)(3). The possibility that 
a return will not be audited or, if audited, that an item will not be 
raised on audit, is not relevant in determining whether the substantial 
authority standard (or the reasonable basis standard) is satisfied.
    (3) Determination of whether substantial authority is present--(i) 
Evaluation of authorities. There is substantial authority for the tax 
treatment of an item only if the weight of the authorities supporting 
the treatment is substantial in relation to the weight of authorities 
supporting contrary treatment. All authorities relevant to the tax 
treatment of an item, including the authorities contrary to the 
treatment, are taken into account in determining whether substantial 
authority exists. The weight of authorities is determined in light of 
the pertinent facts and circumstances in the manner prescribed by 
paragraph (d)(3)(ii) of this section. There may be substantial authority 
for more than one position with respect to the same item. Because the 
substantial authority standard is an objective standard, the taxpayer's 
belief that there is substantial authority for the tax treatment of an 
item is not relevant in determining whether there is substantial 
authority for that treatment.
    (ii) Nature of analysis. The weight accorded an authority depends on 
its relevance and persuasiveness, and the type of document providing the 
authority. For example, a case or revenue ruling having some facts in 
common with the tax treatment at issue is not particularly relevant if 
the authority is materially distinguishable on its facts, or is 
otherwise inapplicable to the tax treatment at issue. An authority that 
merely states a conclusion ordinarily is less persuasive than one that 
reaches its conclusion by cogently relating the applicable law to 
pertinent facts. The weight of an authority from which information has 
been deleted, such as a private letter ruling, is diminished to the 
extent that the deleted information may have affected the authority's 
conclusions. The type of document also must be considered. For example, 
a revenue ruling is accorded greater weight than a private letter ruling 
addressing the same issue. An older private letter ruling, technical 
advice memorandum, general counsel memorandum or action on decision 
generally must be accorded less weight than a more recent one. Any 
document described in the preceding sentence that is more than 10 years 
old generally is accorded very little weight. However, the 
persuasiveness and relevance of a document, viewed in light of 
subsequent developments, should be taken into account along with the age 
of the document. There may be substantial authority for the tax 
treatment of an item despite the absence of certain types of authority. 
Thus, a taxpayer may have substantial authority for a position that is 
supported only by a well-reasoned construction of the applicable 
statutory provision.
    (iii) Types of authority. Except in cases described in paragraph 
(d)(3)(iv) of this section concerning written determinations, only the 
following are authority for purposes of determining whether there is 
substantial authority for the tax treatment of an item: Applicable 
provisions of the Internal Revenue Code and other statutory provisions; 
proposed, temporary and final

[[Page 616]]

regulations construing such statutes; revenue rulings and revenue 
procedures; tax treaties and regulations thereunder, and Treasury 
Department and other official explanations of such treaties; court 
cases; congressional intent as reflected in committee reports, joint 
explanatory statements of managers included in conference committee 
reports, and floor statements made prior to enactment by one of a bill's 
managers; General Explanations of tax legislation prepared by the Joint 
Committee on Taxation (the Blue Book); private letter rulings and 
technical advice memoranda issued after October 31, 1976; actions on 
decisions and general counsel memoranda issued after March 12, 1981 (as 
well as general counsel memoranda published in pre-1955 volumes of the 
Cumulative Bulletin); Internal Revenue Service information or press 
releases; and notices, announcements and other administrative 
pronouncements published by the Service in the Internal Revenue 
Bulletin. Conclusions reached in treatises, legal periodicals, legal 
opinions or opinions rendered by tax professionals are not authority. 
The authorities underlying such expressions of opinion where applicable 
to the facts of a particular case, however, may give rise to substantial 
authority for the tax treatment of an item. Notwithstanding the 
preceding list of authorities, an authority does not continue to be an 
authority to the extent it is overruled or modified, implicitly or 
explicitly, by a body with the power to overrule or modify the earlier 
authority. In the case of court decisions, for example, a district court 
opinion on an issue is not an authority if overruled or reversed by the 
United States Court of Appeals for such district. However, a Tax Court 
opinion is not considered to be overruled or modified by a court of 
appeals to which a taxpayer does not have a right of appeal, unless the 
Tax Court adopts the holding of the court of appeals. Similarly, a 
private letter ruling is not authority if revoked or if inconsistent 
with a subsequent proposed regulation, revenue ruling or other 
administrative pronouncement published in the Internal Revenue Bulletin.
    (iv) Special rules--(A) Written determinations. There is substantial 
authority for the tax treatment of an item by a taxpayer if the 
treatment is supported by the conclusion of a ruling or a determination 
letter (as defined in Sec. 301.6110-2 (d) and (e)) issued to the 
taxpayer, by the conclusion of a technical advice memorandum in which 
the taxpayer is named, or by an affirmative statement in a revenue 
agent's report with respect to a prior taxable year of the taxpayer 
(``written determinations''). The preceding sentence does not apply, 
however, if--
    (1) There was a misstatement or omission of a material fact or the 
facts that subsequently develop are materially different from the facts 
on which the written determination was based, or
    (2) The written determination was modified or revoked after the date 
of issuance by--
    (i) A notice to the taxpayer to whom the written determination was 
issued,
    (ii) The enactment of legislation or ratification of a tax treaty,
    (iii) A decision of the United States Supreme Court,
    (iv) The issuance of temporary or final regulations, or
    (v) The issuance of a revenue ruling, revenue procedure, or other 
statement published in the Internal Revenue Bulletin.


Except in the case of a written determination that is modified or 
revoked on account of Sec. 1.6662-4(d)(3)(iv)(A)(1), a written 
determination that is modified or revoked as described in Sec. 1.6662-
4(d)(3)(iv)(A)(2) ceases to be authority on the date, and to the extent, 
it is so modified or revoked. See section 6404(f) for rules which 
require the Secretary to abate a penalty that is attributable to 
erroneous written advice furnished to a taxpayer by an officer or 
employee of the Internal Revenue Service.
    (B) Taxpayer's jurisdiction. The applicability of court cases to the 
taxpayer by reason of the taxpayer's residence in a particular 
jurisdiction is not taken into account in determining whether there is 
substantial authority for the tax treatment of an item. Notwithstanding 
the preceding sentence, there is substantial authority for the tax 
treatment of an item if the treatment is supported by controlling 
precedent of a United States Court of Appeals to

[[Page 617]]

which the taxpayer has a right of appeal with respect to the item.
    (C) When substantial authority determined. There is substantial 
authority for the tax treatment of an item if there is substantial 
authority at the time the return containing the item is filed or there 
was substantial authority on the last day of the taxable year to which 
the return relates.
    (v) Substantial authority for tax returns due before January 1, 
1990. There is substantial authority for the tax treatment of an item on 
a return that is due (without regard to extensions) after December 31, 
1982 and before January 1, 1990, if there is substantial authority for 
such treatment under either the provisions of paragraph (d)(3)(iii) of 
this section (which set forth an expanded list of authorities) or of 
Sec. 1.6661-3(b)(2) (which set forth a narrower list of authorities). 
Under either list of authorities, authorities both for and against the 
position must be taken into account.
    (e) Disclosure of certain information--(1) Effect of adequate 
disclosure. Items for which there is adequate disclosure as provided in 
this paragraph (e) and in paragraph (f) of this section are treated as 
if such items were shown properly on the return for the taxable year in 
computing the amount of the tax shown on the return. Thus, for purposes 
of section 6662(d), the tax attributable to such items is not included 
in the understatement for that year.
    (2) Circumstances where disclosure will not have an effect. The 
rules of paragraph (e)(1) of this section do not apply where the item or 
position on the return--
    (i) Does not have a reasonable basis (as defined in Sec. 1.6662-
3(b)(3));
    (ii) Is attributable to a tax shelter (as defined in section 
6662(d)(2)(C)(iii) and paragraph (g)(2) of this section); or
    (iii) Is not properly substantiated, or the taxpayer failed to keep 
adequate books and records with respect to the item or position.
    (3) Restriction for corporations. For purposes of paragraph 
(e)(2)(i) of this section, a corporation will not be treated as having a 
reasonable basis for its tax treatment of an item attributable to a 
multi-party financing transaction entered into after August 5, 1997, if 
the treatment does not clearly reflect the income of the corporation.
    (f) Method of making adequate disclosure--(1) Disclosure statement. 
Disclosure is adequate with respect to an item (or group of similar 
items, such as amounts paid or incurred for supplies by a taxpayer 
engaged in business) or a position on a return if the disclosure is made 
on a properly completed form attached to the return or to a qualified 
amended return (as defined in Sec. 1.6664-2(c)(3)) for the taxable 
year. In the case of an item or position other than one that is contrary 
to a regulation, disclosure must be made on Form 8275 (Disclosure 
Statement); in the case of a position contrary to a regulation, 
disclosure must be made on Form 8275-R (Regulation Disclosure 
Statement).
    (2) Disclosure on return. The Commissioner may by annual revenue 
procedure (or otherwise) prescribe the circumstances under which 
disclosure of information on a return (or qualified amended return) in 
accordance with applicable forms and instructions is adequate. If the 
revenue procedure does not include an item, disclosure is adequate with 
respect to that item only if made on a properly completed Form 8275 or 
8275-R, as appropriate, attached to the return for the year or to a 
qualified amended return.
    (3) Recurring item. Disclosure with respect to a recurring item, 
such as the basis of recovery property, must be made for each taxable 
year in which the item is taken into account.
    (4) Carrybacks and carryovers. Disclosure is adequate with respect 
to an item which is included in any loss, deduction or credit that is 
carried to another year only if made in connection with the return (or 
qualified amended return) for the taxable year in which the carryback or 
carryover arises (the ``loss or credit year''). Disclosure is not also 
required in connection with the return for the taxable year in which the 
carryback or carryover is taken into account.
    (5) Pass-through entities. Disclosure in the case of items 
attributable to a pass-through entity (pass-through items) is made with 
respect to the return of the entity, except as provided in this 
paragraph (f)(5). Thus, disclosure in the case of pass-through items

[[Page 618]]

must be made on a Form 8275 or 8275-R, as appropriate, attached to the 
return (or qualified amended return) of the entity, or on the entity's 
return in accordance with the revenue procedure described in paragraph 
(f)(2) of this section, if applicable. A taxpayer (i.e., partner, 
shareholder, beneficiary, or holder of a residual interest in a REMIC) 
also may make adequate disclosure with respect to a pass-through item, 
however, if the taxpayer files a properly completed Form 8275 or 8275-R, 
as appropriate, in duplicate, one copy attached to the taxpayer's return 
(or qualified amended return) and the other copy filed with the Internal 
Revenue Service Center with which the return of the entity is required 
to be filed. Each Form 8275 or 8275-R, as appropriate, filed by the 
taxpayer should relate to the pass-through items of only one entity. For 
purposes of this paragraph (f)(5), a pass-through entity is a 
partnership, S corporation (as defined in section 1361(a)(1)), estate, 
trust, regulated investment company (as defined in section 851(a)), real 
estate investment trust (as defined in section 856(a)), or real estate 
mortgage investment conduit (``REMIC'') (as defined in section 860D(a)).
    (g) Items relating to tax shelters--(1) In general--(i) Noncorporate 
taxpayers. Tax shelter items (as defined in paragraph (g)(3) of this 
section) of a taxpayer other than a corporation are treated for purposes 
of this section as if such items were shown properly on the return for a 
taxable year in computing the amount of tax shown on the return, and 
thus the tax attributable to such items is not included in the 
understatement for the year, if--
    (A) There is substantial authority (as provided in paragraph (d) of 
this section) for the tax treatment of that item; and
    (B) The taxpayer reasonably believed at the time the return was 
filed that the tax treatment of that item was more likely than not the 
proper treatment.
    (ii) Corporate taxpayers--(A) In general. Except as provided in 
paragraph (g)(1)(ii)(B) of this section, all tax shelter items (as 
defined in paragraph (g)(3) of this section) of a corporation are taken 
into account in computing the amount of any understatement.
    (B) Special rule for transactions occurring prior to December 9, 
1994. The tax shelter items of a corporation arising in connection with 
transactions occurring prior to December 9, 1994 are treated for 
purposes of this section as if such items were shown properly on the 
return if the requirements of paragraph (g)(1)(i) are satisfied with 
respect to such items.
    (iii) Disclosure irrelevant. Disclosure made with respect to a tax 
shelter item of either a corporate or noncorporate taxpayer does not 
affect the amount of an understatement.
    (iv) Cross-reference. See Sec. 1.6664-4(f) for certain rules 
regarding the availability of the reasonable cause and good faith 
exception to the substantial understatement penalty with respect to tax 
shelter items of corporations.
    (2) Tax shelter--(i) In general. For purposes of section 6662(d), 
the term ``tax shelter'' means--
    (A) A partnership or other entity (such as a corporation or trust),
    (B) An investment plan or arrangement, or
    (C) Any other plan or arrangement,


if the principal purpose of the entity, plan or arrangement, based on 
objective evidence, is to avoid or evade Federal income tax. The 
principal purpose of an entity, plan or arrangement is to avoid or evade 
Federal income tax if that purpose exceeds any other purpose. Typical of 
tax shelters are transactions structured with little or no motive for 
the realization of economic gain, and transactions that utilize the 
mismatching of income and deductions, overvalued assets or assets with 
values subject to substantial uncertainty, certain nonrecourse 
financing, financing techniques that do not conform to standard 
commercial business practices, or the mischaracterization of the 
substance of the transaction. The existence of economic substance does 
not of itself establish that a transaction is not a tax shelter if the 
transaction includes other characteristics that indicate it is a tax 
shelter.
    (ii) Principal purpose. The principal purpose of an entity, plan or 
arrangement is not to avoid or evade Federal

[[Page 619]]

income tax if the entity, plan or arrangement has as its purpose the 
claiming of exclusions from income, accelerated deductions or other tax 
benefits in a manner consistent with the statute and Congressional 
purpose. For example, an entity, plan or arrangement does not have as 
its principal purpose the avoidance or evasion of Federal income tax 
solely as a result of the following uses of tax benefits provided by the 
Internal Revenue Code: the purchasing or holding of an obligation 
bearing interest that is excluded from gross income under section 103; 
taking an accelerated depreciation allowance under section 168; taking 
the percentage depletion allowance under section 613 or section 613A; 
deducting intangible drilling and development costs as expenses under 
section 263(c); establishing a qualified retirement plan under sections 
401-409; claiming the possession tax credit under section 936; or 
claiming tax benefits available by reason of an election under 992 to be 
taxed as a domestic international sales corporation (``DISC''), under 
section 927(f)(1) to be taxed as a foreign sales corporation (``FSC''), 
or under section 1362 to be taxed as an S corporation.
    (3) Tax shelter item. An item of income, gain, loss, deduction or 
credit is a ``tax shelter item'' if the item is directly or indirectly 
attributable to the principal purpose of a tax shelter to avoid or evade 
Federal income tax. Thus, if a partnership is established for the 
principal purpose of avoiding or evading Federal income tax by acquiring 
and overstating the basis of property for purposes of claiming 
accelerated depreciation, the depreciation with respect to the property 
is a tax shelter item. However, a deduction claimed in connection with a 
separate transaction carried on by the same partnership is not a tax 
shelter item if the transaction does not constitute a plan or 
arrangement the principal purpose of which is to avoid or evade tax.
    (4) Reasonable belief--(i) In general. For purposes of section 
6662(d) and paragraph (g)(1)(i)(B) of this section (pertaining to tax 
shelter items of noncorporate taxpayers), a taxpayer is considered 
reasonably to believe that the tax treatment of an item is more likely 
than not the proper tax treatment if (without taking into account the 
possibility that a return will not be audited, that an issue will not be 
raised on audit, or that an issue will be settled)--
    (A) The taxpayer analyzes the pertinent facts and authorities in the 
manner described in paragraph (d)(3)(ii) of this section, and in 
reliance upon that analysis, reasonably concludes in good faith that 
there is a greater than 50-percent likelihood that the tax treatment of 
the item will be upheld if challenged by the Internal Revenue Service; 
or
    (B) The taxpayer reasonably relies in good faith on the opinion of a 
professional tax advisor, if the opinion is based on the tax advisor's 
analysis of the pertinent facts and authorities in the manner described 
in paragraph (d)(3)(ii) of this section and unambiguously states that 
the tax advisor concludes that there is a greater than 50-percent 
likelihood that the tax treatment of the item will be upheld if 
challenged by the Internal Revenue Service.
    (ii) Facts and circumstances; reliance on professional tax advisor. 
All facts and circumstances must be taken into account in determining 
whether a taxpayer satisfies the requirements of paragraph (g)(4)(i) of 
this section. However, in no event will a taxpayer be considered to have 
reasonably relied in good faith on the opinion of a professional tax 
advisor for purposes of paragraph (g)(4)(i)(B) of this section unless 
the requirements of Sec. 1.6664-4(c)(1) are met. The fact that the 
requirements of Sec. 1.6664-4(c)(1) are satisfied will not necessarily 
establish that the taxpayer reasonably relied on the opinion in good 
faith. For example, reliance may not be reasonable or in good faith if 
the taxpayer knew, or should have known, that the advisor lacked 
knowledge in the relevant aspects of Federal tax law.
    (5) Pass-through entities. In the case of tax shelter items 
attributable to a pass-through entity, the actions described in 
paragraphs (g)(4)(i)(A) and (B) of this section, if taken by the entity, 
are deemed to have been taken by

[[Page 620]]

the taxpayer and are considered in determining whether the taxpayer 
reasonably believed that the tax treatment of an item was more likely 
than not the proper tax treatment.

[T.D. 8381, 56 FR 67499, Dec. 31, 1991; T.D. 8381, 57 FR 6165, Feb. 20, 
1992, as amended by T.D. 8617, 60 FR 45665, Sept. 1, 1995; T.D. 8790, 63 
FR 66435, Dec. 2, 1998; T.D. 9109, 68 FR 75128, Dec. 30, 2003]



Sec. 1.6662-5  Substantial and gross valuation misstatements under
chapter 1.

    (a) In general. If any portion of an underpayment, as defined in 
section 6664(a) and Sec. 1.6664-2, of any income tax imposed under 
chapter 1 of subtitle A of the Code that is required to be shown on a 
return is attributable to a substantial valuation misstatement under 
chapter 1 (``substantial valuation misstatement''), there is added to 
the tax an amount equal to 20 percent of such portion. Section 6662(h) 
increases the penalty to 40 percent in the case of a gross valuation 
misstatement under chapter 1 (``gross valuation misstatement''). No 
penalty under section 6662(b)(3) is imposed, however, on a portion of an 
underpayment that is attributable to a substantial or gross valuation 
misstatement unless the aggregate of all portions of the underpayment 
attributable to substantial or gross valuation misstatements exceeds the 
applicable dollar limitation ($5,000 or $10,000), as provided in section 
6662(e)(2) and paragraphs (b) and (f)(2) of this section. This penalty 
also does not apply to the extent that the reasonable cause and good 
faith exception to this penalty set forth in Sec. 1.6664-4 applies. 
There is no disclosure exception to this penalty.
    (b) Dollar limitation. No penalty may be imposed under section 
6662(b)(3) for a taxable year unless the portion of the underpayment for 
that year that is attributable to substantial or gross valuation 
misstatements exceeds $5,000 ($10,000 in the case of a corporation other 
than an S corporation (as defined in section 1361(a)(1)) or a personal 
holding company (as defined in section 542)). This limitation is applied 
separately to each taxable year for which there is a substantial or 
gross valuation misstatement.
    (c) Special rules in the case of carrybacks and carryovers--(1) In 
general. The penalty for a substantial or gross valuation misstatement 
applies to any portion of an underpayment for a year to which a loss, 
deduction or credit is carried that is attributable to a substantial or 
gross valuation misstatement for the year in which the carryback or 
carryover of the loss, deduction or credit arises (the ``loss or credit 
year''), provided that the applicable dollar limitation set forth in 
section 6662(e)(2) is satisfied in the carryback or carryover year.
    (2) Transition rule for carrybacks to pre-1990 years. The penalty 
under section 6662(b)(3) is imposed on any portion of an underpayment 
for a carryback year, the return for which is due (without regard to 
extensions) before January 1, 1990, if--
    (i) That portion is attributable to a substantial or gross valuation 
misstatement for a loss or credit year; and
    (ii) The return for the loss or credit year is due (without regard 
to extensions) after December 31, 1989.


The preceding sentence applies only if the underpayment for the 
carryback year exceeds the applicable dollar limitation ($5,000, or 
$10,000 for most corporations). See Example 3 in paragraph (d) of this 
section.
    (d) Examples. The following examples illustrate the provisions of 
paragraphs (b) and (c) of this section. These examples do not take into 
account the reasonable cause exception under Sec. 1.6664-4.

    Example 1. Corporation Q is a C corporation. In 1990, the first year 
of its existence, Q had taxable income of $200,000 without considering 
depreciation of a particular asset. On its calendar year 1990 return, Q 
overstated its basis in this asset by an amount that caused a 
substantial valuation misstatement. The overstated basis resulted in 
depreciation claimed of $350,000, which was $250,000 more than the 
$100,000 allowable. Thus, on its 1990 return, Q showed a loss of 
$150,000. In 1991, Q had taxable income of $450,000 before application 
of the loss carryover, and Q claimed a carryover loss deduction under 
section 172 of $150,000, resulting in taxable income of $300,000 for 
1991. Upon audit of the 1990 return, the basis of the asset was 
corrected, resulting in an adjustment of

[[Page 621]]

$250,000. For 1990, the underpayment resulting from the $100,000 taxable 
income (-$150,000 + $250,000) is attributable to the valuation 
misstatement. Assuming the underpayment resulting from the $100,000 
taxable income exceeds the $10,000 limitation, the penalty will be 
imposed in 1990. For 1991, the elimination of the loss carryover results 
in additional taxable income of $150,000. The underpayment for 1991 
resulting from that adjustment is also attributable to the substantial 
valuation misstatement on the 1990 return. Assuming the underpayment 
resulting from the $150,000 additional taxable income for 1991 exceeds 
the $10,000 limitation, the substantial valuation misstatement penalty 
also will be imposed for that year.
    Example 2. (i) Corporation T is a C corporation. In 1990, the first 
year of its existence, T had a loss of $3,000,000 without considering 
depreciation of its major asset. On its calendar year 1990 return, T 
overstated its basis in this asset in an amount that caused a 
substantial valuation misstatement. This overstatement resulted in 
depreciation claimed of $3,500,000, which was $2,500,000 more than the 
$1,000,000 allowable. Thus, on its 1990 return, T showed a loss of 
$6,500,000. In 1991, T had taxable income of $4,500,000 before 
application of the carryover loss, but claimed a carryover loss 
deduction under section 172 in the amount of $4,500,000, resulting in 
taxable income of zero for that year and leaving a $2,000,000 carryover 
available. Upon audit of the 1990 return, the basis of the asset was 
corrected, resulting in an adjustment of $2,500,000.
    (ii) For 1990, the underpayment is still zero (-$6,500,000 + 
$2,500,000=-$4,000,000). Thus, the penalty does not apply in 1990. The 
loss for 1990 is reduced to $4,000,000.
    (iii) For 1991, there is additional taxable income of $500,000 as a 
result of the reduction of the carryover loss ($4,500,000 reported 
income before carryover loss minus corrected carryover loss of 
$4,000,000 = $500,000). The underpayment for 1991 resulting from 
reduction of the carryover loss is attributable to the valuation 
misstatement on the 1990 return. Assuming the underpayment resulting 
from the $500,000 additional taxable income exceeds the $10,000 
limitation, the substantial valuation misstatement penalty will be 
imposed in 1991.
    Example 3. Corporation V is a C corporation. In 1990, V had a loss 
of $100,000 without considering depreciation of a particular asset which 
it had fully depreciated in earlier years. V had a depreciable basis in 
the asset of zero, but on its 1990 calendar year return erroneously 
claimed a basis in the asset of $1,250,000 and depreciation of $250,000. 
V reported a $350,000 loss for the year 1990, and carried back the loss 
to the 1987 and 1988 tax years. V had reported taxable income of 
$300,000 in 1987 and $200,000 in 1988, before application of the 
carryback. The $350,000 carryback eliminated all taxable income for 
1987, and $50,000 of the taxable income for 1988. After disallowance of 
the $250,000 depreciation deduction for 1990, V still had a loss of 
$100,000. Because there is no underpayment for 1990, no valuation 
misstatement penalty is imposed for 1990. However, as a result of the 
1990 depreciation adjustment, the carryback to 1987 is reduced from 
$350,000 to $100,000. After absorption of the $100,000 carryback, V has 
taxable income of $200,000 for 1987. This adjustment results in an 
underpayment for 1987 that is attributable to the valuation misstatement 
on the 1990 return. The valuation misstatement for 1990 is a gross 
valuation misstatement because the correct adjusted basis of the 
depreciated asset was zero. (See paragraph (e)(2) of this section.) 
Therefore, the 40 percent penalty rate applies to the 1987 underpayment 
attributable to the 1990 misstatement, provided that this underpayment 
exceeds $10,000. The adjustment also results in the elimination of any 
loss carryback to 1988 resulting in an increase in taxable income for 
1988 of $50,000. Assuming the underpayment resulting from this 
additional $50,000 of income exceeds $10,000, the gross valuation 
misstatement penalty is imposed on the underpayment for 1988.

    (e) Definitions--(1) Substantial valuation misstatement. There is a 
substantial valuation misstatement if the value or adjusted basis of any 
property claimed on a return of tax imposed under chapter 1 is 200 
percent or more of the correct amount.
    (2) Gross valuation misstatement. There is a gross valuation 
misstatement if the value or adjusted basis of any property claimed on a 
return of tax imposed under chapter 1 is 400 percent or more of the 
correct amount.
    (3) Property. For purposes of this section, the term ``property'' 
refers to both tangible and intangible property. Tangible property 
includes property such as land, buildings, fixtures and inventory. 
Intangible property includes property such as goodwill, covenants not to 
compete, leaseholds, patents, contract rights, debts and choses in 
action.
    (f) Multiple valuation misstatements on a return--(1) Determination 
of whether valuation misstatements are substantial or gross. The 
determination of whether there is a substantial or gross valuation 
misstatement on a return is made on a property-by-property basis. 
Assume, for example, that property A has a value of 60 but a taxpayer 
claims

[[Page 622]]

a value of 110, and that property B has a value of 40 but the taxpayer 
claims a value of 100. Because the claimed and correct values are 
compared on a property-by-property basis, there is a substantial 
valuation misstatement with respect to property B, but not with respect 
to property A, even though the claimed values (210) are 200 percent or 
more of the correct values (100) when compared on an aggregate basis.
    (2) Application of dollar limitation. For purposes of applying the 
dollar limitation set forth in section 6662(e)(2), the determination of 
the portion of an underpayment that is attributable to a substantial or 
gross valuation misstatement is made by aggregating all portions of the 
underpayment attributable to substantial or gross valuation 
misstatements. Assume, for example, that the value claimed for property 
C on a return is 250 percent of the correct value, and that the value 
claimed for property D on the return is 400 percent of the correct 
value. Because the portions of an underpayment that are attributable to 
a substantial or gross valuation misstatement on a return are aggregated 
in applying the dollar limitation, the dollar limitation is satisfied if 
the portion of the underpayment that is attributable to the misstatement 
of the value of property C, when aggregated with the portion of the 
underpayment that is attributable to the misstatement of the value of 
property D, exceeds $5,000 ($10,000 in the case of most corporations).
    (g) Property with a value or adjusted basis of zero. The value or 
adjusted basis claimed on a return of any property with a correct value 
or adjusted basis of zero is considered to be 400 percent or more of the 
correct amount. There is a gross valuation misstatement with respect to 
such property, therefore, and the applicable penalty rate is 40 percent.
    (h) Pass-through entities--(1) In general. The determination of 
whether there is a substantial or gross valuation misstatement in the 
case of a return of a pass-through entity (as defined in Sec. 1.6662-
4(f)(5)) is made at the entity level. However, the dollar limitation 
($5,000 or $10,000, as the case may be) is applied at the taxpayer level 
(i.e., with respect to the return of the shareholder, partner, 
beneficiary, or holder of a residual interest in a REMIC).
    (2) Example. The rules of paragraph (h)(1) of this section may be 
illustrated by the following example.

    Example. Partnership P has two partners, individuals A and B. P 
claims a $40,000 basis in a depreciable asset which, in fact, has a 
basis of $15,000. The determination that there is a substantial 
valuation misstatement is made solely with reference to P by comparing 
the $40,000 basis claimed by P with P's correct basis of $15,000. 
However, the determination of whether the $5,000 threshold for 
application of the penalty has been reached is made separately for each 
partner. With respect to partner A, the penalty will apply if the 
portion of A's underpayment attributable to the passthrough of the 
depreciation deduction, when aggregated with any other portions of A's 
underpayment also attributable to substantial or gross valuation 
misstatements, exceeds $5,000 (assuming there is not reasonable cause 
for the misstatements (see Sec. 1.6664-4(c)).

    (i) [Reserved]
    (j) Transactions between persons described in section 482 and net 
section 482 transfer price adjustments. [Reserved]
    (k) Returns affected. Except in the case of rules relating to 
transactions between persons described in section 482 and net sections 
482 transfer price adjustments, the provisions of section 6662(b)(3) 
apply to returns due (without regard to extensions of time to file) 
after December 31, 1989, notwithstanding that the original substantial 
or gross valuation misstatement occurred on a return that was due 
(without regard to extensions) before January 1, 1990. Assume, for 
example, that a calendar year corporation claimed a deduction on its 
1990 return for depreciation of an asset with a basis of X. Also assume 
that it had reported the same basis for computing depreciation on its 
returns for the preceding 5 years and that the basis shown on the return 
each year was 200 percent or more of the correct basis. The corporation 
may be subject to a penalty for substantial valuation misstatements on 
its 1989 and 1990 returns, even though the original misstatement 
occurred prior to the effective date of sections 6662(b)(3) and (e).

[T.D. 8381, 56 FR 67504, Dec. 31, 1991; T.D. 8381, 57 FR 6165, Feb. 20, 
1992]

[[Page 623]]



Sec. 1.6662-5T  Substantial and gross valuation misstatements under
chapter 1 (temporary).

    (a)-(e)(3) [Reserved]. For further information, see Sec. 1.6662-
5(a) through (e)(3).
    (e)(4) Tests related to section 482--(i) Substantial valuation 
misstatement. There is a substantial valuation misstatement if there is 
a misstatement described in Sec. 1.6662-6 (b)(1) or (c)(1) (concerning 
substantial valuation misstatements pertaining to transactions between 
related persons).
    (ii) Gross valuation misstatement. There is a gross valuation 
misstatement if there is a misstatement described in Sec. 1.6662-6 
(b)(2) or (c)(2) (concerning gross valuation misstatements pertaining to 
transactions between related persons).
    (iii) Property. For purposes of this section, the term property 
refers to both tangible and intangible property. Tangible property 
includes property such as money, land, buildings, fixtures and 
inventory. Intangible property includes property such as goodwill, 
covenants not to compete, leaseholds, patents, contract rights, debts, 
choses in action, and any other item of intangible property described in 
Sec. 1.482-4(b).
    (f)-(h) [Reserved]. For further information, see Sec. 1.6662-5 (f) 
through (h).
    (i) [Reserved]
    (j) Transactions between persons described in section 482 and net 
section 482 transfer price adjustments. For rules relating to the 
penalty imposed with respect to a substantial or gross valuation 
misstatement arising from a section 482 allocation, see Sec. 1.6662-6.

[T.D. 8656, 61 FR 4879, Feb. 9, 1996; T.D. 8656, 61 FR 14248, Apr. 1, 
1996]



Sec. 1.6662-6  Transactions between persons described in section 482 
and net section 482 transfer price adjustments.

    (a) In general--(1) Purpose and scope. Pursuant to section 6662(e) a 
penalty is imposed on any underpayment attributable to a substantial 
valuation misstatement pertaining to either a transaction between 
persons described in section 482 (the transactional penalty) or a net 
section 482 transfer price adjustment (the net adjustment penalty). The 
penalty is equal to 20 percent of the underpayment of tax attributable 
to that substantial valuation misstatement. Pursuant to section 6662(h) 
the penalty is increased to 40 percent of the underpayment in the case 
of a gross valuation misstatement with respect to either penalty. 
Paragraph (b) of this section provides specific rules related to the 
transactional penalty. Paragraph (c) of this section provides specific 
rules related to the net adjustment penalty, and paragraph (d) of this 
section describes amounts that will be excluded for purposes of 
calculating the net adjustment penalty. Paragraph (e) of this section 
sets forth special rules in the case of carrybacks and carryovers. 
Paragraph (f) of this section provides coordination rules between 
penalties. Paragraph (g) of this section provides the effective date of 
this section.
    (2) Reported results. Whether an underpayment is attributable to a 
substantial or gross valuation misstatement must be determined from the 
results of controlled transactions that are reported on an income tax 
return, regardless of whether the amount reported differs from the 
transaction price initially reflected in the taxpayer's books and 
records. The results of controlled transactions that are reported on an 
amended return will be used only if the amended return is filed before 
the Internal Revenue Service has contacted the taxpayer regarding the 
corresponding original return. A written statement furnished by a 
taxpayer subject to the Coordinated Examination Program or a written 
statement furnished by the taxpayer when electing Accelerated Issue 
Resolution or similar procedures will be considered an amended return 
for purposes of this section if it satisfies either the requirements of 
a qualified amended return for purposes of Sec. 1.6664-2(c)(3) or such 
requirements as the Commissioner may prescribe by revenue procedure. In 
the case of a taxpayer that is a member of a consolidated group, the 
rules of this paragraph (a)(2) apply to the consolidated income tax 
return of the group.
    (3) Identical terms used in the section 482 regulations. For 
purposes of this section, the terms used in this section

[[Page 624]]

shall have the same meaning as identical terms used in regulations under 
section 482.
    (b) The transactional penalty--(1) Substantial valuation 
misstatement. In the case of any transaction between related persons, 
there is a substantial valuation misstatement if the price for any 
property or services (or for the use of property) claimed on any return 
is 200 percent or more (or 50 percent or less) of the amount determined 
under section 482 to be the correct price.
    (2) Gross valuation misstatement. In the case of any transaction 
between related persons, there is a gross valuation misstatement if the 
price for any property or services (or for the use of property) claimed 
on any return is 400 percent or more (or 25 percent or less) of the 
amount determined under section 482 to be the correct price.
    (3) Reasonable cause and good faith. Pursuant to section 6664(c), 
the transactional penalty will not be imposed on any portion of an 
underpayment with respect to which the requirements of Sec. 1.6664-4 
are met. In applying the provisions of Sec. 1.6664-4 in a case in which 
the taxpayer has relied on professional analysis in determining its 
transfer pricing, whether the professional is an employee of, or related 
to, the taxpayer is not determinative in evaluating whether the taxpayer 
reasonably relied in good faith on advice. A taxpayer that meets the 
requirements of paragraph (d) of this section with respect to an 
allocation under section 482 will be treated as having established that 
there was reasonable cause and good faith with respect to that item for 
purposes of Sec. 1.6664-4. If a substantial or gross valuation 
misstatement under the transactional penalty also constitutes (or is 
part of) a substantial or gross valuation misstatement under the net 
adjustment penalty, then the rules of paragraph (d) of this section (and 
not the rules of Sec. 1.6664-4) will be applied to determine whether 
the adjustment is excluded from calculation of the net section 482 
adjustment.
    (c) Net adjustment penalty--(1) Net section 482 adjustment. For 
purposes of this section, the term net section 482 adjustment means the 
sum of all increases in the taxable income of a taxpayer for a taxable 
year resulting from allocations under section 482 (determined without 
regard to any amount carried to such taxable year from another taxable 
year) less any decreases in taxable income attributable to collateral 
adjustments as described in Sec. 1.482-1(g). For purposes of this 
section, amounts that meet the requirements of paragraph (d) of this 
section will be excluded from the calculation of the net section 482 
adjustment. Substantial and gross valuation misstatements that are 
subject to the transactional penalty under paragraph (b) (1) or (2) of 
this section are included in determining the amount of the net section 
482 adjustment. See paragraph (f) of this section for coordination rules 
between penalties.
    (2) Substantial valuation misstatement. There is a substantial 
valuation misstatement if a net section 482 adjustment is greater than 
the lesser of 5 million dollars or ten percent of gross receipts.
    (3) Gross valuation misstatement. There is a gross valuation 
misstatement if a net section 482 adjustment is greater than the lesser 
of 20 million dollars or twenty percent of gross receipts.
    (4) Setoff allocation rule. If a taxpayer meets the requirements of 
paragraph (d) of this section with respect to some, but not all of the 
allocations made under section 482, then for purposes of determining the 
net section 482 adjustment, setoffs, as taken into account under Sec. 
1.482-1(g)(4), must be applied ratably against all such allocations. The 
following example illustrates the principle of this paragraph (c)(4):

    Example. (i) The Internal Revenue Service makes the following 
section 482 adjustments for the taxable year:

(1) Attributable to an increase in gross income because of an          $
 increase in royalty payments........................................  9
                                                                       ,
                                                                       0
                                                                       0
                                                                       0
                                                                       ,
                                                                       0
                                                                       0
                                                                       0
(2) Attributable to an increase in sales proceeds due to a decrease    6
 in the profit margin of a related buyer.............................  ,
                                                                       0
                                                                       0
                                                                       0
                                                                       ,
                                                                       0
                                                                       0
                                                                       0
(3) Because of a setoff under Sec. 1.482-1(g)(4)...................  (
                                                                       5
                                                                       ,
                                                                       0
                                                                       0
                                                                       0
                                                                       ,
                                                                       0
                                                                       0
                                                                       0
                                                                       )
                                                                      --
    Total section 482 adjustments....................................  1
                                                                       0
                                                                       ,
                                                                       0
                                                                       0
                                                                       0
                                                                       ,
                                                                       0
                                                                       0
                                                                       0
 

    (ii) The taxpayer meets the requirements of paragraph (d) with 
respect to adjustment number one, but not with respect to adjustment 
number two. The five million dollar setoff will be allocated ratably 
against the nine million dollar adjustment ($9,000,000/$15,000,000 x 
$5,000,000 = $3,000,000) and the six million dollar adjustment 
($6,000,000/

[[Page 625]]

$15,000,000 x $5,000,000 = $2,000,000). Accordingly, in determining the 
net section 482 adjustment, the nine million dollar adjustment is 
reduced to six million dollars ($9,000,000-$3,000,000) and the six 
million dollar adjustment is reduced to four million dollars 
($6,000,000-$2,000,000). Therefore, the net section 482 adjustment 
equals four million dollars.

    (5) Gross receipts. For purposes of this section, gross receipts 
must be computed pursuant to the rules contained in Sec. 1.448-
1T(f)(2)(iv), as adjusted to reflect allocations under section 482.
    (6) Coordination with reasonable cause exception under section 
6664(c). Pursuant to section 6662(e)(3)(D), a taxpayer will be treated 
as having reasonable cause under section 6664(c) for any portion of an 
underpayment attributable to a net section 482 adjustment only if the 
taxpayer meets the requirements of paragraph (d) of this section with 
respect to that portion.
    (7) Examples. The principles of this paragraph (c) are illustrated 
by the following examples:

    Example 1. (i) The Internal Revenue Service makes the following 
section 482 adjustments for the taxable year:

(1) Attributable to an increase in gross income because of    $2,000,000
 an increase in royalty payments...........................
(2) Attributable to an increase in sales proceeds due to a     2,500,000
 decrease in the profit margin of a related buyer..........
(3) Attributable to a decrease in the cost of goods sold       2,000,000
 because of a decrease in the cost plus mark-up of a
 related seller............................................
                                                            ------------
    Total section 482 adjustments..........................    6,500,000
 

    (ii) None of the adjustments are excluded under paragraph (d) of 
this section. The net section 482 adjustment ($6.5 million) is greater 
than five million dollars. Therefore, there is a substantial valuation 
misstatement.
    Example 2. (i) The Internal Revenue Service makes the following 
section 482 adjustments for the taxable year:

(1) Attributable to an increase in gross income because of an          $
 increase in royalty payments........................................  1
                                                                       1
                                                                       ,
                                                                       0
                                                                       0
                                                                       0
                                                                       ,
                                                                       0
                                                                       0
                                                                       0
(2) Attributable to an increase in sales proceeds due to a decrease    2
 in the profit margin of a related buyer.............................  ,
                                                                       0
                                                                       0
                                                                       0
                                                                       ,
                                                                       0
                                                                       0
                                                                       0
(3) Because of a setoff under Sec. 1.482-1(g)(4)...................  (
                                                                       9
                                                                       ,
                                                                       0
                                                                       0
                                                                       0
                                                                       ,
                                                                       0
                                                                       0
                                                                       0
                                                                       )
                                                                      --
    Total section 482 adjustments....................................  4
                                                                       ,
                                                                       0
                                                                       0
                                                                       0
                                                                       ,
                                                                       0
                                                                       0
                                                                       0
 

    (ii) The taxpayer has gross receipts of sixty million dollars after 
taking into account all section 482 adjustments. None of the adjustments 
are excluded under paragraph (d) of this section. The net section 482 
adjustment ($4 million) is less than the lesser of five million dollars 
or ten percent of gross receipts ($60 million x 10% = $6 million). 
Therefore, there is no substantial valuation misstatement.
    Example 3. (i) The Internal Revenue Service makes the following 
section 482 adjustments to the income of an affiliated group that files 
a consolidated return for the taxable year:

(1) Attributable to Member A...............................   $1,500,000
(2) Attributable to Member B...............................    1,000,000
(3) Attributable to Member C...............................    2,000,000
                                                            ------------
    Total section 482 adjustments..........................    4,500,000
 

    (ii) Members A, B, and C have gross receipts of 20 million dollars, 
12 million dollars, and 11 million dollars, respectively. Thus, the 
total gross receipts are 43 million dollars. None of the adjustments are 
excluded under paragraph (d) of this section. The net section 482 
adjustment ($4.5 million) is greater than the lesser of five million 
dollars or ten percent of gross receipts ($43 million x 10% = $4.3 
million). Therefore, there is a substantial valuation misstatement.
    Example 4. (i) The Internal Revenue Service makes the following 
section 482 adjustments to the income of an affiliated group that files 
a consolidated return for the taxable year:

(1) Attributable to Member A...............................   $1,500,000
(2) Attributable to Member B...............................    3,000,000
(3) Attributable to Member C...............................    2,500,000
                                                            ------------
    Total section 482 adjustments..........................    7,000,000
 

    (ii) Members A, B, and C have gross receipts of 20 million dollars, 
35 million dollars, and 40 million dollars, respectively. Thus, the 
total gross receipts are 95 million dollars. None of the adjustments are 
excluded under paragraph (d) of this section. The net section 482 
adjustment (7 million dollars) is greater than the lesser of five 
million dollars or ten percent of gross receipts ($95 million x 10% = 
$9.5 million). Therefore, there is a substantial valuation misstatement.
    Example 5. (i) The Internal Revenue Service makes the following 
section 482 adjustments to the income of an affiliated group that files 
a consolidated return for the taxable year:

(1) Attributable to Member A...............................   $2,000,000
(2) Attributable to Member B...............................    1,000,000
(3) Attributable to Member C...............................    1,500,000
                                                            ------------
    Total section 482 adjustments..........................    4,500,000
 

    (ii) Members A, B, and C have gross receipts of 10 million dollars, 
35 million dollars, and 40 million dollars, respectively. Thus, the 
total gross receipts are 85 million dollars. None of the adjustments are 
excluded under paragraph (d) of this section. The net section 482 
adjustment ($4.5 million) is less than the lesser of five million 
dollars or ten percent of gross receipts ($85 million x 10% = $8.5 
million). Therefore, there is no substantial valuation misstatement even 
though individual member A's adjustment ($2 million) is greater than ten 
percent of its

[[Page 626]]

individual gross receipts ($10 million x 10% = $1 million).

    (d) Amounts excluded from net section 482 adjustments--(1) In 
general. An amount is excluded from the calculation of a net section 482 
adjustment if the requirements of paragraph (d) (2), (3), or (4) of this 
section are met with respect to that amount.
    (2) Application of a specified section 482 method--(i) In general. 
An amount is excluded from the calculation of a net section 482 
adjustment if the taxpayer establishes that both the specified method 
and documentation requirements of this paragraph (d)(2) are met with 
respect to that amount. For purposes of this paragraph (d), a method 
will be considered a specified method if it is described in the 
regulations under section 482 and the method applies to transactions of 
the type under review. An unspecified method is not considered a 
specified method. See Sec. Sec. 1.482-3(e) and 1.482-4(d).
    (ii) Specified method requirement. (A) The specified method 
requirement is met if the taxpayer selects and applies a specified 
method in a reasonable manner. The taxpayer's selection and application 
of a specified method is reasonable only if, given the available data 
and the applicable pricing methods, the taxpayer reasonably concluded 
that the method (and its application of that method) provided the most 
reliable measure of an arm's length result under the principles of the 
best method rule of Sec. 1.482-1(c). A taxpayer can reasonably conclude 
that a specified method provided the most reliable measure of an arm's 
length result only if it has made a reasonable effort to evaluate the 
potential applicability of the other specified methods in a manner 
consistent with the principles of the best method rule. The extent of 
this evaluation generally will depend on the nature of the available 
data, and it may vary from case to case and from method to method. This 
evaluation may not entail an exhaustive analysis or detailed application 
of each method. Rather, after a reasonably thorough search for relevant 
data, the taxpayer should consider which method would provide the most 
reliable measure of an arm's length result given that data. The nature 
of the available data may enable the taxpayer to conclude reasonably 
that a particular specified method provides a more reliable measure of 
an arm's length result than one or more of the other specified methods, 
and accordingly no further consideration of such other specified methods 
is needed. Further, it is not necessary for a taxpayer to conclude that 
the selected specified method provides a more reliable measure of an 
arm's length result than any unspecified method. For examples 
illustrating the selection of a specified method consistent with this 
paragraph (d)(2)(ii), see Sec. 1.482-8. Whether the taxpayer's 
conclusion was reasonable must be determined from all the facts and 
circumstances. The factors relevant to this determination include the 
following:
    (1) The experience and knowledge of the taxpayer, including all 
members of the taxpayer's controlled group.
    (2) The extent to which reliable data was available and the data was 
analyzed in a reasonable manner. A taxpayer must engage in a reasonably 
thorough search for the data necessary to determine which method should 
be selected and how it should be applied. In determining the scope of a 
reasonably thorough search for data, the expense of additional efforts 
to locate new data may be weighed against the likelihood of finding 
additional data that would improve the reliability of the results and 
the amount by which any new data would change the taxpayer's taxable 
income. Furthermore, a taxpayer must use the most current reliable data 
that is available before the end of the taxable year in question. 
Although the taxpayer is not required to search for relevant data after 
the end of the taxable year, the taxpayer must maintain as a principal 
document described in paragraph (d)(2)(iii)(B)(9) of this section any 
relevant data it obtains after the end of the taxable year but before 
the return is filed, if that data would help determine whether the 
taxpayer has reported its true taxable income.
    (3) The extent to which the taxpayer followed the relevant 
requirements set forth in regulations under section 482 with respect to 
the application of the method.

[[Page 627]]

    (4) The extent to which the taxpayer reasonably relied on a study or 
other analysis performed by a professional qualified to conduct such a 
study or analysis, including an attorney, accountant, or economist. 
Whether the professional is an employee of, or related to, the taxpayer 
is not determinative in evaluating the reliability of that study or 
analysis, as long as the study or analysis is objective, thorough, and 
well reasoned. Such reliance is reasonable only if the taxpayer 
disclosed to the professional all relevant information regarding the 
controlled transactions at issue. A study or analysis that was 
reasonably relied upon in a prior year may reasonably be relied upon in 
the current year if the relevant facts and circumstances have not 
changed or if the study or analysis has been appropriately modified to 
reflect any change in facts and circumstances.
    (5) If the taxpayer attempted to determine an arm's length result by 
using more than one uncontrolled comparable, whether the taxpayer 
arbitrarily selected a result that corresponds to an extreme point in 
the range of results derived from the uncontrolled comparables. Such a 
result generally would not likely be closest to an arm's length result. 
If the uncontrolled comparables that the taxpayer uses to determine an 
arm's length result are described in Sec. 1.482-1(e)(2)(iii)(B), one 
reasonable method of selecting a point in the range would be that 
provided in Sec. 1.482-1(e)(3).
    (6) The extent to which the taxpayer relied on a transfer pricing 
methodology developed and applied pursuant to an Advance Pricing 
Agreement for a prior taxable year, or specifically approved by the 
Internal Revenue Service pursuant to a transfer pricing audit of the 
transactions at issue for a prior taxable year, provided that the 
taxpayer applied the approved method reasonably and consistently with 
its prior application, and the facts and circumstances surrounding the 
use of the method have not materially changed since the time of the 
IRS's action, or if the facts and circumstances have changed in a way 
that materially affects the reliability of the results, the taxpayer 
makes appropriate adjustments to reflect such changes.
    (7) The size of a net transfer pricing adjustment in relation to the 
size of the controlled transaction out of which the adjustment arose.
    (B) Services cost method. A taxpayer's selection of the services 
cost method for certain services, described in Sec. 1.482-9(b), and its 
application of that method to a controlled services transaction will be 
considered reasonable for purposes of the specified method requirement 
only if the taxpayer reasonably allocated and apportioned costs in 
accordance with Sec. 1.482-9(k), and reasonably concluded that the 
controlled services transaction satisfies the requirements described in 
Sec. 1.482-9(b)(2). Whether the taxpayer's conclusion was reasonable 
must be determined from all the facts and circumstances. The factors 
relevant to this determination include those described in paragraph 
(d)(2)(ii)(A) of this section, to the extent applicable.
    (iii) Documentation requirement--(A) In general. The documentation 
requirement of this paragraph (d)(2)(iii) is met if the taxpayer 
maintains sufficient documentation to establish that the taxpayer 
reasonably concluded that, given the available data and the applicable 
pricing methods, the method (and its application of that method) 
provided the most reliable measure of an arm's length result under the 
principles of the best method rule in Sec. 1.482-1(c), and provides 
that documentation to the Internal Revenue Service within 30 days of a 
request for it in connection with an examination of the taxable year to 
which the documentation relates. With the exception of the documentation 
described in paragraphs (d)(2)(iii)(B) (9) and (10) of this section, 
that documentation must be in existence when the return is filed. The 
district director may, in his discretion, excuse a minor or inadvertent 
failure to provide required documents, but only if the taxpayer has made 
a good faith effort to comply, and the taxpayer promptly remedies the 
failure when it becomes known. The required documentation is divided 
into two categories, principal documents and background documents as 
described in paragraphs (d)(2)(iii) (B) and (C) of this section.

[[Page 628]]

    (B) Principal documents. The principal documents should accurately 
and completely describe the basic transfer pricing analysis conducted by 
the taxpayer. The documentation must include the following--
    (1) An overview of the taxpayer's business, including an analysis of 
the economic and legal factors that affect the pricing of its property 
or services;
    (2) A description of the taxpayer's organizational structure 
(including an organization chart) covering all related parties engaged 
in transactions potentially relevant under section 482, including 
foreign affiliates whose transactions directly or indirectly affect the 
pricing of property or services in the United States;
    (3) Any documentation explicitly required by the regulations under 
section 482;
    (4) A description of the method selected and an explanation of why 
that method was selected, including an evaluation of whether the 
regulatory conditions and requirements for application of that method, 
if any, were met;
    (5) A description of the alternative methods that were considered 
and an explanation of why they were not selected;
    (6) A description of the controlled transactions (including the 
terms of sale) and any internal data used to analyze those transactions. 
For example, if a profit split method is applied, the documentation must 
include a schedule providing the total income, costs, and assets (with 
adjustments for different accounting practices and currencies) for each 
controlled taxpayer participating in the relevant business activity and 
detailing the allocations of such items to that activity. Similarly, if 
a cost-based method (such as the cost plus method, the services cost 
method for certain services, or a comparable profits method with a cost-
based profit level indicator) is applied, the documentation must include 
a description of the manner in which relevant costs are determined and 
are allocated and apportioned to the relevant controlled transaction.
    (7) A description of the comparables that were used, how 
comparability was evaluated, and what (if any) adjustments were made;
    (8) An explanation of the economic analysis and projections relied 
upon in developing the method. For example, if a profit split method is 
applied, the taxpayer must provide an explanation of the analysis 
undertaken to determine how the profits would be split;
    (9) A description or summary of any relevant data that the taxpayer 
obtains after the end of the tax year and before filing a tax return, 
which would help determine if a taxpayer selected and applied a 
specified method in a reasonable manner; and
    (10) A general index of the principal and background documents and a 
description of the recordkeeping system used for cataloging and 
accessing those documents.
    (C) Background documents. The assumptions, conclusions, and 
positions contained in principal documents ordinarily will be based on, 
and supported by, additional background documents. Documents that 
support the principal documentation may include the documents listed in 
Sec. 1.6038A-3(c) that are not otherwise described in paragraph 
(d)(2)(iii)(B) of this section. Every document listed in those 
regulations may not be relevant to pricing determinations under the 
taxpayer's specific facts and circumstances and, therefore, each of 
those documents need not be maintained in all circumstances. Moreover, 
other documents not listed in those regulations may be necessary to 
establish that the taxpayer's method was selected and applied in the way 
that provided the most reliable measure of an arm's length result under 
the principles of the best method rule in Sec. 1.482-1(c). Background 
documents need not be provided to the Internal Revenue Service in 
response to a request for principal documents. If the Internal Revenue 
Service subsequently requests background documents, a taxpayer must 
provide that documentation to the Internal Revenue Service within 30 
days of the request. However, the district director may, in his 
discretion, extend the period for producing the background 
documentation.
    (D) Satisfaction of the documentation requirements described in 
Sec. 1.482-7(k)(2) for the purpose of complying

[[Page 629]]

with the rules for CSAs under Sec. 1.482-7 also satisfies all of the 
documentation requirements listed in paragraph (d)(2)(iii)(B) of this 
section, except the requirements listed in paragraphs (d)(2)(iii)(B)(2) 
and (10) of this section, with respect to CSTs and PCTs described in 
Sec. 1.482-7(b)(1)(i) and (ii), provided that the documentation also 
satisfies the requirements of paragraph (d)(2)(iii)(A) of this section.
    (3) Application of an unspecified method--(i) In general. An 
adjustment is excluded from the calculation of a net section 482 
adjustment if the taxpayer establishes that both the unspecified method 
and documentation requirements of this paragraph (d)(3) are met with 
respect to that amount.
    (ii) Unspecified method requirement--(A) In general. If a method 
other than a specified method was applied, the unspecified method 
requirement is met if the requirements of paragraph (d)(3)(ii) (B) or 
(C) of this section, as appropriate, are met.
    (B) Specified method potentially applicable. If the transaction is 
of a type for which methods are specified in the regulations under 
section 482, then a taxpayer will be considered to have met the 
unspecified method requirement if the taxpayer reasonably concludes, 
given the available data, that none of the specified methods was likely 
to provide a reliable measure of an arm's length result, and that it 
selected and applied an unspecified method in a way that would likely 
provide a reliable measure of an arm's length result. A taxpayer can 
reasonably conclude that no specified method was likely to provide a 
reliable measure of an arm's length result only if it has made a 
reasonable effort to evaluate the potential applicability of the 
specified methods in a manner consistent with the principles of the best 
method rule. However, it is not necessary for a taxpayer to conclude 
that the selected method provides a more reliable measure of an arm's 
length result than any other unspecified method. Whether the taxpayer's 
conclusion was reasonable must be determined from all the facts and 
circumstances. The factors relevant to this conclusion include those set 
forth in paragraph (d)(2)(ii) of this section.
    (C) No specified method applicable. If the transaction is of a type 
for which no methods are specified in the regulations under section 482, 
then a taxpayer will be considered to have met the unspecified method 
requirement if it selected and applied an unspecified method in a 
reasonable manner. For purposes of this paragraph (d)(3)(ii)(C), a 
taxpayer's selection and application is reasonable if the taxpayer 
reasonably concludes that the method (and its application of that 
method) provided the most reliable measure of an arm's length result 
under the principles of the best method rule in Sec. 1.482-1(c). 
However, it is not necessary for a taxpayer to conclude that the 
selected method provides a more reliable measure of an arm's length 
result than any other unspecified method. Whether the taxpayer's 
conclusion was reasonable must be determined from all the facts and 
circumstances. The factors relevant to this conclusion include those set 
forth in paragraph (d)(2)(ii) of this section.
    (iii) Documentation requirement--(A) In general. The documentation 
requirement of this paragraph (d)(3) is met if the taxpayer maintains 
sufficient documentation to establish that the unspecified method 
requirement of paragraph (d)(3)(ii) of this section is met and provides 
that documentation to the Internal Revenue Service within 30 days of a 
request for it. That documentation must be in existence when the return 
is filed. The district director may, in his discretion, excuse a minor 
or inadvertent failure to provide required documents, but only if the 
taxpayer has made a good faith effort to comply, and the taxpayer 
promptly remedies the failure when it becomes known.
    (B) Principal and background documents. See paragraphs (d)(2)(iii) 
(B) and (C) of this section for rules regarding these two categories of 
required documentation.
    (4) Certain foreign to foreign transactions. For purposes of 
calculating a net section 482 adjustment, any increase in taxable income 
resulting from an allocation under section 482 that is attributable to 
any controlled transaction solely between foreign corporations will be 
excluded unless the

[[Page 630]]

treatment of that transaction affects the determination of either 
corporation's income from sources within the United States or taxable 
income effectively connected with the conduct of a trade or business 
within the United States.
    (5) Special rule. If the regular tax (as defined in section 55(c)) 
imposed on the taxpayer is determined by reference to an amount other 
than taxable income, that amount shall be treated as the taxable income 
of the taxpayer for purposes of section 6662(e)(3). Accordingly, for 
taxpayers whose regular tax is determined by reference to an amount 
other than taxable income, the increase in that amount resulting from 
section 482 allocations is the taxpayer's net section 482 adjustment.
    (6) Examples. The principles of this paragraph (d) are illustrated 
by the following examples:

    Example 1. (i) The Internal Revenue Service makes the following 
section 482 adjustments for the taxable year:

(1) Attributable to an increase in gross income because of    $9,000,000
 an increase in royalty payments...........................
(2) Not a 200 percent or 400 percent adjustment............    2,000,000
(3) Attributable to a decrease in the cost of goods sold       9,000,000
 because of a decrease in the cost plus mark-up of a
 related seller............................................
                                                            ------------
    Total section 482 adjustments..........................   20,000,000
 

    (ii) The taxpayer has gross receipts of 75 million dollars after all 
section 482 adjustments. The taxpayer establishes that for adjustments 
number one and three, it applied a transfer pricing method specified in 
section 482, the selection and application of the method was reasonable, 
it documented the pricing analysis, and turned that documentation over 
to the IRS within 30 days of a request. Accordingly, eighteen million 
dollars is excluded from the calculation of the net section 482 
adjustment. Because the net section 482 adjustment is two million 
dollars, there is no substantial valuation misstatement.
    Example 2. (i) The Internal Revenue Service makes the following 
section 482 adjustments for the taxable year:

(1) Attributable to an increase in gross income because of    $9,000,000
 an increase in royalty payments...........................
(2) Attributable to an adjustment that is 200 percent or       2,000,000
 more of the correct section 482 price.....................
(3) Attributable to a decrease in the cost of goods sold       9,000,000
 because of a decrease in the cost plus mark-up of a
 related seller............................................
                                                            ------------
    Total section 482 adjustments..........................   20,000,000
 

    (ii) The taxpayer has gross receipts of 75 million dollars after all 
section 482 adjustments. The taxpayer establishes that for adjustments 
number one and three, it applied a transfer pricing method specified in 
section 482, the selection and application of the method was reasonable, 
it documented that analysis, and turned the documentation over to the 
IRS within 30 days. Accordingly, eighteen million dollars is excluded 
from the calculation of the section 482 transfer pricing adjustments for 
purposes of applying the five million dollar or 10% of gross receipts 
test. Because the net section 482 adjustment is only two million 
dollars, the taxpayer is not subject to the net adjustment penalty. 
However, the taxpayer may be subject to the transactional penalty on the 
underpayment of tax attributable to the two million dollar adjustment.
    Example 3. CFC1 and CFC2 are controlled foreign corporations within 
the meaning of section 957. Applying section 482, the IRS disallows a 
deduction for 25 million dollars of the interest that CFC1 paid to CFC2, 
which results in CFC1's U.S. shareholder having a subpart F inclusion in 
excess of five million dollars. No other adjustments under section 482 
are made with respect to the controlled taxpayers. However, the increase 
has no effect upon the determination of CFC1's or CFC2's income from 
sources within the United States or taxable income effectively connected 
with the conduct of a trade or business within the United States. 
Accordingly, there is no substantial valuation misstatement.

    (e) Special rules in the case of carrybacks and carryovers. If there 
is a substantial or gross valuation misstatement for a taxable year that 
gives rise to a loss, deduction or credit that is carried to another 
taxable year, the transactional penalty and the net adjustment penalty 
will be imposed on any resulting underpayment of tax in that other 
taxable year. In determining whether there is a substantial or gross 
valuation misstatement for a taxable year, no amount carried from 
another taxable year shall be included. The following example 
illustrates the principle of this paragraph (e):

    Example. The Internal Revenue Service makes a section 482 adjustment 
of six million dollars in taxable year 1, no portion of which is 
excluded under paragraph (d) of this section. The taxpayer's income tax 
return for year 1 reported a loss of three million dollars, which was 
carried to taxpayer's year 2 income tax return and used to reduce income 
taxes otherwise due with respect to year 2. A determination is made that 
the six

[[Page 631]]

million dollar allocation constitutes a substantial valuation 
misstatement, and a penalty is imposed on the underpayment of tax in 
year 1 attributable to the substantial valuation misstatement and on the 
underpayment of tax in year 2 attributable to the disallowance of the 
net operating loss in year 2. For purposes of determining whether there 
is a substantial or gross valuation misstatement for year 2, the three 
million dollar reduction of the net operating loss will not be added to 
any section 482 adjustments made with respect to year 2.

    (f) Rules for coordinating between the transactional penalty and the 
net adjustment penalty--(1) Coordination of a net section 482 adjustment 
subject to the net adjustment penalty and a gross valuation misstatement 
subject to the transactional penalty. In determining whether a net 
section 482 adjustment exceeds five million dollars or 10 percent of 
gross receipts, an adjustment attributable to a substantial or gross 
valuation misstatement that is subject to the transactional penalty will 
be taken into account. If the net section 482 adjustment exceeds five 
million dollars or ten percent of gross receipts, any portion of such 
amount that is attributable to a gross valuation misstatement will be 
subject to the transactional penalty at the forty percent rate, but will 
not also be subject to net adjustment penalty at a twenty percent rate. 
The remaining amount is subject to the net adjustment penalty at the 
twenty percent rate, even if such amount is less than the lesser of five 
million dollars or ten percent of gross receipts.
    (2) Coordination of net section 482 adjustment subject to the net 
adjustment penalty and substantial valuation misstatements subject to 
the transactional penalty. If the net section 482 adjustment exceeds 
twenty million dollars or 20 percent of gross receipts, the entire 
amount of the adjustment is subject to the net adjustment penalty at a 
forty percent rate. No portion of the adjustment is subject to the 
transactional penalty at a twenty percent rate.
    (3) Examples. The following examples illustrate the principles of 
this paragraph (f):

    Example 1. (i) Applying section 482, the Internal Revenue Service 
makes the following adjustments for the taxable year:

(1) Attributable to an adjustment that is 400 percent or      $2,000,000
 more of the correct section 482 arm's length result.......
(2) Not a 200 or 400 percent adjustment....................    2,500,000
                                                            ------------
    Total..................................................    4,500,000
 

    (ii) The taxpayer has gross receipts of 75 million dollars after all 
section 482 adjustments. None of the adjustments is excluded under 
paragraph (d) (Amounts excluded from net section 482 adjustments) of 
this section, in determining the five million dollar or 10% of gross 
receipts test under section 6662(e)(1)(B)(ii). The net section 482 
adjustment (4.5 million dollars) is less than the lesser of five million 
dollars or ten percent of gross receipts ($75 million x 10% = $7.5 
million). Thus, there is no substantial valuation misstatement. However, 
the two million dollar adjustment is attributable to a gross valuation 
misstatement. Accordingly, the taxpayer may be subject to a penalty, 
under section 6662(h), equal to 40 percent of the underpayment of tax 
attributable to the gross valuation misstatement of two million dollars. 
The 2.5 million dollar adjustment is not subject to a penalty under 
section 6662(b)(3).
    Example 2. The facts are the same as in Example 1, except the 
taxpayer has gross receipts of 40 million dollars. The net section 482 
adjustment ($4.5 million) is greater than the lesser of five million 
dollars or ten percent of gross receipts ($40 million x 10% = $4 
million). Thus, the five million dollar or 10% of gross receipts test 
has been met. The two million dollar adjustment is attributable to a 
gross valuation misstatement. Accordingly, the taxpayer is subject to a 
penalty, under section 6662(h), equal to 40 percent of the underpayment 
of tax attributable to the gross valuation misstatement of two million 
dollars. The 2.5 million dollar adjustment is subject to a penalty under 
sections 6662(a) and 6662(b)(3), equal to 20 percent of the underpayment 
of tax attributable to the substantial valuation misstatement.
    Example 3. (i) Applying section 482, the Internal Revenue Service 
makes the following transfer pricing adjustments for the taxable year:

(1) Attributable to an adjustment that is 400 percent or      $6,000,000
 more of the correct section 482 arm's length result.......
(2) Not a 200 or 400 percent adjustment....................   15,000,000
                                                            ------------
    Total..................................................   21,000,000
 

    (ii) None of the adjustments are excluded under paragraph (d) 
(Amounts excluded from net section 482 adjustments) in determining the 
twenty million dollar or 20% of gross receipts test under section 
6662(h). The net section 482 adjustment (21 million dollars) is greater 
than twenty million dollars and thus constitutes a gross valuation 
misstatement. Accordingly, the total adjustment is subject to the net 
adjustment penalty equal to 40

[[Page 632]]

percent of the underpayment of tax attributable to the 21 million dollar 
gross valuation misstatement. The six million dollar adjustment will not 
be separately included for purposes of any additional penalty under 
section 6662.

    (g) Effective/applicability date--(1) In general. This section is 
generally applicable on February 9, 1996. However, taxpayers may elect 
to apply this section to all open taxable years beginning after December 
31, 1993.
    (2) Special rules. The provisions of paragraphs (d)(2)(ii)(B), 
(d)(2)(iii)(B)(4) and (d)(2)(iii)(B)(6) of this section are applicable 
for taxable years beginning after July 31, 2009. However, taxpayers may 
elect to apply the provisions of paragraphs (d)(2)(ii)(B), 
(d)(2)(iii)(B)(4) and (d)(2)(iii)(B)(6) of this section to earlier 
taxable years in accordance with the rules set forth in Sec. 1.482-
9(n)(2).

[T.D. 8656, 61 FR 4880, Feb. 9, 1996; T.D. 8656, 61 FR 14248, Apr. 1, 
1996; 62 FR 46877, Sept. 5, 1997, as amended by T.D. 9278, 71 FR 44518, 
Aug. 4, 2006; T.D. 9441, 74 FR 390, Jan. 5, 2009; T.D. 9456, 74 FR 
38875, Aug. 4, 2009; T.D. 9568, 76 FR 80136, Dec. 22, 2011]



Sec. 1.6662-7  Omnibus Budget Reconciliation Act of 1993 changes to 
the accuracy-related penalty.

    (a) Scope. The Omnibus Budget Reconciliation Act of 1993 made 
certain changes to the accuracy-related penalty in section 6662. This 
section provides rules reflecting those changes.
    (b) No disclosure exception for negligence penalty. The penalty for 
negligence in section 6662(b)(1) may not be avoided by disclosure of a 
return position.
    (c) Disclosure standard for other penalties is reasonable basis. The 
penalties for disregarding rules or regulations in section 6662(b)(1) 
and for a substantial understatement of income tax in section 6662(b)(2) 
may be avoided by adequate disclosure of a return position only if the 
position has at least a reasonable basis. See Sec. 1.6662-3(c) and 
Sec. Sec. 1.6662-4(e) and (f) for other applicable disclosure rules.
    (d) Reasonable basis. For purposes of Sec. Sec. 1.6662-3(c) and 
1.6662-4(e) and (f) (relating to methods of making adequate disclosure), 
the provisions of Sec. 1.6662-3(b)(3) apply in determining whether a 
return position has a reasonable basis.

[T.D. 8617, 60 FR 45665, Sept. 1, 1995, as amended by T.D. 8790, 63 FR 
66435, Dec. 2, 1998]



Sec. 1.6664-0  Table of contents.

    This section lists the captions in Sec. Sec. 1.6664-1 through 
1.6664-4T.

  Sec. 1.6664-1 Accuracy-related and fraud penalties; definitions and 
                             special rules.

    (a) In general.
    (b) Effective date.
    (1) In general.
    (2) Reasonable cause and good faith exception to section 6662 
penalties.
    (i) For returns due after September 1, 1995.
    (ii) For returns filed after December 31, 2002.
    (3) Qualified amended returns.

                      Sec. 1.6664-2 Underpayment.

    (a) Underpayment defined.
    (b) Amount of income tax imposed.
    (c) Amount shown as the tax by the taxpayer on his return.
    (1) Defined.
    (2) Effect of qualified amended return.
    (3) Qualified amended return defined.
    (i) General rule.
    (ii) Undisclosed listed transactions.
    (4) Special rules.
    (5) Examples.
    (d) Amounts not so shown previously assessed (or collected without 
assessment).
    (e) Rebates.
    (f) Underpayments for certain carryback years not reduced by amount 
of carrybacks.
    (g) Examples.

   Sec. 1.6664-3 Ordering rules for determining the total amount of 
                           penalties imposed.

    (a) In general.
    (b) Order in which adjustments are taken into account.
    (c) Manner in which unclaimed prepayment credits are allocated.
    (d) Examples.

Sec. 1.6664-4 Reasonable cause and good faith exception to section 6662 
                               penalties.

    (a) In general.
    (b) Facts and circumstances taken into account.
    (1) In general.
    (2) Examples.
    (c) Reliance on opinion or advice.
    (1) Fact and circumstances; minimum requirements.
    (i) All facts and circumstances considered.
    (ii) No unreasonable assumptions.
    (iii) Reliance on the invalidity of a regulation.

[[Page 633]]

    (2) Advice defined.
    (3) Cross-reference.
    (d) Underpayments attributable to reportable transactions.
    (e) Pass-through items.
    (f) Special rules for substantial understatement penalty 
attributable to tax shelter items of corporations.
    (1) In general; facts and circumstances.
    (2) Reasonable cause based on legal justification.
    (i) Minimum requirements.
    (A) Authority requirement.
    (B) Belief requirement.
    (ii) Legal justification defined.
    (3) Minimum requirements not dispositive.
    (4) Other factors.
    (g) Transactions between persons described in section 482 and net 
section 482 transfer price adjustments. [Reserved]
    (h) Valuation misstatements of charitable deduction property.
    (1) In general.
    (2) Definitions.
    (i) Charitable deduction property.
    (ii) Qualified appraisal.
    (iii) Qualified appraiser.
    (3) Special rules.

  Sec. 1.6664-4T Reasonable cause and good faith exception to section 
                             6662 penalties

    (a)-(c) [Reserved]
    (d) Transactions between persons described in section 482 and net 
section 482 transfer price adjustments.

[T.D. 8381, 56 FR 67505, Dec. 31, 1991, as amended by T.D. 8519, 59 FR 
4799, Feb. 2, 1994; T.D. 8617, 60 FR 45666, Sept. 1, 1995; T.D. 8656, 61 
FR 4885, Feb. 9, 1996; T.D. 8790, 63 FR 66435, Dec. 2, 1998; T.D. 9109, 
68 FR 75128, Dec. 30, 2003; T.D. 9309, 72 FR 903, Jan. 9, 2007]



Sec. 1.6664-1  Accuracy-related and fraud penalties; definitions, 
effective date and special rules.

    (a) In general. Section 6664(a) defines the term ``underpayment'' 
for purposes of the accuracy-related penalty under section 6662 and the 
fraud penalty under section 6663. The definition of ``underpayment'' of 
income taxes imposed under subtitle A is set forth in Sec. 1.6664-2. 
Ordering rules for computing the total amount of accuracy-related and 
fraud penalties imposed with respect to a return are set forth in Sec. 
1.6664-3. Section 6664(c) provides a reasonable cause and good faith 
exception to the accuracy-related penalty. Rules relating to the 
reasonable cause and good faith exception are set forth in Sec. 1.6664-
4.
    (b) Effective date--(1) In general. Sections 1.6664-1 through 
1.6664-3 apply to returns the due date of which (determined without 
regard to extensions of time for filing) is after December 31, 1989.
    (2) Reasonable cause and good faith exception to section 6662 
penalties. (i) For returns due after September 1, 1995. Section 1.6664-4 
applies to returns the due date of which (determined without regard to 
extensions of time for filing) is after September 1, 1995. Except as 
provided in the last sentence of this paragraph (b)(2), Sec. 1.6664-4 
(as contained in 26 CFR part 1 revised April 1, 1995) applies to returns 
the due date of which (determined without regard to extensions of time 
for filing) is on or before September 1, 1995 and after December 31, 
1989. For transactions occurring after December 8, 1994, Sec. 1.6664-4 
(as contained in 26 CFR part 1 revised April 1, 1995) is applied taking 
into account the changes made to section 6662(d)(2)(C) (relating to the 
substantial understatement penalty for tax shelter items of 
corporations) by section 744 of title VII of the Uruguay Round 
Agreements Act, Pub. L. 103-465 (108 Stat. 4809).
    (ii) For returns filed after December 31, 2002. Sections 1.6664-4(c) 
(relating to relying on opinion or advice) and (d) (relating to 
underpayments attributable to reportable transactions) apply to returns 
filed after December 31, 2002, with respect to transactions entered into 
on or after January 1, 2003. Except as provided in paragraph (b)(2)(i) 
of this section, Sec. 1.6664-4 (as contained in 26 CFR part 1 revised 
April 1, 2003) applies to returns filed with respect to transactions 
entered into before January 1, 2003.
    (3) Qualified amended returns. Sections 1.6664-2(c)(1), (c)(2), 
(c)(3)(i)(A), (c)(3)(i)(B), (c)(3)(i)(C), (c)(3)(i)(D)(2), (c)(3)(i)(E), 
and (c)(4) are applicable for amended returns and requests for 
administrative adjustment filed on or after March 2, 2005. Sections 
1.6664-2(c)(3)(i)(D)(1) and (c)(3)(ii)(B) and (C) are applicable for 
amended returns and requests for administrative adjustment filed on or 
after April 30, 2004. The applicability date for Sec. 1.6664-
2(c)(3)(ii)(A)

[[Page 634]]

varies depending upon which event occurs under Sec. 1.6664-2(c)(3)(i). 
For purposes of Sec. 1.6664-2(c)(3)(ii)(A), the date described in Sec. 
1.6664-2(c)(3)(i)(D)(1) is applicable for amended returns and requests 
for administrative adjustment filed on or after April 30, 2004. For 
purposes of Sec. 1.6664-2(c)(3)(ii)(A), the dates described in Sec. 
1.6664-2(c)(3)(i)(A), (B), (C), (D)(2), and (E) are applicable for 
amended returns and requests for administrative adjustment filed on or 
after March 2, 2005. Section 1.6664-2(c)(1) through (c)(3), as contained 
in 26 CFR part 1 revised as of April 1, 2004 and as modified by Notice 
2004-38, 2004-1 C.B. 949, applies with respect to returns and requests 
for administrative adjustment filed on or after April 30, 2004 and 
before March 2, 2005. Section 1.6664-2(c)(1) through (3), as contained 
in 26 CFR part 1 revised as of April 30, 2004, applies with respect to 
returns and requests for administrative adjustment filed before April 
30, 2004.

[T.D. 8381, 56 FR 67506, Dec. 31, 1991, as amended by T.D. 8617, 60 FR 
45666, Sept. 1, 1995; T.D. 9109, 68 FR 75128, Dec. 30, 2003; T.D. 9309, 
72 FR 903, Jan. 9, 2007]



Sec. 1.6664-2  Underpayment.

    (a) Underpayment defined. In the case of income taxes imposed under 
subtitle A, an underpayment for purposes of section 6662, relating to 
the accuracy-related penalty, and section 6663, relating to the fraud 
penalty, means the amount by which any income tax imposed under this 
subtitle (as defined in paragraph (b) of the section) exceeds the excess 
of--
    (1) The sum of--
    (i) The amount shown as the tax by the taxpayer on his return (as 
defined in paragraph (c) of this section), plus
    (ii) Amounts not so shown previously assessed (or collected without 
assessment) (as defined in paragraph (d) of this section), over
    (2) The amount of rebates made (as defined in paragraph (e) of this 
section).


The definition of underpayment also may be expressed as--

Underpayment = W - (X + Y - Z),

where W = the amount of income tax imposed; X = the amount shown as the 
          tax by the taxpayer on his return; Y = amounts not so shown 
          previously assessed (or collected without assessment); and Z = 
          the amount of rebates made.

    (b) Amount of income tax imposed. For purposes of paragraph (a) of 
this section, the ``amount of income tax imposed'' is the amount of tax 
imposed on the taxpayer under subtitle A for the taxable year, 
determined without regard to--
    (1) The credits for tax withheld under sections 31 (relating to tax 
withheld on wages) and 33 (relating to tax withheld at source on 
nonresident aliens and foreign corporations);
    (2) Payments of tax or estimated tax by the taxpayer;
    (3) Any credit resulting from the collection of amounts assessed 
under section 6851 as the result of a termination assessment, or section 
6861 as the result of a jeopardy assessment; and
    (4) Any tax that the taxpayer is not required to assess on the 
return (such as the tax imposed by section 531 on the accumulated 
taxable income of a corporation).
    (c) Amount shown as the tax by the taxpayer on his return--(1) 
Defined. For purposes of paragraph (a) of this section, the amount shown 
as the tax by the taxpayer on his return is the tax liability shown by 
the taxpayer on his return, determined without regard to the items 
listed in paragraphs (b)(1), (2), and (3) of this section, except that 
it is reduced by the excess of--
    (i) The amounts shown by the taxpayer on his return as credits for 
tax withheld under section 31 (relating to tax withheld on wages) and 
section 33 (relating to tax withheld at source on nonresident aliens and 
foreign corporations), as payments of estimated tax, or as any other 
payments made by the taxpayer with respect to a taxable year before 
filing the return for such taxable year, over
    (ii) The amounts actually withheld, actually paid as estimated tax, 
or actually paid with respect to a taxable year before the return is 
filed for such taxable year.
    (2) Effect of qualified amended return. The amount shown as the tax 
by the taxpayer on his return includes an amount shown as additional tax 
on a qualified amended return (as defined in paragraph (c)(3) of this 
section), except that

[[Page 635]]

such amount is not included if it relates to a fraudulent position on 
the original return.
    (3) Qualified amended return defined--(i) General rule. A qualified 
amended return is an amended return, or a timely request for an 
administrative adjustment under section 6227, filed after the due date 
of the return for the taxable year (determined with regard to extensions 
of time to file) and before the earliest of--
    (A) The date the taxpayer is first contacted by the Internal Revenue 
Service (IRS) concerning any examination (including a criminal 
investigation) with respect to the return;
    (B) The date any person is first contacted by the IRS concerning an 
examination of that person under section 6700 (relating to the penalty 
for promoting abusive tax shelters) for an activity with respect to 
which the taxpayer claimed any tax benefit on the return directly or 
indirectly through the entity, plan or arrangement described in section 
6700(a)(1)(A);
    (C) In the case of a pass-through item (as defined in Sec. 1.6662-
4(f)(5)), the date the pass-through entity (as defined in Sec. 1.6662-
4(f)(5)) is first contacted by the IRS in connection with an examination 
of the return to which the pass-through item relates;
    (D)(1) The date on which the IRS serves a summons described in 
section 7609(f) relating to the tax liability of a person, group, or 
class that includes the taxpayer (or pass-through entity of which the 
taxpayer is a partner, shareholder, beneficiary, or holder of a residual 
interest in a REMIC) with respect to an activity for which the taxpayer 
claimed any tax benefit on the return directly or indirectly.
    (2) The rule in paragraph (c)(3)(i)(D)(1) of this section applies to 
any return on which the taxpayer claimed a direct or indirect tax 
benefit from the type of activity that is the subject of the summons, 
regardless of whether the summons seeks the production of information 
for the taxable period covered by such return; and
    (E) The date on which the Commissioner announces by revenue ruling, 
revenue procedure, notice, or announcement, to be published in the 
Internal Revenue Bulletin (see Sec. 601.601(d)(2) of this chapter), a 
settlement initiative to compromise or waive penalties, in whole or in 
part, with respect to a listed transaction. This rule applies only to a 
taxpayer who participated in the listed transaction and for the taxable 
year(s) in which the taxpayer claimed any direct or indirect tax 
benefits from the listed transaction. The Commissioner may waive the 
requirements of this paragraph or identify a later date by which a 
taxpayer who participated in the listed transaction must file a 
qualified amended return in the published guidance announcing the listed 
transaction settlement initiative.
    (ii) Undisclosed listed transactions. An undisclosed listed 
transaction is a transaction that is the same as, or substantially 
similar to, a listed transaction within the meaning of Sec. 1.6011-
4(b)(2) (regardless of whether Sec. 1.6011-4 requires the taxpayer to 
disclose the transaction) and was neither previously disclosed by the 
taxpayer within the meaning of Sec. 1.6011-4 or Sec. 1.6011-4T, nor 
disclosed under Announcement 2002-2 (2002-1 C.B. 304), (see Sec. 
601.601(d)(2)(ii) of this chapter) by the deadline therein. In the case 
of an undisclosed listed transaction for which a taxpayer claims any 
direct or indirect tax benefits on its return (regardless of whether the 
transaction was a listed transaction at the time the return was filed), 
an amended return or request for administrative adjustment under section 
6227 will not be a qualified amended return if filed on or after the 
earliest of--
    (A) The dates described in paragraph (c)(3)(i) of this section;
    (B) The date on which the IRS first contacts any person regarding an 
examination of that person's liability under section 6707(a) with 
respect to the undisclosed listed transaction of the taxpayer; or
    (C) The date on which the IRS requests, from any person who made a 
tax statement to or for the benefit of the taxpayer or from any person 
who gave the taxpayer material aid, assistance, or advice as described 
in section 6111(b)(1)(A)(i) with respect to the taxpayer, the 
information required to be included on a list under section 6112 
relating to a transaction that was the

[[Page 636]]

same as, or substantially similar to, the undisclosed listed 
transaction, regardless of whether the taxpayer's information is 
required to be included on that list.
    (4) Special rules. (i) A qualified amended return includes an 
amended return that is filed to disclose information pursuant to Sec. 
1.6662-3(c) or Sec. 1.6662-4(e) and (f) even though it does not report 
any additional tax liability. See Sec. 1.6662-3(c), Sec. 1.6662-4(f), 
and Sec. 1.6664-4(c) for rules relating to adequate disclosure.
    (ii) The Commissioner may by revenue procedure prescribe the manner 
in which the rules of paragraph (c) of this section regarding qualified 
amended returns apply to particular classes of taxpayers.
    (5) Examples. The following examples illustrate the provisions of 
paragraphs (c)(3) and (c)(4) of this section:

    Example 1. T, an individual taxpayer, claimed tax benefits on its 
2002 Federal income tax return from a transaction that is substantially 
similar to the transaction identified as a listed transaction in Notice 
2002-65, 2002-2 C.B. 690 (Partnership Entity Straddle Tax Shelter). T 
did not disclose his participation in this transaction on a Form 8886, 
``Reportable Transaction Disclosure Statement,'' as required by Sec. 
1.6011-4. On June 30, 2004, the IRS requested from P, T's material 
advisor, an investor list required to be maintained under section 6112. 
The section 6112 request, however, related to the type of transaction 
described in Notice 2003-81, 2003-2 C.B. 1223 (Tax Avoidance Using 
Offsetting Foreign Currency Option Contracts). T did not participate in 
(within the meaning of Sec. 1.6011-4(c)) a transaction described in 
Notice 2003-81. T may file a qualified amended return relating to the 
transaction described in Notice 2002-65 because T did not claim a tax 
benefit with respect to the listed transaction described in Notice 2003-
81, which is the subject of the section 6112 request.
    Example 2. The facts are the same as in Example 1, except that T's 
2002 Federal income tax return reflected T's participation in the 
transaction described in Notice 2003-81. As of June 30, 2004, T may not 
file a qualified amended return for the 2002 tax year.
    Example 3. (i) Corporation X claimed tax benefits from a transaction 
on its 2002 Federal income tax return. In October 2004, the IRS and 
Treasury Department identified the transaction as a listed transaction. 
In December 2004, the IRS contacted P concerning an examination of P's 
liability under section 6707(a) (as in effect prior to the amendment to 
section 6707 by section 816 of the American Jobs Creation Act of 2004 
(the Jobs Act), Public Law 108-357 (118 Stat. 1418)). P is the organizer 
of a section 6111 tax shelter (as in effect prior to the amendment to 
section 6111 by section 815 of the Jobs Act) who provided 
representations to X regarding tax benefits from the transaction, and 
the IRS has contacted P about the failure to register that transaction. 
Three days later, X filed an amended return.
    (ii) X's amended return is not a qualified amended return, because X 
did not disclose the transaction before the IRS contacted P. X's amended 
return would have been a qualified amended return if it was submitted 
prior to the date on which the IRS contacted P.
    Example 4. The facts are the same as in Example 3 except that, 
instead of contacting P concerning an examination under section 6707(a), 
in December 2004, the IRS served P with a John Doe summons described in 
section 7609(f) relating to the tax liability of participants in the 
type of transaction for which X claimed tax benefits on its return. X 
cannot file a qualified amended return after the John Doe summons has 
been served regardless of when, or whether, the transaction becomes a 
listed transaction.
    Example 5. On November 30, 2003, the IRS served a John Doe summons 
described in section 7609(f) on Corporation Y, a credit card company. 
The summons requested the identity of, and information concerning, 
United States taxpayers who, during the taxable years 2001 and 2002, had 
signature authority over Corporation Y's credit cards issued by, 
through, or on behalf of certain offshore financial institutions. 
Corporation Y complied with the summons, and identified, among others, 
Taxpayer B. On May 31, 2004, before the IRS first contacted Taxpayer B 
concerning an examination of Taxpayer B's Federal income tax return for 
the taxable year 2002, Taxpayer B filed an amended return for that 
taxable year, that showed an increase in Taxpayer B's Federal income tax 
liability. Under paragraph (c)(3)(i)(D) of this section, the amended 
return is not a qualified amended return because it was not filed before 
the John Doe summons was served on Corporation Y.
    Example 6. The facts are the same as in Example 5. Taxpayer B 
continued to maintain the offshore credit card account through 2003 and 
filed an original tax return for the 2003 taxable year claiming tax 
benefits attributable to the existence of the account. On March 21, 
2005, Taxpayer B filed an amended return for the taxable year 2003, that 
showed an increase in Taxpayer B's Federal income tax liability. Under 
paragraph (c)(3)(i)(D) of this section, the amended return is not a 
qualified amended return because it was not filed before the John Doe 
summons for 2001 and 2002 was served on Corporation Y, and the return 
reflects benefits from the type of

[[Page 637]]

activity that is the subject of the John Doe summons.
    Example 7. (i) On November 30, 2003, the IRS served a John Doe 
summons described in section 7609(f) on Corporation Y, a credit card 
company. The summons requested the identity of, and information 
concerning, United States taxpayers who, during the taxable years 2001 
and 2002, had signature authority over Corporation Y's credit cards 
issued by, through, or on behalf of certain offshore financial 
institutions. Taxpayer C did not have signature authority over any of 
Corporation Y's credit cards during either 2001 or 2002 and, therefore, 
was not a person described in the John Doe summons.
    (ii) In 2003, Taxpayer C first acquired signature authority over a 
Corporation Y credit card issued by an offshore financial institution. 
Because Taxpayer C did not have signature authority during 2001 or 2002 
over a Corporation Y credit card issued by an offshore financial 
institution, and was therefore not covered by the John Doe summons 
served on November 30, 2003, Taxpayer C's ability to file a qualified 
amended return for the 2003 taxable year is not limited by paragraph 
(c)(3)(i)(D) of this section.
    (d) Amounts not so shown previously assessed (or collected without 
assessment). For purposes of paragraph (a) of this section, ``amounts 
not so shown previously assessed'' means only amounts assessed before 
the return is filed that were not shown on the return, such as 
termination assessments under section 6851 and jeopardy assessments 
under section 6861 made prior to the filing of the return for the 
taxable year. For purposes of paragraph (a) of this section, the amount 
``collected without assessment'' is the amount by which the total of the 
credits allowable under section 31 (relating to tax withheld on wages) 
and section 33 (relating to tax withheld at source on nonresident aliens 
and foreign corporations), estimated tax payments, and other payments in 
satisfaction of tax liability made before the return is filed, exceed 
the tax shown on the return (provided such excess has not been refunded 
or allowed as a credit to the taxpayer).
    (e) Rebates. The term ``rebate'' means so much of an abatement 
credit, refund or other repayment, as was made on the ground that the 
tax imposed was less than the excess of--
    (1) The sum of--
    (i) The amount shown as the tax by the taxpayer on his return, plus
    (ii) Amounts not so shown previously assessed (or collected without 
assessment), over
    (2) Rebates previously made.
    (f) Underpayments for certain carryback years not reduced by amount 
of carrybacks. The amount of an underpayment for a taxable year that is 
attributable to conduct proscribed by sections 6662 or 6663 is not 
reduced on account of a carryback of a loss, deduction or credit to that 
year. Such conduct includes negligence or disregard of rules or 
regulations; a substantial understatement of income tax; and a 
substantial (or gross) valuation misstatement under chapter 1, provided 
that the applicable dollar limitation is satisfied for the carryback 
year.
    (g) Examples. The following examples illustrate this section:

    Example 1. Taxpayer's 1990 return showed a tax liability of $18,000. 
Taxpayer had no amounts previously assessed (or collected without 
assessment) and received no rebates of tax. Taxpayer claimed a credit in 
the amount of $23,000 for income tax withheld under section 3402, which 
resulted in a refund received of $5,000. It is later determined that the 
taxpayer should have reported additional income and that the correct tax 
for the taxable year is $25,500. There is an underpayment of $7,500, 
determined as follows:

Tax imposed under subtitle A....................  ..........     $25,500
Tax shown on return.............................     $18,000  ..........
Tax previously assessed (or collected without           None  ..........
 assessment)....................................
Amount of rebates made..........................        None  ..........
                                                 -----------------------
Balance.........................................  ..........     $18,000
                                                 -----------------------
      Underpayment..............................  ..........      $7,500
 

    Example 2. The facts are the same as in Example 1 except that the 
taxpayer failed to claim on the return a credit of $1,500 for income tax 
withheld. This $1,500 constitutes an amount collected without assessment 
as defined in paragraph (d) of this section. The underpayment is $6,000, 
determined as follows:

Tax imposed under subtitle A....................  ..........     $25,500
Tax shown on return.............................     $18,000  ..........
Tax previously assessed (or collected without          1,500  ..........
 assessment)....................................
Amount of rebates made..........................        None  ..........
                                                 -----------------------
Balance.........................................  ..........     $19,500
                                                 -----------------------
      Underpayment..............................  ..........      $6,000
 

    Example 3. On Form 1040 filed for tax year 1990, taxpayer reported a 
tax liability of $10,000, estimated tax payments of $15,000, and 
received a refund of $5,000. Estimated tax payments actually made with 
respect to tax

[[Page 638]]

year 1990 were only $7,000. For purposes of determining the amount of 
underpayment subject to a penalty under section 6662 or section 6663, 
the tax shown on the return is $2,000 (reported tax liability of $10,000 
reduced by the overstated estimated tax of $8,000 ($15,000-$7,000)). The 
underpayment is $8,000, determined as follows:

Tax imposed under subtitle A....................  ..........     $10,000
Tax shown on return.............................      $2,000  ..........
Tax previously assessed (or collected without           None  ..........
 assessment)....................................
Amount of rebates made..........................        None  ..........
                                                 -----------------------
Balance.........................................  ..........      $2,000
                                                 -----------------------
      Underpayment..............................  ..........      $8,000
 


[T.D. 8381, 56 FR 67506, Dec. 31, 1991; T.D. 8381, 57 FR 6165, Feb. 20, 
1992, as amended by T.D. 9186, 70 FR 10039, Mar. 2, 2005; T.D. 9309, 72 
FR 903, Jan. 9, 2007]



Sec. 1.6664-3  Ordering rules for determining the total amount 
of penalties imposed.

    (a) In general. This section provides rules for determining the 
order in which adjustments to a return are taken into account for the 
purpose of computing the total amount of penalties imposed under 
sections 6662 and 6663, where--
    (1) There is at least one adjustment with respect to which no 
penalty has been imposed and at least one with respect to which a 
penalty has been imposed, or
    (2) There are at least two adjustments with respect to which 
penalties have been imposed and they have been imposed at different 
rates.


This section also provides rules for allocating unclaimed prepayment 
credits to adjustments to a return.
    (b) Order in which adjustments are taken into account. In computing 
the portions of an underpayment subject to penalties imposed under 
sections 6662 and 6663, adjustments to a return are considered made in 
the following order:
    (1) Those with respect to which no penalties have been imposed.
    (2) Those with respect to which a penalty has been imposed at a 20 
percent rate (i.e., a penalty for negligence or disregard of rules or 
regulations, substantial understatement of income tax, or substantial 
valuation misstatement, under sections 6662(b)(1) through 6662(b)(3), 
respectively).
    (3) Those with respect to which a penalty has been imposed at a 40 
percent rate (i.e., a penalty for a gross valuation misstatement under 
sections 6662 (b)(3) and (h)).
    (4) Those with respect to which a penalty has been imposed at a 75 
percent rate (i.e., a penalty for fraud under section 6663).
    (c) Manner in which unclaimed prepayment credits are allocated. Any 
income tax withholding or other payment made before a return was filed, 
that was neither claimed on the return nor previously allowed as a 
credit against the tax liability for the taxable year (an ``unclaimed 
prepayment credit''), is allocated as follows--
    (1) If an unclaimed prepayment credit is allocable to a particular 
adjustment, such credit is applied in full in determining the amount of 
the underpayment resulting from such adjustment.
    (2) If an unclaimed prepayment credit is not allocable to a 
particular adjustment, such credit is applied in accordance with the 
ordering rules set forth in paragraph (b) of this section.
    (d) Examples. The following examples illustrate the rules of this 
Sec. 1.6664-3. These examples do not take into account the reasonable 
cause exception to the accuracy-related penalty under Sec. 1.6664-4.
    Example 1. A and B, husband and wife, filed a joint federal income 
tax return for calendar year 1989, reporting taxable income of $15,800 
and a tax liability of $2,374. A and B had no amounts previously 
assessed (or collected without assessment) and no rebates had been made. 
Subsequently, the return was examined and the following adjustments and 
penalties were agreed to:

Adjustment 1 (No penalty imposed)..............  ..........      $1,000
Adjustment 2 (Substantial understatement         ..........      40,000
 penalty imposed)...............................
Adjustment 3 (Civil fraud penalty imposed).....  ..........      45,000
                                                 -----------------------
Total adjustments...............................  ..........     $86,000
Taxable income shown on return..................  ..........      15,800
                                                 -----------------------
Taxable income as corrected.....................  ..........    $101,800
Computation of underpayment:
    Tax imposed by subtitle A...................  ..........     $25,828
    Tax shown on return.........................      $2,374  ..........
    Previous assessments........................        None  ..........
    Rebates.....................................        None  ..........
                                                 -----------------------
    Balance.....................................  ..........      $2,374
                                                 -----------------------
      Underpayment..............................  ..........     $23,454
 


[[Page 639]]

    Computation of the portions of the underpayment on which penalties 
under section 6662(b)(2) and section 6663 are imposed:
    Step 1 Determine the portion, if any, of the underpayment on which 
no accuracy-related or fraud penalty is imposed:

Taxable income shown on return..............................     $15,800
Adjustment 1...............................................       1,000
                                                             -----------
      ``Adjusted'' taxable income...........................     $16,800
                                                             ===========
Tax on ``adjusted'' taxable income..........................      $2,524
Tax shown on return.........................................       2,374
                                                             -----------
      Portion of underpayment on which no penalty is imposed        $150
 

    Step 2 Determine the portion, if any, of the underpayment on which a 
penalty of 20 percent is imposed:

``Adjusted'' taxable income from step 1.....................     $16,800
Adjustment 2...............................................      40,000
                                                             -----------
      ``Adjusted'' taxable income...........................      56,800
                                                             ===========
Tax on ``adjusted'' taxable income..........................     $11,880
Tax on ``adjusted'' taxable income from step 1..............      $2,524
                                                             -----------
      Portion of underpayment on which 20 percent penalty is      $9,356
       imposed..............................................
 

    Step 3 Determine the portion, if any, of the underpayment on which a 
penalty of 75 percent is imposed:

Total underpayment..............................  ..........     $23,454
Less the sum of the portions of such
 underpayment determined in:
    Step 1......................................        $150
    Step 2......................................       9,356
                                                 -----------------------
Total...........................................  ..........      $9,506
                                                 -----------------------
      Portion of underpayment on which 75         ..........     $13,948
       percent penalty is imposed...............
 

    Example 2. The facts are the same as in Example 1 except that the 
taxpayers failed to claim on their return a credit of $1,500 for income 
tax withheld on unreported additional income that resulted in Adjustment 
2. Because the unclaimed prepayment credit is allocable to Adjustment 
2, the portion of the underpayment attributable to that adjustment is 
$7,856 ($9,356--$1,500). The portions of the underpayment attributable 
to Adjustments 1 and 3 remain the same.
    Example 3. The facts are the same as in Example 1 except that the 
taxpayers made a timely estimated tax payment of $1,500 for 1989 which 
they failed to claim (and which the Service had not previously allowed). 
This unclaimed prepayment credit is not allocable to any particular 
adjustment. Therefore, the credit is allocated first to the portion of 
the underpayment on which no penalty is imposed ($150). The remaining 
amount ($1,350) is allocated next to the 20 percent penalty portion of 
the underpayment ($9,356). Thus, the portion of the underpayment that is 
not penalized is zero ($150--$150), the portion subject to a 20 percent 
penalty is $8,006 ($9,356--$1,350) and the portion subject to a 75 
percent penalty is unchanged at $13,948.

[T.D. 8381, 56 FR 67507, Dec. 31, 1991; T.D. 8381, 57 FR 6165, Feb. 20, 
1992]



Sec. 1.6664-4  Reasonable cause and good faith exception to section 
6662 penalties.

    (a) In general. No penalty may be imposed under section 6662 with 
respect to any portion of an underpayment upon a showing by the taxpayer 
that there was reasonable cause for, and the taxpayer acted in good 
faith with respect to, such portion. Rules for determining whether the 
reasonable cause and good faith exception applies are set forth in 
paragraphs (b) through (h) of this section.
    (b) Facts and circumstances taken into account--(1) In general. The 
determination of whether a taxpayer acted with reasonable cause and in 
good faith is made on a case-by-case basis, taking into account all 
pertinent facts and circumstances. (See paragraph (e) of this section 
for certain rules relating to a substantial understatement penalty 
attributable to tax shelter items of corporations.) Generally, the most 
important factor is the extent of the taxpayer's effort to assess the 
taxpayer's proper tax liability. Circumstances that may indicate 
reasonable cause and good faith include an honest misunderstanding of 
fact or law that is reasonable in light of all of the facts and 
circumstances, including the experience, knowledge, and education of the 
taxpayer. An isolated computational or transcriptional error generally 
is not inconsistent with reasonable cause and good faith. Reliance on an 
information return or on the advice of a professional tax advisor or an 
appraiser does not necessarily demonstrate reasonable cause and good 
faith. Similarly, reasonable cause and good faith is not necessarily 
indicated by reliance on facts that, unknown to the taxpayer, are 
incorrect. Reliance on an information return, professional advice, or 
other facts, however, constitutes reasonable cause and good faith if, 
under all the circumstances, such reliance was reasonable and the 
taxpayer acted in good faith. (See paragraph (c) of this section for 
certain

[[Page 640]]

rules relating to reliance on the advice of others.) For example, 
reliance on erroneous information (such as an error relating to the cost 
or adjusted basis of property, the date property was placed in service, 
or the amount of opening or closing inventory) inadvertently included in 
data compiled by the various divisions of a multidivisional corporation 
or in financial books and records prepared by those divisions generally 
indicates reasonable cause and good faith, provided the corporation 
employed internal controls and procedures, reasonable under the 
circumstances, that were designed to identify such factual errors. 
Reasonable cause and good faith ordinarily is not indicated by the mere 
fact that there is an appraisal of the value of property. Other factors 
to consider include the methodology and assumptions underlying the 
appraisal, the appraised value, the relationship between appraised value 
and purchase price, the circumstances under which the appraisal was 
obtained, and the appraiser's relationship to the taxpayer or to the 
activity in which the property is used. (See paragraph (g) of this 
section for certain rules relating to appraisals for charitable 
deduction property.) A taxpayer's reliance on erroneous information 
reported on a Form W-2, Form 1099, or other information return indicates 
reasonable cause and good faith, provided the taxpayer did not know or 
have reason to know that the information was incorrect. Generally, a 
taxpayer knows, or has reason to know, that the information on an 
information return is incorrect if such information is inconsistent with 
other information reported or otherwise furnished to the taxpayer, or 
with the taxpayer's knowledge of the transaction. This knowledge 
includes, for example, the taxpayer's knowledge of the terms of his 
employment relationship or of the rate of return on a payor's 
obligation.
    (2) Examples. The following examples illustrate this paragraph (b). 
They do not involve tax shelter items. (See paragraph (e) of this 
section for certain rules relating to the substantial understatement 
penalty attributable to the tax shelter items of corporations.)

    Example 1. A, an individual calendar year taxpayer, engages B, a 
professional tax advisor, to give A advice concerning the deductibility 
of certain state and local taxes. A provides B with full details 
concerning the taxes at issue. B advises A that the taxes are fully 
deductible. A, in preparing his own tax return, claims a deduction for 
the taxes. Absent other facts, and assuming the facts and circumstances 
surrounding B's advice and A's reliance on such advice satisfy the 
requirements of paragraph (c) of this section, A is considered to have 
demonstrated good faith by seeking the advice of a professional tax 
advisor, and to have shown reasonable cause for any underpayment 
attributable to the deduction claimed for the taxes. However, if A had 
sought advice from someone that A knew, or should have known, lacked 
knowledge in the relevant aspects of Federal tax law, or if other facts 
demonstrate that A failed to act reasonably or in good faith, A would 
not be considered to have shown reasonable cause or to have acted in 
good faith.
    Example 2. C, an individual, sought advice from D, a friend who was 
not a tax professional, as to how C might reduce his Federal tax 
obligations. D advised C that, for a nominal investment in Corporation 
X, D had received certain tax benefits which virtually eliminated D's 
Federal tax liability. D also named other investors who had received 
similar benefits. Without further inquiry, C invested in X and claimed 
the benefits that he had been assured by D were due him. In this case, C 
did not make any good faith attempt to ascertain the correctness of what 
D had advised him concerning his tax matters, and is not considered to 
have reasonable cause for the underpayment attributable to the benefits 
claimed.
    Example 3. E, an individual, worked for Company X doing odd jobs and 
filling in for other employees when necessary. E worked irregular hours 
and was paid by the hour. The amount of E's pay check differed from week 
to week. The Form W-2 furnished to E reflected wages for 1990 in the 
amount of $29,729. It did not, however, include compensation of $1,467 
paid for some hours E worked. Relying on the Form W-2, E filed a return 
reporting wages of $29,729. E had no reason to know that the amount 
reported on the Form W-2 was incorrect. Under the circumstances, E is 
considered to have acted in good faith in relying on the Form W-2 and to 
have reasonable cause for the underpayment attributable to the 
unreported wages.
    Example 4. H, an individual, did not enjoy preparing his tax returns 
and procrastinated in doing so until April 15th. On April 15th, H 
hurriedly gathered together his tax records and materials, prepared a 
return, and mailed it before midnight. The return contained numerous 
errors, some of which were in H's favor and some of which were not. The 
net result of all the adjustments, however, was an underpayment of tax 
by H. Under these circumstances, H is not considered to have

[[Page 641]]

reasonable cause for the underpayment or to have acted in good faith in 
attempting to file an accurate return.

    (c) Reliance on opinion or advice--(1) Facts and circumstances; 
minimum requirements. All facts and circumstances must be taken into 
account in determining whether a taxpayer has reasonably relied in good 
faith on advice (including the opinion of a professional tax advisor) as 
to the treatment of the taxpayer (or any entity, plan, or arrangement) 
under Federal tax law. For example, the taxpayer's education, 
sophistication and business experience will be relevant in determining 
whether the taxpayer's reliance on tax advice was reasonable and made in 
good faith. In no event will a taxpayer be considered to have reasonably 
relied in good faith on advice (including an opinion) unless the 
requirements of this paragraph (c)(1) are satisfied. The fact that these 
requirements are satisfied, however, will not necessarily establish that 
the taxpayer reasonably relied on the advice (including the opinion of a 
tax advisor) in good faith. For example, reliance may not be reasonable 
or in good faith if the taxpayer knew, or reasonably should have known, 
that the advisor lacked knowledge in the relevant aspects of Federal tax 
law.
    (i) All facts and circumstances considered. The advice must be based 
upon all pertinent facts and circumstances and the law as it relates to 
those facts and circumstances. For example, the advice must take into 
account the taxpayer's purposes (and the relative weight of such 
purposes) for entering into a transaction and for structuring a 
transaction in a particular manner. In addition, the requirements of 
this paragraph (c)(1) are not satisfied if the taxpayer fails to 
disclose a fact that it knows, or reasonably should know, to be relevant 
to the proper tax treatment of an item.
    (ii) No unreasonable assumptions. The advice must not be based on 
unreasonable factual or legal assumptions (including assumptions as to 
future events) and must not unreasonably rely on the representations, 
statements, findings, or agreements of the taxpayer or any other person. 
For example, the advice must not be based upon a representation or 
assumption which the taxpayer knows, or has reason to know, is unlikely 
to be true, such as an inaccurate representation or assumption as to the 
taxpayer's purposes for entering into a transaction or for structuring a 
transaction in a particular manner.
    (iii) Reliance on the invalidity of a regulation. A taxpayer may not 
rely on an opinion or advice that a regulation is invalid to establish 
that the taxpayer acted with reasonable cause and good faith unless the 
taxpayer adequately disclosed, in accordance with Sec. 1.6662-3(c)(2), 
the position that the regulation in question is invalid.
    (2) Advice defined. Advice is any communication, including the 
opinion of a professional tax advisor, setting forth the analysis or 
conclusion of a person, other than the taxpayer, provided to (or for the 
benefit of) the taxpayer and on which the taxpayer relies, directly or 
indirectly, with respect to the imposition of the section 6662 accuracy-
related penalty. Advice does not have to be in any particular form.
    (3) Cross-reference. For rules applicable to advisors, see e.g., 
Sec. Sec. 1.6694-1 through 1.6694-3 (regarding preparer penalties), 31 
CFR 10.22 (regarding diligence as to accuracy), 31 CFR 10.33 (regarding 
tax shelter opinions), and 31 CFR 10.34 (regarding standards for 
advising with respect to tax return positions and for preparing or 
signing returns).
    (d) Underpayments attributable to reportable transactions. If any 
portion of an underpayment is attributable to a reportable transaction, 
as defined in Sec. 1.6011-4(b) (or Sec. 1.6011-4T(b), as applicable), 
then failure by the taxpayer to disclose the transaction in accordance 
with Sec. 1.6011-4 (or Sec. 1.6011-4T, as applicable) is a strong 
indication that the taxpayer did not act in good faith with respect to 
the portion of the underpayment attributable to the reportable 
transaction.
    (e) Pass-through items. The determination of whether a taxpayer 
acted with reasonable cause and in good faith with respect to an 
underpayment that is related to an item reflected on the return of a 
pass-through entity is made on the basis of all pertinent facts and 
circumstances, including the taxpayer's

[[Page 642]]

own actions, as well as the actions of the pass-through entity.
    (f) Special rules for substantial understatement penalty 
attributable to tax shelter items of corporations--(1) In general; facts 
and circumstances. The determination of whether a corporation acted with 
reasonable cause and in good faith in its treatment of a tax shelter 
item (as defined in Sec. 1.6662-4(g)(3)) is based on all pertinent 
facts and circumstances. Paragraphs (f)(2), (3), and (4) of this section 
set forth rules that apply, in the case of a penalty attributable to a 
substantial understatement of income tax (within the meaning of section 
6662(d)), in determining whether a corporation acted with reasonable 
cause and in good faith with respect to a tax shelter item.
    (2) Reasonable cause based on legal justification--(i) Minimum 
requirements. A corporation's legal justification (as defined in 
paragraph (f)(2)(ii) of this section) may be taken into account, as 
appropriate, in establishing that the corporation acted with reasonable 
cause and in good faith in its treatment of a tax shelter item only if 
the authority requirement of paragraph (f)(2)(i)(A) of this section and 
the belief requirement of paragraph (f)(2)(i)(B) of this section are 
satisfied (the minimum requirements). Thus, a failure to satisfy the 
minimum requirements will preclude a finding of reasonable cause and 
good faith based (in whole or in part) on the corporation's legal 
justification.
    (A) Authority requirement. The authority requirement is satisfied 
only if there is substantial authority (within the meaning of Sec. 
1.6662-4(d)) for the tax treatment of the item.
    (B) Belief requirement. The belief requirement is satisfied only if, 
based on all facts and circumstances, the corporation reasonably 
believed, at the time the return was filed, that the tax treatment of 
the item was more likely than not the proper treatment. For purposes of 
the preceding sentence, a corporation is considered reasonably to 
believe that the tax treatment of an item is more likely than not the 
proper tax treatment if (without taking into account the possibility 
that a return will not be audited, that an issue will not be raised on 
audit, or that an issue will be settled)--
    (1) The corporation analyzes the pertinent facts and authorities in 
the manner described in Sec. 1.6662-4(d)(3)(ii), and in reliance upon 
that analysis, reasonably concludes in good faith that there is a 
greater than 50-percent likelihood that the tax treatment of the item 
will be upheld if challenged by the Internal Revenue Service; or
    (2) The corporation reasonably relies in good faith on the opinion 
of a professional tax advisor, if the opinion is based on the tax 
advisor's analysis of the pertinent facts and authorities in the manner 
described in Sec. 1.6662-4(d)(3)(ii) and unambiguously states that the 
tax advisor concludes that there is a greater than 50-percent likelihood 
that the tax treatment of the item will be upheld if challenged by the 
Internal Revenue Service. (For this purpose, the requirements of 
paragraph (c) of this section must be met with respect to the opinion of 
a professional tax advisor.)
    (ii) Legal justification defined. For purposes of this paragraph 
(e), legal justification includes any justification relating to the 
treatment or characterization under the Federal tax law of the tax 
shelter item or of the entity, plan, or arrangement that gave rise to 
the item. Thus, a taxpayer's belief (whether independently formed or 
based on the advice of others) as to the merits of the taxpayer's 
underlying position is a legal justification.
    (3) Minimum requirements not dispositive. Satisfaction of the 
minimum requirements of paragraph (f)(2) of this section is an important 
factor to be considered in determining whether a corporate taxpayer 
acted with reasonable cause and in good faith, but is not necessarily 
dispositive. For example, depending on the circumstances, satisfaction 
of the minimum requirements may not be dispositive if the taxpayer's 
participation in the tax shelter lacked significant business purpose, if 
the taxpayer claimed tax benefits that are unreasonable in comparison to 
the taxpayer's investment in the tax shelter, or if the taxpayer agreed 
with the organizer or promoter of the tax shelter that the taxpayer 
would protect the confidentiality of the tax aspects of the structure of 
the tax shelter.

[[Page 643]]

    (4) Other factors. Facts and circumstances other than a 
corporation's legal justification may be taken into account, as 
appropriate, in determining whether the corporation acted with 
reasonable cause and in good faith with respect to a tax shelter item 
regardless of whether the minimum requirements of paragraph (f)(2) of 
this section are satisfied.
    (g) Tranactions between persons described in section 482 and net 
section 482 transfer price adjustments. [Reserved]
    (h) Valuation misstatements of charitable deduction property--(1) In 
general. There may be reasonable cause and good faith with respect to a 
portion of an underpayment that is attributable to a substantial (or 
gross) valuation misstatement of charitable deduction property (as 
defined in paragraph (h)(2) of this section) only if--
    (i) The claimed value of the property was based on a qualified 
appraisal (as defined in paragraph (h)(2) of this section) by a 
qualified appraiser (as defined in paragraph (h)(2) of this section); 
and
    (ii) In addition to obtaining a qualified appraisal, the taxpayer 
made a good faith investigation of the value of the contributed 
property.
    (2) Definitions. For purposes of this paragraph (h):
    Charitable deduction property means any property (other than money 
or publicly traded securities, as defined in Sec. 1.170A-13(c)(7)(xi)) 
contributed by the taxpayer in a contribution for which a deduction was 
claimed under section 170.
    Qualified appraisal means a qualified appraisal as defined in Sec. 
1.170A-13(c)(3).
    Qualified appraiser means a qualified appraiser as defined in Sec. 
1.170A-13(c)(5).
    (3) Special rules. The rules of this paragraph (h) apply regardless 
of whether Sec. 1.170A-13 permits a taxpayer to claim a charitable 
contribution deduction for the property without obtaining a qualified 
appraisal. The rules of this paragraph (h) apply in addition to the 
generally applicable rules concerning reasonable cause and good faith.

[T.D. 8381, 56 FR 67508, Dec. 31, 1991; T.D. 8381, 57 FR 6166, Feb. 20, 
1992, as amended by T.D. 8617, 60 FR 45666, Sept. 1, 1995; T.D. 8790, 63 
FR 66435, Dec. 2, 1998; T.D. 9109, 68 FR 75128, Dec. 30, 2003]



Sec. 1.6664-4T  Reasonable cause and good faith exception to section
6662 penalties.

    (a)-(e) [Reserved]
    (f) Transactions between persons described in section 482 and net 
section 482 transfer price adjustments. For purposes of applying the 
reasonable cause and good faith exception of section 6664(c) to net 
section 482 adjustments, the rules of Sec. 1.6662-6(d) apply. A 
taxpayer that does not satisfy the rules of Sec. 1.6662-6(d) for a net 
section 482 adjustment cannot satisfy the reasonable cause and good 
faith exception under section 6664(c). The rules of this section apply 
to underpayments subject to the transactional penalty in Sec. 1.6662-
6(b). If the standards of the net section 482 penalty exclusion 
provisions under Sec. 1.6662-6(d) are met with respect to such 
underpayments, then the taxpayer will be considered to have acted with 
reasonable cause and good faith for purposes of this section.

[T.D. 8656, 61 FR 4885, Feb. 9, 1996]



Sec. 1.6694-0  Table of contents.

    This section lists the captions that appear in Sec. Sec. 1.6694-1 
through 1.6694-4.

     Sec. 1.6694-1 Section 6694 penalties applicable to tax return 
                               preparers.

    (a) Overview.
    (1) In general.
    (2) Date return is deemed prepared.
    (b) Tax return preparer.
    (1) In general.
    (2) Responsibility of signing tax return preparer.
    (3) Responsibility of nonsigning tax return preparer.
    (4) Responsibility of signing and nonsigning tax return preparer.
    (5) Tax return preparer and firm responsibility.
    (6) Examples.
    (c) Understatement of liability.
    (d) Abatement of penalty where taxpayer's liability not understated.
    (e) Verification of information furnished by taxpayer or other third 
party.
    (1) In general.

[[Page 644]]

    (2) Verification of information on previously filed returns.
    (3) Examples.
    (f) Income derived (or to be derived) with respect to the return or 
claim for refund.
    (1) In general.
    (2) Compensation.
    (i) Multiple engagements.
    (ii) Reasonable allocation.
    (iii) Fee refunds.
    (iv) Reduction of compensation.
    (3) Individual and firm allocation.
    (4) Examples.
    (g) Effective/applicability date.

    Sec. 1.6694-2 Penalty for understatement due to an unreasonable 
                                position.

    (a) In general.
    (1) Proscribed conduct.
    (2) Special rule for corporations, partnerships, and other firms.
    (b) Reasonable to believe that the position would more likely than 
not be sustained on its merits.
    (1) In general.
    (2) Authorities.
    (3) Written determinations.
    (4) Taxpayer's jurisdiction.
    (5) When ``more likely than not'' standard must be satisfied.
    (c) Substantial authority.
    (d) Exception for adequate disclosure of positions with a reasonable 
basis.
    (1) In general.
    (2) Reasonable basis.
    (3) Adequate disclosure.
    (i) Signing tax return preparers.
    (ii) Nonsigning tax return preparers.
    (A) Advice to taxpayers.
    (B) Advice to another tax return preparer.
    (iii) Requirements for advice.
    (iv) Pass-through entities.
    (v) Examples.
    (e) Exception for reasonable cause and good faith.
    (1) Nature of the error causing the understatement.
    (2) Frequency of errors.
    (3) Materiality of errors.
    (4) Tax return preparer's normal office practice.
    (5) Reliance on advice of others.
    (6) Reliance on generally accepted administrative or industry 
practice.
    (f) Effective/applicability date.

 Sec. 1.6694-3 Penalty for understatement due to willful, reckless, or 
                          intentional conduct.

    (a) In general.
    (1) Proscribed conduct.
    (2) Special rule for corporations, partnerships, and other firms.
    (b) Willful attempt to understate liability.
    (c) Reckless or intentional disregard.
    (d) Examples.
    (e) Rules or regulations.
    (f) Section 6694(b) penalty reduced by section 6694(a) penalty.
    (g) Effective/applicability date.

    Sec. 1.6694-4 Extension of period of collection when tax return 
 preparer pays 15 percent of a penalty for understatement of taxpayer's 
             liability and certain other procedural matters.

    (a) In general.
    (b) Tax return preparer must bring suit in district court to 
determine liability for penalty.
    (c) Suspension of running of period of limitations on collection.
    (d) Effective/applicability date.

[T.D. 9436, 73 FR 78439, Dec. 22, 2008]



Sec. 1.6694-1  Section 6694 penalties applicable to tax return 
preparers.

    (a) Overview--(1) In general. Sections 6694(a) and (b) impose 
penalties on tax return preparers for conduct giving rise to certain 
understatements of liability on a return (including an amended or 
adjusted return) or claim for refund. For positions other than those 
with respect to tax shelters (as defined in section 6662(d)(2)(C)(ii)) 
and reportable transactions to which section 6662A applies, the section 
6694(a) penalty is imposed in an amount equal to the greater of $1,000 
or 50 percent of the income derived (or to be derived) by the tax return 
preparer for an understatement of tax liability that is due to an 
undisclosed position for which the tax return preparer did not have 
substantial authority or due to a disclosed position for which there is 
no reasonable basis. For positions with respect to tax shelters (as 
defined in section 6662(d)(2)(C)(ii)) or reportable transactions to 
which section 6662A applies, the section 6694(a) penalty is imposed in 
an amount equal to the greater of $1,000 or 50 percent of the income 
derived (or to be derived) by the tax return preparer for an 
understatement of tax liability for which it is not reasonable to 
believe that the position would more likely than not be sustained on its 
merits. The section 6694(b) penalty is imposed in an amount equal to the 
greater of $5,000 or 50 percent of the income derived (or to be derived) 
by the tax return preparer for an understatement of liability with 
respect to tax that is due to a willful attempt to understate tax 
liability or that is due to reckless or intentional disregard of

[[Page 645]]

rules or regulations. Refer to Sec. 1.6694-2 for rules relating to the 
penalty under section 6694(a). Refer to Sec. 1.6694-3 for rules 
relating to the penalty under section 6694(b).
    (2) Date return is deemed prepared. For purposes of the penalties 
under section 6694, a return or claim for refund is deemed prepared on 
the date it is signed by the tax return preparer. If a signing tax 
return preparer within the meaning of Sec. 301.7701-15(b)(1) of this 
chapter fails to sign the return, the return or claim for refund is 
deemed prepared on the date the return or claim is filed. See Sec. 
1.6695-1 of this section. In the case of a nonsigning tax return 
preparer within the meaning of Sec. 301.7701-15(b)(2) of this chapter, 
the relevant date is the date the nonsigning tax return preparer 
provides the tax advice with respect to the position giving rise to the 
understatement. This date will be determined based on all the facts and 
circumstances.
    (b) Tax return preparer--(1) In general. For purposes of this 
section, ``tax return preparer'' means any person who is a tax return 
preparer within the meaning of section 7701(a)(36) and Sec. 301.7701-15 
of this chapter. An individual is a tax return preparer subject to 
section 6694 if the individual is primarily responsible for the 
position(s) on the return or claim for refund giving rise to an 
understatement. See Sec. 301.7701-15(b)(3). There is only one 
individual within a firm who is primarily responsible for each position 
on the return or claim for refund giving rise to an understatement. In 
the course of identifying the individual who is primarily responsible 
for the position, the Internal Revenue Service (IRS) may advise multiple 
individuals within the firm that it may be concluded that they are the 
individual within the firm who is primarily responsible. In some 
circumstances, there may be more than one tax return preparer who is 
primarily responsible for the position(s) giving rise to an 
understatement if multiple tax return preparers are employed by, or 
associated with, different firms.
    (2) Responsibility of signing tax return preparer. If there is a 
signing tax return preparer within the meaning of Sec. 301.7701-
15(b)(1) of this chapter within a firm, the signing tax return preparer 
generally will be considered the person who is primarily responsible for 
all of the positions on the return or claim for refund giving rise to an 
understatement unless, based upon credible information from any source, 
it is concluded that the signing tax return preparer is not primarily 
responsible for the position(s) on the return or claim for refund giving 
rise to an understatement. In that case, a nonsigning tax return 
preparer within the signing tax return preparer's firm (as determined in 
paragraph (b)(3) of this section) will be considered the tax return 
preparer who is primarily responsible for the position(s) on the return 
or claim for refund giving rise to an understatement.
    (3) Responsibility of nonsigning tax return preparer. If there is no 
signing tax return preparer within the meaning of Sec. 301.7701-
15(b)(1) of this chapter for the return or claim for refund within the 
firm or if, after the application of paragraph (b)(2) of this section, 
it is concluded that the signing tax return preparer is not primarily 
responsible for the position, the nonsigning tax return preparer within 
the meaning of Sec. 301.7701-15(b)(2) of this chapter within the firm 
with overall supervisory responsibility for the position(s) giving rise 
to the understatement generally will be considered the tax return 
preparer who is primarily responsible for the position for purposes of 
section 6694 unless, based upon credible information from any source, it 
is concluded that another nonsigning tax return preparer within that 
firm is primarily responsible for the position(s) on the return or claim 
for refund giving rise to the understatement.
    (4) Responsibility of signing and nonsigning tax return preparer. If 
the information presented would support a finding that, within a firm, 
either the signing tax return preparer or a nonsigning tax return 
preparer is primarily responsible for the position(s) giving rise to the 
understatement, the penalty may be assessed against either one of the 
individuals, but not both, as the primarily responsible tax return 
preparer.
    (5) Tax return preparer and firm responsibility. To the extent 
provided in

[[Page 646]]

Sec. Sec. 1.6694-2(a)(2) and 1.6694-3(a)(2), an individual and the firm 
that employs the individual, or the firm of which the individual is a 
partner, member, shareholder, or other equity holder, both may be 
subject to penalty under section 6694 with respect to the position(s) on 
the return or claim for refund giving rise to an understatement. If an 
individual (other than the sole proprietor) who is employed by a sole 
proprietorship is subject to penalty under section 6694, the sole 
proprietorship is considered a ``firm'' for purposes of this paragraph 
(b).
    (6) Examples. The provisions of paragraph (b) of this section are 
illustrated by the following examples:

    Example 1. Attorney A provides advice to Client C concerning the 
proper treatment of an item with respect to which all events have 
occurred on C's tax return. In preparation for providing that advice, A 
seeks advice regarding the proper treatment of the item from Attorney B, 
who is within the same firm as A, but A is the attorney who signs C's 
return as a tax return preparer. B provides advice on the treatment of 
the item upon which A relies. B's advice is reflected on C's tax return 
but no disclosure was made in accordance with Sec. 1.6694-2(d)(3). The 
advice constitutes preparation of a substantial portion of the return 
within the meaning of Sec. 301.7701-15(b)(3). The IRS later challenges 
the position taken on the tax return, giving rise to an understatement 
of liability. For purposes of the regulations under section 6694, A is 
initially considered the tax return preparer with respect to C's return, 
and the IRS advises A that A may be subject to the penalty under section 
6694 with respect to C's return. Based upon information received from A 
or another source, it may be concluded that B, rather than A, had 
primary responsibility for the position taken on the return that gave 
rise to the understatement and may be subject to penalty under section 
6694 instead of A.
    Example 2. Same as Example 1, except that neither Attorney A nor any 
other source produce credible information that Attorney B had primary 
responsibility for the position on the return giving rise to an 
understatement. Attorney A is the tax return preparer who may be subject 
to penalty under section 6694 with respect to C's return.
    Example 3. Same as Example 1, except that neither Attorney A nor any 
other attorney within A's firm signs Client C's return as a tax return 
preparer. Attorney B is the nonsigning tax return preparer within the 
firm with overall supervisory responsibility for the position giving 
rise to an understatement. Accordingly, B is the tax return preparer who 
is primarily responsible for the position on C's return giving rise to 
an understatement and may be subject to penalty under section 6694.
    Example 4. Same as Example 1, except Attorney D, who works for a 
different firm than A, also provides advice on the same position upon 
which A relies. It may be concluded that D is also primarily responsible 
for the position on the return and may be subject to penalty under 
section 6694.
    Example 5. Same as Example 1, except Attorney B is able to present 
credible information that A is also responsible for the position on C's 
return giving rise to an understatement. The IRS may conclude between A 
and B, the two responsible persons for the position, who is primarily 
responsible and may assess a section 6694 penalty against A or B, but 
not both, as the primarily responsible tax return preparer.

    (c) Understatement of liability. For purposes of this section, an 
``understatement of liability'' exists if, viewing the return or claim 
for refund as a whole, there is an understatement of the net amount 
payable with respect to any tax imposed by the Internal Revenue Code 
(Code), or an overstatement of the net amount creditable or refundable 
with respect to any tax imposed by the Code. The net amount payable in a 
taxable year with respect to the return for which the tax return 
preparer engaged in conduct proscribed by section 6694 is not reduced by 
any carryback. Tax imposed by the Code does not include additions to the 
tax, additional amounts, and assessable penalties imposed by subchapter 
68 of the Code. Except as provided in paragraph (d) of this section, the 
determination of whether an understatement of liability exists may be 
made in a proceeding involving the tax return preparer that is separate 
and apart from any proceeding involving the taxpayer.
    (d) Abatement of penalty where taxpayer's liability not understated. 
If a penalty under section 6694(a) or (b) concerning a return or claim 
for refund has been assessed against one or more tax return preparers, 
and if it is established at any time in a final administrative 
determination or a final judicial decision that there was no 
understatement of liability relating to the position(s) on the return or 
claim for refund, then--

[[Page 647]]

    (1) The assessment shall be abated; and
    (2) If any amount of the penalty was paid, that amount shall be 
refunded to the person or persons who so paid, as if the payment were an 
overpayment of tax, without consideration of any period of limitations.
    (e) Verification of information furnished by taxpayer or other 
party--(1) In general. For purposes of sections 6694(a) and (b) 
(including demonstrating that a position complied with relevant 
standards under section 6694(a) and demonstrating reasonable cause and 
good faith under Sec. 1.6694-2(e)), the tax return preparer generally 
may rely in good faith without verification upon information furnished 
by the taxpayer. A tax return preparer also may rely in good faith and 
without verification upon information and advice furnished by another 
advisor, another tax return preparer or other party (including another 
advisor or tax return preparer at the tax return preparer's firm). The 
tax return preparer is not required to audit, examine or review books 
and records, business operations, documents, or other evidence to verify 
independently information provided by the taxpayer, advisor, other tax 
return preparer, or other party. The tax return preparer, however, may 
not ignore the implications of information furnished to the tax return 
preparer or actually known by the tax return preparer. The tax return 
preparer must make reasonable inquiries if the information as furnished 
appears to be incorrect or incomplete. Additionally, some provisions of 
the Code or regulations require that specific facts and circumstances 
exist (for example, that the taxpayer maintain specific documents) 
before a deduction or credit may be claimed. The tax return preparer 
must make appropriate inquiries to determine the existence of facts and 
circumstances required by a Code section or regulation as a condition of 
the claiming of a deduction or credit.
    (2) Verification of information on previously filed returns. For 
purposes of section 6694(a) and (b) (including meeting the reasonable to 
believe that the position would more likely than not be sustained on its 
merits and reasonable basis standards in Sec. Sec. 1.6694-2(b) and 
(d)(2), and demonstrating reasonable cause and good faith under Sec. 
1.6694-2(e)), a tax return preparer may rely in good faith without 
verification upon a tax return that has been previously prepared by a 
taxpayer or another tax return preparer and filed with the IRS. For 
example, a tax return preparer who prepares an amended return (including 
a claim for refund) need not verify the positions on the original 
return. The tax return preparer, however, may not ignore the 
implications of information furnished to the tax return preparer or 
actually known by the tax return preparer. The tax return preparer must 
make reasonable inquiries if the information as furnished appears to be 
incorrect or incomplete. The tax return preparer must confirm that the 
position being relied upon has not been adjusted by examination or 
otherwise.
    (3) Examples. The provisions of this paragraph (e) are illustrated 
by the following examples:

    Example 1. During an interview conducted by Preparer E, a taxpayer 
stated that he had made a charitable contribution of real estate in the 
amount of $50,000 during the tax year, when in fact he had not made this 
charitable contribution. E did not inquire about the existence of a 
qualified appraisal or complete a Form 8283, Noncash Charitable 
Contributions, in accordance with the reporting and substantiation 
requirements under section 170(f)(11). E reported a deduction on the tax 
return for the charitable contribution, which resulted in an 
understatement of liability for tax, and signed the tax return as the 
tax return preparer. E is subject to a penalty under section 6694.
    Example 2. While preparing the 2008 tax return for an individual 
taxpayer, Preparer F realizes that the taxpayer did not provide a Form 
1099-INT, ``Interest Income'', for a bank account that produced 
significant taxable income in 2007. When F inquired about any other 
income, the taxpayer furnished the Form 1099-INT to F for use in 
preparation of the 2008 tax return. F did not know that the taxpayer 
owned an additional bank account that generated taxable income for 2008, 
and the taxpayer did not reveal this information to the tax return 
preparer notwithstanding F's general inquiry about any other income. F 
signed the taxpayer's return as the tax return preparer. F is not 
subject to a penalty under section 6694.
    Example 3. In preparing a tax return, for purposes of determining 
the deductibility of a contribution by an employer for a qualified

[[Page 648]]

pension plan, Accountant G relies on a computation of the section 404 
limit on deductible amounts made by the enrolled actuary for the plan. 
On the basis of this calculation, G completed and signed the tax return. 
It is later determined that there is an understatement of liability for 
tax that resulted from the overstatement of the section 404 limit on 
deductible amounts made by the actuary. G had no reason to believe that 
the actuary's calculation of the limit on deductible contributions was 
incorrect or incomplete, and the calculation appeared reasonable on its 
face. G was also not aware at the time the return was prepared of any 
reason why the actuary did not know all of the relevant facts or that 
the calculation of the limit on deductible contributions was no longer 
reliable due to developments in the law since the time the calculation 
was given. G is not subject to a penalty under section 6694. The 
actuary, however, may be subject to penalty under section 6694 if the 
calculation provided by the actuary constitutes a substantial portion of 
the tax return within the meaning of Sec. 301.7701-15(b)(3) of this 
chapter.

    (f) Income derived (or to be derived) with respect to the return or 
claim for refund--(1) In general. For purposes of sections 6694(a) and 
(b), income derived (or to be derived) means all compensation the tax 
return preparer receives or expects to receive with respect to the 
engagement of preparing the return or claim for refund or providing tax 
advice (including research and consultation) with respect to the 
position(s) taken on the return or claim for refund that gave rise to 
the understatement. In the situation of a tax return preparer who is not 
compensated directly by the taxpayer, but rather by a firm that employs 
the tax return preparer or with which the tax return preparer is 
associated, income derived (or to be derived) means all compensation the 
tax return preparer receives from the firm that can be reasonably 
allocated to the engagement of preparing the return or claim for refund 
or providing tax advice (including research and consultation) with 
respect to the position(s) taken on the return or claim for refund that 
gave rise to the understatement. In the situation where a firm that 
employs the individual tax return preparer (or the firm of which the 
individual tax return preparer is a partner, member, shareholder, or 
other equity holder) is subject to a penalty under section 6694(a) or 
(b) pursuant to the provisions in Sec. Sec. 1.6694-2(a)(2) or 1.6694-
3(a)(2), income derived (or to be derived) means all compensation the 
firm receives or expects to receive with respect to the engagement of 
preparing the return or claim for refund or providing tax advice 
(including research and consultation) with respect to the position(s) 
taken on the return or claim for refund that gave rise to the 
understatement.
    (2) Compensation--(i) Multiple engagements. For purposes of applying 
paragraph (f)(1) of this section, if the tax return preparer or the tax 
return preparer's firm has multiple engagements related to the same 
return or claim for refund, only those engagements relating to the 
position(s) taken on the return or claim for refund that gave rise to 
the understatement are considered for purposes of calculating the income 
derived (or to be derived) with respect to the return or claim for 
refund.
    (ii) Reasonable allocation. For purposes of applying paragraph 
(f)(1) of this section, only compensation for tax advice that is given 
with respect to events that have occurred at the time the advice is 
rendered and that relates to the position(s) giving rise to the 
understatement will be taken into account for purposes of calculating 
the section 6694(a) and (b) penalties. If a lump sum fee is received 
that includes amounts not taken into account under the preceding 
sentence, the amount of income derived will be based on a reasonable 
allocation of the lump sum fee between the tax advice giving rise to the 
penalty and the advice that does not give rise to the penalty.
    (iii) Fee refunds. For purposes of applying paragraph (f)(1) of this 
section, a refund to the taxpayer of all or part of the amount paid to 
the tax return preparer or the tax return preparer's firm will not 
reduce the amount of the section 6694 penalty assessed. A refund in this 
context does not include a discounted fee or alternative billing 
arrangement for the services provided.
    (iv) Reduction of compensation. For purposes of applying paragraph 
(f)(1) of this section, it may be concluded based upon information 
provided by the tax return preparer or the tax return preparer's firm 
that an appropriate allocation of compensation attributable to

[[Page 649]]

the position(s) giving rise to the understatement on the return or claim 
for refund is less than the total amount of compensation associated with 
the engagement. For example, the number of hours of the engagement spent 
on the position(s) giving rise to the understatement may be less than 
the total hours associated with the engagement. If this is concluded, 
the amount of the penalty will be calculated based upon the compensation 
attributable to the position(s) giving rise to the understatement. 
Otherwise, the total amount of compensation from the engagement will be 
the amount of income derived for purposes of calculating the penalty 
under section 6694.
    (3) Individual and firm allocation. If both an individual within a 
firm and a firm that employs the individual (or the firm of which the 
individual is a partner, member, shareholder, or other equity holder) 
are subject to a penalty under section 6694(a) or (b) pursuant to the 
provisions in Sec. Sec. 1.6694-2(a)(2) or 1.6694-3(a)(2), the amount of 
penalties assessed against the individual and the firm shall not exceed 
50 percent of the income derived (or to be derived) by the firm from the 
engagement of preparing the return or claim for refund or providing tax 
advice (including research and consultation) with respect to the 
position(s) taken on the return or claim for refund that gave rise to 
the understatement. The portion of the total amount of the penalty 
assessed against the individual tax return preparer shall not exceed 50 
percent of the individual's compensation as determined under paragraphs 
(f)(1) and (2) of this section.
    (4) Examples. The provisions of this paragraph (f) are illustrated 
by the following examples:

    Example 1. Signing Tax Return Preparer H is engaged by a taxpayer 
and paid a total of $21,000. Of this amount, $20,000 relates to research 
and consultation regarding a transaction that is later reported on a 
return, and $1,000 is for the activities relating to the preparation of 
the return. Based on H's hourly rates, a reasonable allocation of the 
amount of compensation related to the advice rendered prior to the 
occurrence of events that are the subject of the advice is $5,000. The 
remaining compensation of $16,000 is considered to be compensation 
related to the advice rendered after the occurrence of events that are 
the subject of the advice and return preparation. The income derived by 
H with respect to the return for purposes of computing the penalty under 
section 6694(a) is $16,000, and the amount of the penalty imposed under 
section 6694(a) is $8,000.
    Example 2. Accountants I, J, and K are employed by Firm L. I is a 
principal manager of Firm L and provides corporate tax advice for the 
taxpayer after all events have occurred subject to an engagement for 
corporate tax advice. J provides international tax advice for the 
taxpayer after all events have occurred subject to a different 
engagement for international tax advice. K prepares and signs the 
taxpayer's return under a general tax services engagement. I's advice is 
the source of an understatement on the return and the advice constitutes 
preparation of a substantial portion of the return within the meaning of 
Sec. 301.7701-15(b) of this chapter. I is the nonsigning tax return 
preparer within the firm with overall supervisory responsibility for the 
position on the taxpayer's return giving rise to an understatement. 
Thus, I is the tax return preparer who is primarily responsible for the 
position on the taxpayer's return giving rise to the understatement. 
Because K's signature as the signing tax return preparer is on the 
return, the IRS advises K that K may be subject to the section 6694(a) 
penalty. K provides credible information that I is the tax return 
preparer with primary responsibility for the position that gave rise to 
the understatement. The IRS, therefore, assesses the section 6694 
penalty against I. The portion of the total amount of the penalty 
allocable to I does not exceed 50 percent of that part of I's 
compensation that is attributable to the corporate tax advice 
engagement. In the event that Firm L is also liable under the provisions 
in Sec. 1.6694-2(a)(2), the IRS assesses the section 6694 penalty in an 
amount not exceeding 50 percent of Firm L's firm compensation based on 
the engagement relating to the corporate tax advice services provided by 
I where there is no applicable reduction in compensation pursuant to 
Sec. 1.6694-1(f)(2)(iii).
    Example 3. Same facts as Example 2, except that I provides the 
advice on the corporate matter when the events have not yet occurred. 
I's advice is the cause of an understatement position on the return, but 
I is not a tax return preparer pursuant to Sec. 301.7701-15(b)(2) or 
(3) of this chapter. K is not limited to reliance on persons who provide 
post-transactional advice if such reliance is reasonable and in good 
faith. Further, K has reasonable cause because K relied on I for the 
advice on the corporate tax matter. I, K and Firm L are not liable for 
the section 6694 penalty.
    Example 4. Attorney M is an employee of Firm N with a salary of 
$75,000 per year. M performs tax preparation work for Client O.

[[Page 650]]

Client O's return contains a position that results in an understatement 
subject to the section 6694 penalty. M spent 100 hours on the position 
(out of a total 2,000 billed during the year). The total fees earned by 
Firm N with respect to the position reflected on Client O's return are 
$50,000. If M is subject to the penalty, the penalty amount computed 
under the 50 percent of income standard is .5 x (100/2,000) x $75,000 = 
$1,875. If Firm N is subject to the penalty, the penalty amount computed 
under the 50% of income standard is .5 x $50,000 = $25,000, less any 
penalty amount imposed against M. If a penalty of $1,875 was assessed 
against M and Firm N was subject to the penalty, a penalty of $23,125 
would be the amount of penalty assessed against Firm N.

    (g) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after December 
31, 2008.

[T.D. 9436, 73 FR 78439, Dec. 22, 2008, as amended at 74 FR 5104, Jan. 
29, 2009]



Sec. 1.6694-2  Penalty for understatement due to an unreasonable 
position.

    (a) In general--(1) Proscribed conduct. Except as otherwise provided 
in this section, a tax return preparer is liable for a penalty under 
section 6694(a) equal to the greater of $1,000 or 50 percent of the 
income derived (or to be derived) by the tax return preparer for any 
return or claim for refund that it prepares that results in an 
understatement of liability due to a position if the tax return preparer 
knew (or reasonably should have known) of the position and either--
    (i) The position is with respect to a tax shelter (as defined in 
section 6662(d)(2)(C)(ii)) or a reportable transaction to which section 
6662A applies, and it was not reasonable to believe that the position 
would more likely than not be sustained on its merits;
    (ii) The position was not disclosed as provided in this section, the 
position is not with respect to a tax shelter (as defined in section 
6662(d)(2)(C)(ii)) or a reportable transaction to which section 6662A 
applies, and there was not substantial authority for the position; or
    (iii) The position (other than a position with respect to a tax 
shelter or a reportable transaction to which section 6662A applies) was 
disclosed as provided in this section but there was no reasonable basis 
for the position.
    (2) Special rule for corporations, partnerships, and other firms. A 
firm that employs a tax return preparer subject to a penalty under 
section 6694(a) (or a firm of which the individual tax return preparer 
is a partner, member, shareholder or other equity holder) is also 
subject to penalty if, and only if--
    (i) One or more members of the principal management (or principal 
officers) of the firm or a branch office participated in or knew of the 
conduct proscribed by section 6694(a);
    (ii) The corporation, partnership, or other firm entity failed to 
provide reasonable and appropriate procedures for review of the position 
for which the penalty is imposed; or
    (iii) The corporation, partnership, or other firm entity disregarded 
its reasonable and appropriate review procedures through willfulness, 
recklessness, or gross indifference (including ignoring facts that would 
lead a person of reasonable prudence and competence to investigate or 
ascertain) in the formulation of the advice, or the preparation of the 
return or claim for refund, that included the position for which the 
penalty is imposed.
    (b) Reasonable to believe that the position would more likely than 
not be sustained on its merits--(1) In general. If a position is with 
respect to a tax shelter (as defined in section 6662(d)(2)(C)(ii)) or a 
reportable transaction to which section 6662A applies, it is 
``reasonable to believe that a position would more likely than not be 
sustained on its merits'' if the tax return preparer analyzes the 
pertinent facts and authorities and, in reliance upon that analysis, 
reasonably concludes in good faith that the position has a greater than 
50 percent likelihood of being sustained on its merits. In reaching this 
conclusion, the possibility that the position will not be challenged by 
the Internal Revenue Service (IRS) (for example, because the taxpayer's 
return may not be audited or because the issue may not be raised on 
audit) is not to be taken into account. The analysis prescribed by Sec. 
1.6662-4(d)(3)(ii) (or any successor provision) for purposes of 
determining whether substantial authority is present applies for 
purposes of determining whether the more likely than not standard is 
satisfied. Whether

[[Page 651]]

a tax return preparer meets this standard will be determined based upon 
all facts and circumstances, including the tax return preparer's 
diligence. In determining the level of diligence in a particular 
situation, the tax return preparer's experience with the area of Federal 
tax law and familiarity with the taxpayer's affairs, as well as the 
complexity of the issues and facts, will be taken into account. A tax 
return preparer may reasonably believe that a position more likely than 
not would be sustained on its merits despite the absence of other types 
of authority if the position is supported by a well-reasoned 
construction of the applicable statutory provision. For purposes of 
determining whether it is reasonable to believe that the position would 
more likely than not be sustained on the merits, a tax return preparer 
may rely in good faith without verification upon information furnished 
by the taxpayer and information and advice furnished by another advisor, 
another tax return preparer, or other party (including another advisor 
or tax return preparer at the tax return preparer's firm), as provided 
in Sec. Sec. 1.6694-1(e) and 1.6694-2(e)(5).
    (2) Authorities. The authorities considered in determining whether a 
position satisfies the more likely than not standard are those 
authorities provided in Sec. 1.6662-4(d)(3)(iii) (or any successor 
provision).
    (3) Written determinations. The tax return preparer may avoid the 
section 6694(a) penalty by taking the position that the tax return 
preparer reasonably believed that the taxpayer's position satisfies the 
``more likely than not'' standard if the taxpayer is the subject of a 
``written determination'' as provided in Sec. 1.6662-4(d)(3)(iv)(A).
    (4) Taxpayer's jurisdiction. The applicability of court cases to the 
taxpayer by reason of the taxpayer's residence in a particular 
jurisdiction is not taken into account in determining whether it is 
reasonable to believe that the position would more likely than not be 
sustained on the merits. Notwithstanding the preceding sentence, the tax 
return preparer may reasonably believe that the position would more 
likely than not be sustained on the merits if the position is supported 
by controlling precedent of a United States Court of Appeals to which 
the taxpayer has a right of appeal with respect to the item.
    (5) When ``more likely than not'' standard must be satisfied. For 
purposes of this section, the requirement that a position satisfies the 
``more likely than not'' standard must be satisfied on the date the 
return is deemed prepared, as prescribed by Sec. 1.6694-1(a)(2).
    (c) [Reserved]
    (d) Exception for adequate disclosure of positions with a reasonable 
basis--(1) In general. The section 6694(a) penalty will not be imposed 
on a tax return preparer if the position taken (other than a position 
with respect to a tax shelter or a reportable transaction to which 
section 6662A applies) has a reasonable basis and is adequately 
disclosed within the meaning of paragraph (c)(3) of this section. For an 
exception to the section 6694(a) penalty for reasonable cause and good 
faith, see paragraph (e) of this section.
    (2) Reasonable basis. For purposes of this section, ``reasonable 
basis'' has the same meaning as in Sec. 1.6662-3(b)(3) or any successor 
provision of the accuracy-related penalty regulations. For purposes of 
determining whether the tax return preparer has a reasonable basis for a 
position, a tax return preparer may rely in good faith without 
verification upon information furnished by the taxpayer and information 
and advice furnished by another advisor, another tax return preparer, or 
other party (including another advisor or tax return preparer at the tax 
return preparer's firm), as provided in Sec. Sec. 1.6694-1(e) and 
1.6694-2(e)(5).
    (3) Adequate disclosure--(i) Signing tax return preparers. In the 
case of a signing tax return preparer within the meaning of Sec. 
301.7701-15(b)(1) of this chapter, disclosure of a position (other than 
a position with respect to a tax shelter or a reportable transaction to 
which section 6662A applies) for which there is a reasonable basis but 
for which there is not substantial authority is adequate if the tax 
return preparer meets any of the following standards:
    (A) The position is disclosed in accordance with Sec. 1.6662-4(f) 
(which permits disclosure on a properly completed and filed Form 8275, 
``Disclosure

[[Page 652]]

Statement,'' or Form 8275-R, ``Regulation Disclosure Statement,'' as 
appropriate, or on the tax return in accordance with the annual revenue 
procedure described in Sec. 1.6662-4(f)(2));
    (B) The tax return preparer provides the taxpayer with the prepared 
tax return that includes the disclosure in accordance with Sec. 1.6662-
4(f); or
    (C) For returns or claims for refund that are subject to penalties 
pursuant to section 6662 other than the accuracy-related penalty 
attributable to a substantial understatement of income tax under section 
6662(b)(2) and (d), the tax return preparer advises the taxpayer of the 
penalty standards applicable to the taxpayer under section 6662. The tax 
return preparer must also contemporaneously document the advice in the 
tax return preparer's files.
    (ii) Nonsigning tax return preparers. In the case of a nonsigning 
tax return preparer within the meaning of Sec. 301.7701-15(b)(2) of 
this chapter, disclosure of a position (other than a position with 
respect to a tax shelter or a reportable transaction to which section 
6662A applies) that satisfies the reasonable basis standard but does not 
satisfy the substantial authority standard is adequate if the position 
is disclosed in accordance with Sec. 1.6662-4(f) (which permits 
disclosure on a properly completed and filed Form 8275 or Form 8275-R, 
as applicable, or on the return in accordance with an annual revenue 
procedure described in Sec. 1.6662-4(f)(2)). In addition, disclosure of 
a position is adequate in the case of a nonsigning tax return preparer 
if, with respect to that position, the tax return preparer complies with 
the provisions of paragraph (c)(3)(ii)(A) or (B) of this section, 
whichever is applicable.
    (A) Advice to taxpayers. If a nonsigning tax return preparer 
provides advice to the taxpayer with respect to a position (other than a 
position with respect to a tax shelter or a reportable transaction to 
which section 6662A applies) for which there is a reasonable basis but 
for which there is not substantial authority, disclosure of that 
position is adequate if the tax return preparer advises the taxpayer of 
any opportunity to avoid penalties under section 6662 that could apply 
to the position, if relevant, and of the standards for disclosure to the 
extent applicable. The tax return preparer must also contemporaneously 
document the advice in the tax return preparer's files. The 
contemporaneous documentation should reflect that the affected taxpayer 
has been advised by a tax return preparer in the firm of the potential 
penalties and the opportunity to avoid penalty through disclosure.
    (B) Advice to another tax return preparer. If a nonsigning tax 
return preparer provides advice to another tax return preparer with 
respect to a position (other than a position with respect to a tax 
shelter or a reportable transaction to which section 6662A applies) for 
which there is a reasonable basis but for which there is not substantial 
authority, disclosure of that position is adequate if the tax return 
preparer advises the other tax return preparer that disclosure under 
section 6694(a) may be required. The tax return preparer must also 
contemporaneously document the advice in the tax return preparer's 
files. The contemporaneous documentation should reflect that the tax 
return preparer outside the firm has been advised that disclosure under 
section 6694(a) may be required. In addition, disclosure of a position 
is adequate in the case of a nonsigning tax return preparer if, with 
respect to that position, the tax return preparer complies with the 
provisions of paragraph (d)(3)(ii)(A) or (B) of this section, whichever 
is applicable.
    (iii) Requirements for advice. For purposes of satisfying the 
disclosure standards of paragraphs (d)(3)(i)(C) and (ii) of this 
section, each return position for which there is a reasonable basis but 
for which there is not substantial authority must be addressed by the 
tax return preparer. The advice to the taxpayer with respect to each 
position, therefore, must be particular to the taxpayer and tailored to 
the taxpayer's facts and circumstances. The tax return preparer is 
required to contemporaneously document the fact that the advice was 
provided. There is no general pro forma language or special format 
required for a tax return preparer to comply with these rules. A general 
disclaimer will not satisfy the requirement that the tax return preparer 
provide and contemporaneously

[[Page 653]]

document advice regarding the likelihood that a position will be 
sustained on the merits and the potential application of penalties as a 
result of that position. Tax return preparers, however, may rely on 
established forms or templates in advising clients regarding the 
operation of the penalty provisions of the Internal Revenue Code. A tax 
return preparer may choose to comply with the documentation standard in 
one document addressing each position or in multiple documents 
addressing all of the positions.
    (iv) Pass-through entities. Disclosure in the case of items 
attributable to a pass-through entity is adequate if made at the entity 
level in accordance with the rules in Sec. 1.6662-4(f)(5) or at the 
entity level in accordance with the rules in paragraphs (d)(3)(i) or 
(ii) of this section.
    (v) Examples. The provisions of paragraph (d)(3) of this section are 
illustrated by the following examples:

    Example 1. An individual taxpayer hires Accountant R to prepare its 
income tax return. A particular position taken on the tax return does 
not have substantial authority although there is a reasonable basis for 
the position. The position is not with respect to a tax shelter or a 
reportable transaction to which section 6662A applies. R prepares and 
signs the tax return and provides the taxpayer with the prepared tax 
return that includes the Form 8275, ``Disclosure Statement,'' disclosing 
the position taken on the tax return. The individual taxpayer signs and 
files the tax return without disclosing the position. The IRS later 
challenges the position taken on the tax return, resulting in an 
understatement of liability. R is not subject to a penalty under section 
6694.
    Example 2. Attorney S advises a large corporate taxpayer concerning 
the proper treatment of complex entries on the corporate taxpayer's tax 
return. S has reason to know that the tax attributable to the entries is 
a substantial portion of the tax required to be shown on the tax return 
within the meaning of Sec. 301.7701-15(b)(3). When providing the 
advice, S concludes that one position does not have substantial 
authority, although the position meets the reasonable basis standard. 
The position is not with respect to a tax shelter or a reportable 
transaction to which section 6662A applies. S advises the corporate 
taxpayer that the position lacks substantial authority and the taxpayer 
may be subject to an accuracy-related penalty under section 6662 unless 
the position is disclosed in a disclosure statement included in the 
return. S also documents the fact that this advice was contemporaneously 
provided to the corporate taxpayer at the time the advice was provided. 
Neither S nor any other attorney within S's firm signs the corporate 
taxpayer's return as a tax return preparer, but the advice by S 
constitutes preparation of a substantial portion of the tax return, and 
S is the individual with overall supervisory responsibility for the 
position giving rise to the understatement. Thus, S is a tax return 
preparer for purposes of section 6694. S, however, will not be subject 
to a penalty under section 6694.

    (e) Exception for reasonable cause and good faith. The penalty under 
section 6694(a) will not be imposed if, considering all the facts and 
circumstances, it is determined that the understatement was due to 
reasonable cause and that the tax return preparer acted in good faith. 
Factors to consider include:
    (1) Nature of the error causing the understatement. The error 
resulted from a provision that was complex, uncommon, or highly 
technical, and a competent tax return preparer of tax returns or claims 
for refund of the type at issue reasonably could have made the error. 
The reasonable cause and good faith exception, however, does not apply 
to an error that would have been apparent from a general review of the 
return or claim for refund by the tax return preparer.
    (2) Frequency of errors. The understatement was the result of an 
isolated error (such as an inadvertent mathematical or clerical error) 
rather than a number of errors. Although the reasonable cause and good 
faith exception generally applies to an isolated error, it does not 
apply if the isolated error is so obvious, flagrant, or material that it 
should have been discovered during a review of the return or claim for 
refund. Furthermore, the reasonable cause and good faith exception does 
not apply if there is a pattern of errors on a return or claim for 
refund even though any one error, in isolation, would have qualified for 
the reasonable cause and good faith exception.
    (3) Materiality of errors. The understatement was not material in 
relation to the correct tax liability. The reasonable cause and good 
faith exception generally applies if the understatement is of a 
relatively immaterial amount. Nevertheless, even an immaterial 
understatement may not qualify for the

[[Page 654]]

reasonable cause and good faith exception if the error or errors 
creating the understatement are sufficiently obvious or numerous.
    (4) Tax return preparer's normal office practice. The tax return 
preparer's normal office practice, when considered together with other 
facts and circumstances, such as the knowledge of the tax return 
preparer, indicates that the error in question would occur rarely and 
the normal office practice was followed in preparing the return or claim 
for refund in question. Such a normal office practice must be a system 
for promoting accuracy and consistency in the preparation of returns or 
claims for refund and generally would include, in the case of a signing 
tax return preparer, checklists, methods for obtaining necessary 
information from the taxpayer, a review of the prior year's return, and 
review procedures. Notwithstanding these rules, the reasonable cause and 
good faith exception does not apply if there is a flagrant error on a 
return or claim for refund, a pattern of errors on a return or claim for 
refund, or a repetition of the same or similar errors on numerous 
returns or claims for refund.
    (5) Reliance on advice of others. For purposes of demonstrating 
reasonable cause and good faith, a tax return preparer may rely without 
verification upon advice and information furnished by the taxpayer and 
information and advice furnished by another advisor, another tax return 
preparer or other party, as provided in Sec. 1.6694-1(e). The tax 
return preparer may rely in good faith on the advice of, or schedules or 
other documents prepared by, the taxpayer, another advisor, another tax 
return preparer, or other party (including another advisor or tax return 
preparer at the tax return preparer's firm), who the tax return preparer 
had reason to believe was competent to render the advice or other 
information. The advice or information may be written or oral, but in 
either case the burden of establishing that the advice or information 
was received is on the tax return preparer. A tax return preparer is not 
considered to have relied in good faith if--
    (i) The advice or information is unreasonable on its face;
    (ii) The tax return preparer knew or should have known that the 
other party providing the advice or information was not aware of all 
relevant facts; or
    (iii) The tax return preparer knew or should have known (given the 
nature of the tax return preparer's practice), at the time the return or 
claim for refund was prepared, that the advice or information was no 
longer reliable due to developments in the law since the time the advice 
was given.
    (6) Reliance on generally accepted administrative or industry 
practice. The tax return preparer reasonably relied in good faith on 
generally accepted administrative or industry practice in taking the 
position that resulted in the understatement. A tax return preparer is 
not considered to have relied in good faith if the tax return preparer 
knew or should have known (given the nature of the tax return preparer's 
practice), at the time the return or claim for refund was prepared, that 
the administrative or industry practice was no longer reliable due to 
developments in the law or IRS administrative practice since the time 
the practice was developed.
    (f) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after December 
31, 2008.

[T.D. 9436, 73 FR 78442, Dec. 22, 2008, as amended at 74 FR 5104, Jan. 
29, 2009]



Sec. 1.6694-3  Penalty for understatement due to willful, reckless,
or intentional conduct.

    (a) In general--(1) Proscribed conduct. A tax return preparer is 
liable for a penalty under section 6694(b) equal to the greater of 
$5,000 or 50 percent of the income derived (or to be derived) by the tax 
return preparer if any part of an understatement of liability for a 
return or claim for refund that is prepared is due to--
    (i) A willful attempt by a tax return preparer to understate in any 
manner the liability for tax on the return or claim for refund; or
    (ii) Any reckless or intentional disregard of rules or regulations 
by a tax return preparer.
    (2) Special rule for corporations, partnerships, and other firms. A 
firm that employs a tax return preparer subject

[[Page 655]]

to a penalty under section 6694(b) (or a firm of which the individual 
tax return preparer is a partner, member, shareholder or other equity 
holder) is also subject to penalty if, and only if--
    (i) One or more members of the principal management (or principal 
officers) of the firm or a branch office participated in or knew of the 
conduct proscribed by section 6694(b);
    (ii) The corporation, partnership, or other firm entity failed to 
provide reasonable and appropriate procedures for review of the position 
for which the penalty is imposed; or
    (iii) The corporation, partnership, or other firm entity disregarded 
its reasonable and appropriate review procedures through willfulness, 
recklessness, or gross indifference (including ignoring facts that would 
lead a person of reasonable prudence and competence to investigate or 
ascertain) in the formulation of the advice, or the preparation of the 
return or claim for refund, that included the position for which the 
penalty is imposed.
    (b) Willful attempt to understate liability. A preparer is 
considered to have willfully attempted to understate liability if the 
preparer disregards, in an attempt wrongfully to reduce the tax 
liability of the taxpayer, information furnished by the taxpayer or 
other persons. For example, if a preparer disregards information 
concerning certain items of taxable income furnished by the taxpayer or 
other persons, the preparer is subject to the penalty. Similarly, if a 
taxpayer states to a preparer that the taxpayer has only two dependents, 
and the preparer reports six dependents on the return, the preparer is 
subject to the penalty.
    (c) Reckless or intentional disregard. (1) Except as provided in 
paragraphs (c)(2) and (c)(3) of this section, a preparer is considered 
to have recklessly or intentionally disregarded a rule or regulation if 
the preparer takes a position on the return or claim for refund that is 
contrary to a rule or regulation (as defined in paragraph (f) of this 
section) and the preparer knows of, or is reckless in not knowing of, 
the rule or regulation in question. A preparer is reckless in not 
knowing of a rule or regulation if the preparer makes little or no 
effort to determine whether a rule or regulation exists, under 
circumstances which demonstrate a substantial deviation from the 
standard of conduct that a reasonable preparer would observe in the 
situation.
    (2) A tax return preparer is not considered to have recklessly or 
intentionally disregarded a rule or regulation if the position contrary 
to the rule or regulation has a reasonable basis as defined in Sec. 
1.6694-2(d)(2) and is adequately disclosed in accordance with Sec. Sec. 
1.6694-2(d)(3)(i)(A) or (C) or 1.6694-2(d)(3)(ii). In the case of a 
position contrary to a regulation, the position must represent a good 
faith challenge to the validity of the regulation and, when disclosed in 
accordance with Sec. Sec. 1.6694-2(d)(3)(i)(A) or (C) or 1.6694-
2(d)(3)(ii), the tax return preparer must identify the regulation being 
challenged. For purposes of this section, disclosure on the return in 
accordance with an annual revenue procedure under Sec. 1.6662-4(f)(2) 
is not applicable.
    (3) In the case of a position contrary to a revenue ruling or notice 
(other than a notice of proposed rulemaking) published by the Internal 
Revenue Service in the Internal Revenue Bulletin, a tax return preparer 
also is not considered to have recklessly or intentionally disregarded 
the ruling or notice if the position meets the substantial authority 
standard described in Sec. 1.6662-4(d) and is not with respect to a 
reportable transaction to which section 6662A applies.
    (d) Examples. The provisions of paragraphs (b) and (c) of this 
section are illustrated by the following examples:

    Example 1. A taxpayer provided Preparer T with detailed check 
registers reflecting personal and business expenses. One of the expenses 
was for domestic help, and this expense was identified as personal on 
the check register. T knowingly deducted the expenses of the taxpayer's 
domestic help as wages paid in the taxpayer's business. T is subject to 
the penalty under section 6694(b).
    Example 2. A taxpayer provided Preparer U with detailed check 
registers to compute the taxpayer's expenses. U, however, knowingly 
overstated the expenses on the return. After adjustments by the 
examiner, the tax liability increased significantly. Because U 
disregarded information provided in the check registers, U is subject to 
the penalty under section 6694(b).
    Example 3. Preparer V prepares a taxpayer's return in 2009 and 
encounters certain

[[Page 656]]

expenses incurred in the purchase of a business. Final regulations 
provide that such expenses incurred in the purchase of a business must 
be capitalized. One U.S. Tax Court case decided in 2006 has expressly 
invalidated that portion of the regulations. There are no courts that 
ruled favorably with respect to the validity of that portion of the 
regulations and there are no other authorities existing on the issue. 
Under these facts, V will have a reasonable basis for the position as 
defined in Sec. 1.6694-2(d)(2) and will not be subject to the section 
6694(b) penalty if the position is adequately disclosed in accordance 
with paragraph (c)(2) of this section because the position represents a 
good faith challenge to the validity of the regulations.

    (e) Rules or regulations. The term rules or regulations includes the 
provisions of the Internal Revenue Code (Code), temporary or final 
Treasury regulations issued under the Code, and revenue rulings or 
notices (other than notices of proposed rulemaking) issued by the 
Internal Revenue Service and published in the Internal Revenue Bulletin.
    (f) Section 6694(b) penalty reduced by section 6694(a) penalty. The 
amount of any penalty to which a tax return preparer may be subject 
under section 6694(b) for a return or claim for refund is reduced by any 
amount assessed and collected against the tax return preparer under 
section 6694(a) for the same position on a return or claim for refund.
    (g) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after December 
31, 2008.
    (h) Burden of proof. In any proceeding with respect to the penalty 
imposed by section 6694(b), the Government bears the burden of proof on 
the issue of whether the preparer willfully attempted to understate the 
liability for tax. See section 7427. The preparer bears the burden of 
proof on such other issues as whether--
    (1) The preparer recklessly or intentionally disregarded a rule or 
regulation;
    (2) A position contrary to a regulation represents a good faith 
challenge to the validity of the regulation; and
    (3) Disclosure was adequately made in accordance with paragraph (e) 
of this section.

[T.D. 8382, 56 FR 67518, Dec. 31, 1991, as amended by T.D. 9436, 73 FR 
78445, Dec. 22, 2008; 74 FR 5104, Jan. 29, 2009]



Sec. 1.6694-4  Extension of period of collection when tax return 
preparer pays 15 percent of a penalty for understatement of 
taxpayer's liability and certain other procedural matters.
          

    (a) In general. (1) The Internal Revenue Service (IRS) will 
investigate the preparation by a tax return preparer of a return of tax 
under the Internal Revenue Code (Code) or claim for refund of tax under 
the Code as described in Sec. 301.7701-15(b)(4) of this chapter, and 
will send a report of the examination to the tax return preparer before 
the assessment of either--
    (i) A penalty for understating tax liability due to a position for 
which either it was not reasonable to believe that the position would 
more likely than not be sustained on its merits under section 6694(a) or 
no substantial authority, as applicable (or not a reasonable basis for 
disclosed positions); or
    (ii) A penalty for willful understatement of liability or reckless 
or intentional disregard of rules or regulations under section 6694(b).
    (2) Unless the period of limitations (if any) under section 6696(d) 
may expire without adequate opportunity for assessment, the IRS will 
also send, before assessment of either penalty, a 30-day letter to the 
tax return preparer notifying him of the proposed penalty or penalties 
and offering an opportunity to the tax return preparer to request 
further administrative consideration and a final administrative 
determination by the IRS concerning the assessment. If the tax return 
preparer then makes a timely request, assessment may not be made until 
the IRS makes a final administrative determination adverse to the tax 
return preparer.
    (3) If the IRS assesses either of the two penalties described in 
section 6694(a) and section 6694(b), it will send to the tax return 
preparer a statement of notice and demand, separate from

[[Page 657]]

any notice of a tax deficiency, for payment of the amount assessed.
    (4) Within 30 days after the day on which notice and demand of 
either of the two penalties described in section 6694(a) and section 
6694(b) is made against the tax return preparer, the tax return preparer 
must either--
    (i) Pay the entire amount assessed (and may file a claim for refund 
of the amount paid at any time not later than 3 years after the date of 
payment); or
    (ii) Pay an amount which is not less than 15 percent of the entire 
amount assessed with respect to each return or claim for refund and file 
a claim for refund of the amount paid.
    (5) If the tax return preparer pays an amount and files a claim for 
refund under paragraph (a)(4)(ii) of this section, the IRS may not make, 
begin, or prosecute a levy or proceeding in court for collection of the 
unpaid remainder of the amount assessed until the later of--
    (i) A date which is more than 30 days after the earlier of--
    (A) The day on which the tax return preparer's claim for refund is 
denied; or
    (B) The expiration of 6 months after the day on which the tax return 
preparer filed the claim for refund; and
    (ii) Final resolution of any proceeding begun as provided in 
paragraph (b) of this section.
    (6) The IRS may counterclaim in any proceeding begun as provided in 
paragraph (b) of this section for the unpaid remainder of the amount 
assessed. Final resolution of a proceeding includes any settlement 
between the IRS and the tax return preparer, any final determination by 
a court (for which the period for appeal, if any, has expired) and, 
generally, the types of determinations provided under section 1313(a) 
(relating to taxpayer deficiencies). Notwithstanding section 7421(a) 
(relating to suits to restrain assessment or collection), the beginning 
of a levy or proceeding in court by the IRS in contravention of 
paragraph (a)(5) of this section may be enjoined by a proceeding in the 
proper court.
    (b) Preparer must bring suit in district court to determine 
liability for penalty. The IRS may proceed with collection of the amount 
of the penalty not paid under paragraph (a)(4)(ii) of this section if 
the preparer fails to begin a proceeding for refund in the appropriate 
United States district court within 30 days after the earlier of--
    (1) The day on which the preparer's claim for refund filed under 
paragraph (a)(4)(ii) of this section is denied; or
    (2) The expiration of 6 months after the day on which the preparer 
filed the claim for refund.
    (c) Suspension of running of period of limitations on collection. 
The running of the period of limitations provided in section 6502 on the 
collection by levy or by a proceeding in court of the unpaid amount of a 
penalty or penalties described in section 6694(a) or section 6694(b) is 
suspended for the period during which the IRS, under paragraph (a)(5) of 
this section, may not collect the unpaid amount of the penalty or 
penalties by levy or a proceeding in court.
    (d) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after December 
31, 2008.

[T.D. 9436, 73 FR 78446, Dec. 22, 2008]



Sec. 1.6695-1  Other assessable penalties with respect to the
preparation of tax returns for other persons.

    (a) Failure to furnish copy to taxpayer. (1) A person who is a 
signing tax return preparer as described in Sec. 301.7701-15(b)(1) of 
this chapter of any return of tax or claim for refund of tax under the 
Internal Revenue Code (Code), and who fails to satisfy the requirements 
imposed by section 6107(a) and Sec. 1.6107-1(a) to furnish a copy of 
the return or claim for refund to the taxpayer (or nontaxable entity), 
shall be subject to a penalty of $50 for such failure, with a maximum 
penalty of $25,000 per person imposed with respect to each calendar 
year, unless it is shown that the failure is due to reasonable cause and 
not due to willful neglect.
    (2) No penalty may be imposed under section 6695(a) and paragraph 
(a)(1) of this section upon a tax return preparer who furnishes a copy 
of the return or claim for refund to taxpayers who--
    (i) Hold an elected or politically appointed position with the 
government of the United States or a state or political subdivision 
thereof; and

[[Page 658]]

    (ii) In order faithfully to carry out their official duties, have so 
arranged their affairs that they have less than full knowledge of the 
property that they hold or of the debts for which they are responsible, 
if information is deleted from the copy in order to preserve or maintain 
this arrangement.
    (b) Failure to sign return. (1) An individual who is a signing tax 
return preparer as described in Sec. 301.7701-15(b)(1) of this chapter 
with respect to a return of tax or claim for refund of tax under the 
Code as described in Sec. 301.7701-15(b)(4) that is not signed 
electronically shall sign the return or claim for refund after it is 
completed and before it is presented to the taxpayer (or nontaxable 
entity) for signature. For rules covering electronically signed returns, 
see paragraph (b)(2) of this section. If the signing tax return preparer 
is unavailable for signature, another tax return preparer shall review 
the entire preparation of the return or claim for refund, and then shall 
sign the return or claim for refund. The tax return preparer shall sign 
the return in the manner prescribed by the Commissioner in forms, 
instructions, or other appropriate guidance.
    (2) In the case of electronically signed tax returns, the signing 
tax return preparer need not sign the return prior to presenting a 
completed copy of the return to the taxpayer. The signing tax return 
preparer, however, must furnish all of the information that will be 
transmitted as the electronically signed tax return to the taxpayer 
contemporaneously with furnishing the Form 8879, ``IRS e-file Signature 
Authorization,'' or other similar Internal Revenue Service (IRS) e-file 
signature form. The information may be furnished on a replica of an 
official form. The signing tax return preparer shall electronically sign 
the return in the manner prescribed by the Commissioner in forms, 
instructions, or other appropriate guidance.
    (3) An individual required by this paragraph (b) to sign a return or 
claim for refund shall be subject to a penalty of $50 for each failure 
to sign, with a maximum of $25,000 per person imposed with respect to 
each calendar year, unless it is shown that the failure is due to 
reasonable cause and not due to willful neglect. If the tax return 
preparer asserts reasonable cause for failure to sign, the IRS will 
require a written statement to substantiate the tax return preparer's 
claim of reasonable cause. For purposes of this paragraph (b), 
reasonable cause is a cause that arises despite ordinary care and 
prudence exercised by the individual tax return preparer.
    (4) Examples. The application of this paragraph (b) is illustrated 
by the following examples:

    Example 1. Law Firm A employs B, a lawyer, to prepare for 
compensation estate tax returns and claims for refund of taxes. Firm A 
is engaged by C to prepare a Federal estate tax return. Firm A assigns B 
to prepare the return. B obtains the information necessary for 
completing the return from C and makes determinations with respect to 
the proper application of the tax laws to such information in order to 
determine the estate's tax liability. B then forwards such information 
to D, a computer tax service that performs the mathematical computations 
and prints the return by means of computer processing. D then sends the 
completed estate tax return to B who reviews the accuracy of the return. 
B is the individual tax return preparer who is primarily responsible for 
the overall accuracy of the estate tax return. B must sign the return as 
tax return preparer in order to not be subject to the section 6695(b) 
penalty.
    Example 2. Partnership E is a national accounting firm that prepares 
returns and claims for refund of taxes for compensation. F and G, 
employees of Partnership E, are involved in preparing the Form 990-T, 
Exempt Organization Business Income Tax Return, for H, a tax exempt 
organization. After they complete the return, including the gathering of 
the necessary information, analyzing the proper application of the tax 
laws to such information, and the performance of the necessary 
mathematical computations, I, a supervisory employee of Partnership E, 
reviews the return. As part of this review, I reviews the information 
provided and the application of the tax laws to this information. The 
mathematical computations and carried-forward amounts are reviewed by J, 
an employee of Partnership E. The policies and practices of Partnership 
E require that K, a partner, finally review the return. The scope of K's 
review includes reviewing the information provided and applying to this 
information his knowledge of H's affairs, observing that Partnership E's 
policies and practices have been followed, and making the final 
determination with respect to the proper application of the tax laws to 
determine H's tax liability. K may or may not exercise these 
responsibilities, or may exercise them to a

[[Page 659]]

greater or lesser extent, depending on the degree of complexity of the 
return, his confidence in I (or F and G), and other factors. K is the 
individual tax return preparer who is primarily responsible for the 
overall accuracy of H's return. K must sign the return as tax return 
preparer in order to not be subject to the section 6695(b) penalty.
    Example 3. L corporation maintains an office in Seattle, Washington, 
for the purpose of preparing partnership returns for compensation. L 
makes compensatory arrangements with individuals (but provides no 
working facilities) in several states to collect information from 
partners of a partnership and to make decisions with respect to the 
proper application of the tax laws to the information in order to 
prepare the partnership return and calculate the partnership's 
distributive items. M, an individual, who has such an arrangement in Los 
Angeles with L, collects information from N, the general partner of a 
partnership, and completes a worksheet kit supplied by L that is stamped 
with M's name and an identification number assigned to M by L. In this 
process, M classifies this information in appropriate categories for the 
preparation of the partnership return. The completed worksheet kit 
signed by M is then mailed to L. O, an employee in L's office, reviews 
the worksheet kit to make sure it was properly completed. O does not 
review the information obtained from N for its validity or accuracy. O 
may, but did not, make the final decision with respect to the proper 
application of tax laws to the information provided. The data from the 
worksheet is entered into a computer and the return form is completed. 
The return is prepared for submission to N with filing instructions. M 
is the individual tax return preparer primarily responsible for the 
overall accuracy of the partnership return. M must sign the return as 
tax return preparer in order to not be subject to the section 6695(b) 
penalty.
    Example 4. P employs R, S, and T to prepare gift tax returns for 
taxpayers. After R and S have collected the information from a taxpayer 
and applied the tax laws to the information, the return form is 
completed by a computer service. On the day the returns prepared by R 
and S are ready for their signatures, R is away from the city for 1 week 
on another assignment and S is on detail to another office in the same 
city for the day. T may sign the gift tax returns prepared by R, 
provided that T reviews the information obtained by R relative to the 
taxpayer, and T reviews the preparation of each return prepared by R. T 
may not sign the returns prepared by S because S is available.

    (5) Effective/applicability date. This paragraph (b) is applicable 
to returns and claims for refund filed after December 31, 2008.
    (c) Failure to furnish identifying number. (1) A person who is a 
signing tax return preparer as described in Sec. 301.7701-15(b)(1) of 
this chapter of any return of tax under the Code or claim for refund of 
tax under the Code, and who fails to satisfy the requirement of section 
6109(a)(4) and Sec. 1.6109-2(a) to furnish one or more identifying 
numbers of signing tax return preparers or persons employing the signing 
tax return preparer (or with which the signing tax return preparer is 
associated) on a return or claim for refund after it is completed and 
before it is presented to the taxpayer (or nontaxable entity) for 
signature shall be subject to a penalty of $50 for each failure, with a 
maximum of $25,000 per person imposed with respect to each calendar 
year, unless it is shown that the failure is due to reasonable cause and 
not due to willful neglect.
    (2) No more than one penalty of $50 may be imposed under section 
6695(c) and paragraph (c)(1) of this section with respect to a single 
return or claim for refund.
    (d) Failure to retain copy or record. (1) A person who is a signing 
tax return preparer as described in Sec. 301.7701-15(b)(1) of this 
chapter of any return of tax under the Code or claim for refund of tax 
under the Code, and who fails to satisfy the requirements imposed upon 
him or her by section 6107(b) and Sec. 1.6107-1(b) and (c) (other than 
the record requirement described in both Sec. 1.6107-1(b)(2) and (3)) 
to retain and make available for inspection a copy of the return or 
claim for refund, or to include the return or claim for refund in a 
record of returns and claims for refund and make the record available 
for inspection, shall be subject to a penalty of $50 for the failure, 
unless it is shown that the failure is due to reasonable cause and not 
due to willful neglect.
    (2) A person may not, for returns or claims for refund presented to 
the taxpayers (or nontaxable entities) during each calendar year, be 
subject to more than $25,000 in penalties under section 6695(d) and 
paragraph (d)(1) of this section.
    (e) Failure to file correct information returns. A person who is 
subject to the reporting requirements of section 6060

[[Page 660]]

and Sec. 1.6060-1 and who fails to satisfy these requirements shall pay 
a penalty of $50 for each such failure, with a maximum of $25,000 per 
person imposed for each calendar year, unless such failure was due to 
reasonable cause and not due to willful neglect.
    (f) Negotiation of check. (1) No person who is a tax return preparer 
as described in Sec. 301.7701-15 of this chapter may endorse or 
otherwise negotiate, directly or through an agent, a check (including an 
electronic version of a check) for the refund of tax under the Code that 
is issued to a taxpayer other than the tax return preparer if the person 
was a tax return preparer of the return or claim for refund which gave 
rise to the refund check. A tax return preparer will not be considered 
to have endorsed or otherwise negotiated a check for purposes of this 
paragraph (f)(1) solely as a result of having affixed the taxpayer's 
name to a refund check for the purpose of depositing the check into an 
account in the name of the taxpayer or in the joint names of the 
taxpayer and one or more other persons (excluding the tax return 
preparer) if authorized by the taxpayer or the taxpayer's recognized 
representative.
    (2) Section 6695(f) and paragraphs (f)(1) and (3) of this section do 
not apply to a tax return preparer-bank that--
    (i) Cashes a refund check and remits all of the cash to the taxpayer 
or accepts a refund check for deposit in full to a taxpayer's account, 
so long as the bank does not initially endorse or negotiate the check 
(unless the bank has made a loan to the taxpayer on the basis of the 
anticipated refund); or
    (ii) Endorses a refund check for deposit in full to a taxpayer's 
account pursuant to a written authorization of the taxpayer (unless the 
bank has made a loan to the taxpayer on the basis of the anticipated 
refund).
    (3) A tax return preparer-bank may also subsequently endorse or 
negotiate a refund check as a part of the check-clearing process through 
the financial system after initial endorsement or negotiation.
    (4) The tax return preparer shall be subject to a penalty of $500 
for each endorsement or negotiation of a check prohibited under section 
6695(f) and paragraph (f)(1) of this section.
    (g) Effective/applicability date. This section is applicable to 
returns and claims for refund filed after December 31, 2008.

[T.D. 9436, 73 FR 78447, Dec. 22, 2008, as amended at 74 FR 5104, Jan. 
29, 2009]



Sec. 1.6695-2  Tax return preparer due diligence requirements
for certain tax returns and claims.

    (a) Penalty for failure to meet due diligence requirements--(1) In 
general. A person who is a tax return preparer (as defined in section 
7701(a)(36)) of a tax return or claim for refund under the Internal 
Revenue Code who determines the taxpayer's eligibility to file as head 
of household under section 2(b), or who determines the taxpayer's 
eligibility for, or the amount of, the child tax credit (CTC)/additional 
child tax credit (ACTC) under section 24, the American opportunity tax 
credit (AOTC) under section 25A(i), or the earned income credit (EIC) 
under section 32, and who fails to satisfy the due diligence 
requirements of paragraph (b) of this section will be subject to a 
penalty as prescribed in section 6695(g) (indexed for inflation under 
section 6695(h)) for each failure. A separate penalty applies to a tax 
return preparer with respect to the head of household filing status 
determination and to each applicable credit claimed on a return or claim 
for refund for which the due diligence requirements of this section are 
not satisfied and for which the exception to penalty provided by 
paragraph (d) of this section does not apply.
    (2) Examples. The provisions of paragraph (a)(1) of this section are 
illustrated by the following examples:
    (i) Example 1. Preparer A prepares a federal income tax return for a 
taxpayer claiming the CTC and the AOTC. Preparer A did not meet the due 
diligence requirements under this section with respect to the CTC or the 
AOTC claimed on the taxpayer's return. Unless the exception to penalty 
provided by paragraph (d) of this section applies, Preparer A is subject 
to two penalties under section 6695(g): One for failure to meet the due 
diligence requirements for the CTC and a second penalty for

[[Page 661]]

failure to meet the due diligence requirements for the AOTC.
    (ii)Example 2. Preparer B prepares a federal income tax return for a 
taxpayer claiming the CTC and the AOTC. Preparer B did not meet the due 
diligence requirements under this section with respect to the CTC 
claimed on the taxpayer's return, but Preparer B did meet the due 
diligence requirements under this section with respect to the AOTC 
claimed on the taxpayer's return. Unless the exception to penalty 
provided by paragraph (d) of this section applies, Preparer B is subject 
to one penalty under section 6695(g) for the failure to meet the due 
diligence requirements for the CTC. Preparer B is not subject to a 
penalty under section 6695(g) for failure to meet the due diligence 
requirements for the AOTC.
    (iii) Example 3. Preparer C prepares a federal income tax return for 
a taxpayer using the head of household filing status and claiming the 
CTC and the AOTC. Preparer C did not meet the due diligence requirements 
under this section with respect to the head of household filing status 
and the CTC claimed on the taxpayer's return. Preparer C did meet the 
due diligence requirements under this section with respect to the AOTC 
claimed on the taxpayer's return. Unless the exception to penalty 
provided by paragraph (d) of this section applies, Preparer C is subject 
to two penalties under section 6695(g) for the failure to meet the due 
diligence requirements: One for the head of household filing status and 
one for the CTC. Preparer C is not subject to a penalty under section 
6695(g) for failure to meet the due diligence requirements for the AOTC.
    (b) Due diligence requirements. A preparer must satisfy the 
following due diligence requirements:
    (1) Completion and submission of Form 8867--(i) The tax return 
preparer must complete Form 8867, ``Paid Preparer's Due Diligence 
Checklist,'' or complete such other form and provide such other 
information as may be prescribed by the Internal Revenue Service (IRS), 
and--
    (A) In the case of a signing tax return preparer electronically 
filing the tax return or claim for refund, must electronically file the 
completed Form 8867 (or successor form) with the tax return or claim for 
refund;
    (B) In the case of a signing tax return preparer not electronically 
filing the tax return or claim for refund, must provide the taxpayer 
with the completed Form 8867 (or successor form) for inclusion with the 
filed tax return or claim for refund; or
    (C) In the case of a nonsigning tax return preparer, must provide 
the signing tax return preparer with the completed Form 8867 (or 
successor form), in either electronic or non-electronic format, for 
inclusion with the filed tax return or claim for refund.
    (ii) The tax return preparer's completion of Form 8867 must be based 
on information provided by the taxpayer to the tax return preparer or 
otherwise reasonably obtained or known by the tax return preparer.
    (2) Computation of credit or credits. (i) When computing the amount 
of a credit or credits described in paragraph (a) of this section to be 
claimed on a return or claim for refund, the tax return preparer must 
either--
    (A) Complete the worksheet in the Form 1040, 1040A, 1040EZ, and/or 
Form 8863 instructions or such other form including such other 
information as may be prescribed by the IRS applicable to each credit 
described in paragraph (a) of this section claimed on the return or 
claim for refund; or
    (B) Otherwise record in one or more documents in the tax return 
preparer's paper or electronic files the tax return preparer's 
computation of the credit or credits claimed on the return or claim for 
refund, including the method and information used to make the 
computations.
    (ii) The tax return preparer's completion of an applicable worksheet 
described in paragraph (b)(2)(i)(A) of this section (or other record of 
the tax return preparer's computation of the credit or credits permitted 
under paragraph (b)(2)(i)(B) of this section) must be based on 
information provided by the taxpayer to the tax return preparer or 
otherwise reasonably obtained or known by the tax return preparer.
    (3) Knowledge--(i) In general. The tax return preparer must not 
know, or have reason to know, that any information used by the tax 
return preparer

[[Page 662]]

in determining the taxpayer's eligibility to file as head of household 
or in determining the taxpayer's eligibility for, or the amount of, any 
credit described in paragraph (a) of this section and claimed on the 
return or claim for refund is incorrect. The tax return preparer may not 
ignore the implications of information furnished to, or known by, the 
tax return preparer, and must make reasonable inquiries if a reasonable 
and well-informed tax return preparer knowledgeable in the law would 
conclude that the information furnished to the tax return preparer 
appears to be incorrect, inconsistent, or incomplete. The tax return 
preparer must also contemporaneously document in the preparer's paper or 
electronic files any inquiries made and the responses to those 
inquiries.
    (ii) Examples. The provisions of paragraph (b)(3)(i) of this section 
are illustrated by the following examples:
    (A) Example 1. In 2018, Q, a 22-year-old taxpayer, engages Preparer 
C to prepare Q's 2017 federal income tax return. Q completes Preparer 
C's standard intake questionnaire and states that Q has never been 
married and has two sons, ages 10 and 11. Based on the intake sheet and 
other information that Q provides, including information that shows that 
the boys lived with Q throughout 2017, Preparer C believes that Q may be 
eligible to claim each boy as a qualifying child for purposes of the EIC 
and the CTC. However, Q provides no information to Preparer C, and 
Preparer C does not have any information from other sources, to verify 
the relationship between Q and the boys. To meet the knowledge 
requirement in paragraph (b)(3) of this section, Preparer C must make 
reasonable inquiries to determine whether each boy is a qualifying child 
of Q for purposes of the EIC and the CTC, including reasonable inquiries 
to verify Q's relationship to the boys, and Preparer C must 
contemporaneously document these inquiries and the responses.
    (B) Example 2. Assume the same facts as in Example 1 of paragraph 
(b)(3)(ii)(A) of this section. In addition, as part of preparing Q's 
2017 federal income tax return, Preparer C made sufficient reasonable 
inquiries to verify that the boys were Q's legally adopted children. In 
2019, Q engages Preparer C to prepare Q's 2018 federal income tax 
return. When preparing Q's 2018 federal income tax return, Preparer C is 
not required to make additional inquiries to determine each boy's 
relationship to Q for purposes of the knowledge requirement in paragraph 
(b)(3) of this section.
    (C) Example 3. In 2018, R, an 18-year-old taxpayer, engages Preparer 
D to prepare R's 2017 federal income tax return. R completes Preparer 
D's standard intake questionnaire and states that R has never been 
married, has one child, an infant, and that R and R's infant lived with 
R's parents during part of the 2017 tax year. R also provides Preparer D 
with a Form W-2 showing that R earned $10,000 during 2017. R provides no 
other documents or information showing that R earned any other income 
during the tax year. Based on the intake sheet and other information 
that R provides, Preparer D believes that R may be eligible to claim the 
infant as a qualifying child for the EIC and the CTC. To meet the 
knowledge requirement in paragraph (b)(3) of this section, Preparer D 
must make reasonable inquiries to determine whether R is eligible to 
claim these credits, including reasonable inquiries to verify that R is 
not a qualifying child of R's parents (which would make R ineligible to 
claim the EIC) or a dependent of R's parents (which would make R 
ineligible to claim the CTC), and Preparer D must contemporaneously 
document these inquiries and the responses.
    (D) Example 4. Assume the same facts as the facts in Example 3 of 
paragraph (b)(3)(ii)(C) of this section. In addition, Preparer D 
previously prepared the 2017 joint federal income tax return for R's 
parents. Based on information provided by R's parents, Preparer D has 
determined that R is not eligible to be claimed as a dependent or as a 
qualifying child for purposes of the EIC or the CTC on R's parents' 
return. Therefore, for purposes of the knowledge requirement in 
paragraph (b)(3) of this section, Preparer D is not required to make 
additional inquiries to determine that R is not R's parents' qualifying 
child or dependent.

[[Page 663]]

    (E) Example 5. In 2019, S engages Preparer E to prepare S's 2018 
federal income tax return. During Preparer E's standard intake 
interview, S states that S has never been married and that S's niece and 
nephew lived with S for part of the 2018 tax year. Preparer E believes S 
may be eligible to file as head of household and claim each of these 
children as a qualifying child for purposes of the EIC and the CTC, but 
the information furnished to Preparer E is incomplete. To meet the 
knowledge requirement in paragraph (b)(3) of this section, Preparer E 
must make reasonable inquiries to determine whether S is eligible to 
file as head of household and whether each child is a qualifying child 
for purposes of the EIC and the CTC, including reasonable inquiries 
about the children's residency, S's relationship to the children, the 
children's income, the sources of support for the children, and S's 
contribution to the payment of costs related to operating the household, 
and Preparer E must contemporaneously document these inquiries and the 
responses.
    (F) Example 6. Assume the same facts as the facts in Example 5 of 
paragraph (b)(3)(ii)(E) of this section. In addition, Preparer E knows 
from prior social interactions with S that the children resided with S 
for more than one-half of the 2018 tax year and that the children did 
not provide over one-half of their own support for the 2018 tax year. To 
meet the knowledge requirement in paragraph (b)(3) of this section, 
Preparer E must make the same reasonable inquiries to determine whether 
S is eligible to file as head of household and whether each child is a 
qualifying child for purposes of the EIC and the CTC as discussed in 
Example 5 of this section, and Preparer E must contemporaneously 
document these inquiries and the responses.
    (G)Example 7. W engages Preparer F to prepare W's federal income tax 
return. During Preparer F's standard intake interview, W states that W 
is 50 years old, has never been married, and has no children. W further 
states to Preparer F that during the tax year W was self-employed, 
earned $10,000 from W's business, and had no business expenses or other 
income. Preparer F believes W may be eligible for the EIC. To meet the 
knowledge requirement in paragraph (b)(3) of this section, Preparer F 
must make reasonable inquiries to determine whether W is eligible for 
the EIC, including reasonable inquiries to determine whether W's 
business income and expenses are correct, and Preparer F must 
contemporaneously document these inquiries and the responses.
    (H) Example 8. Y, who is 32 years old, engages Preparer G to prepare 
Y's federal income tax return. Y completes Preparer G's standard intake 
questionnaire and states that Y has never been married. As part of 
Preparer G's client intake process, Y provides Preparer G with a copy of 
the Form 1098-T Y received showing that University M billed $4,000 of 
qualified tuition and related expenses for Y's enrollment or attendance 
at the university and that Y was at least a half-time undergraduate 
student. Preparer G believes that Y may be eligible for the AOTC. To 
meet the knowledge requirement in paragraph (b)(3) of this section, 
Preparer G must make reasonable inquiries to determine whether Y is 
eligible for the AOTC, as Form 1098-T does not contain all the 
information needed to determine eligibility for the AOTC or to calculate 
the amount of the credit if Y is eligible, and contemporaneously 
document these inquiries and the responses.
    (4) Retention of records--(i) The tax return preparer must retain--
    (A) A copy of the completed Form 8867 (or successor form);
    (B) A copy of each completed worksheet required under paragraph 
(b)(2)(i)(A) of this section (or other record of the tax return 
preparer's computation permitted under paragraph (b)(2)(i)(B) of this 
section); and
    (C) A record of how and when the information used to complete Form 
8867 and the applicable worksheets required under paragraph (b)(2)(i)(A) 
of this section (or other record of the tax return preparer's 
computation permitted under paragraph (b)(2)(i)(B) of this section) was 
obtained by the tax return preparer, including the identity of any 
person furnishing the information, as well as a copy of any document 
that was provided by the taxpayer and on which the tax return preparer 
relied to

[[Page 664]]

complete Form 8867 and/or an applicable worksheet required under 
paragraph (b)(2)(i)(A) of this section (or other record of the tax 
return preparer's computation permitted under paragraph (b)(2)(i)(B) of 
this section).
    (ii) The items in paragraph (b)(4)(i) of this section must be 
retained for three years from the latest of the following dates, as 
applicable:
    (A) The due date of the tax return (determined without regard to any 
extension of time for filing);
    (B) In the case of a signing tax return preparer electronically 
filing the tax return or claim for refund, the date the tax return or 
claim for refund was filed;
    (C) In the case of a signing tax return preparer not electronically 
filing the tax return or claim for refund, the date the tax return or 
claim for refund was presented to the taxpayer for signature; or
    (D) In the case of a nonsigning tax return preparer, the date the 
nonsigning tax return preparer submitted to the signing tax return 
preparer that portion of the tax return or claim for refund for which 
the nonsigning tax return preparer was responsible.
    (iii) The items in paragraph (b)(4)(i) of this section may be 
retained on paper or electronically in the manner prescribed in 
applicable regulations, revenue rulings, revenue procedures, or other 
appropriate guidance (see Sec. 601.601(d)(2) of this chapter).
    (c) Special rule for firms. A firm that employs a tax return 
preparer subject to a penalty under section 6695(g) is also subject to 
penalty if, and only if--
    (1) One or more members of the principal management (or principal 
officers) of the firm or a branch office participated in or, prior to 
the time the return was filed, knew of the failure to comply with the 
due diligence requirements of this section;
    (2) The firm failed to establish reasonable and appropriate 
procedures to ensure compliance with the due diligence requirements of 
this section; or
    (3) The firm disregarded its reasonable and appropriate compliance 
procedures through willfulness, recklessness, or gross indifference 
(including ignoring facts that would lead a person of reasonable 
prudence and competence to investigate) in the preparation of the tax 
return or claim for refund with respect to which the penalty is imposed.
    (d) Exception to penalty. The section 6695(g) penalty will not be 
applied with respect to a particular tax return or claim for refund if 
the tax return preparer can demonstrate to the satisfaction of the IRS 
that, considering all the facts and circumstances, the tax return 
preparer's normal office procedures are reasonably designed and 
routinely followed to ensure compliance with the due diligence 
requirements of paragraph (b) of this section, and the failure to meet 
the due diligence requirements of paragraph (b) of this section with 
respect to the particular tax return or claim for refund was isolated 
and inadvertent. The preceding sentence does not apply to a firm that is 
subject to the penalty as a result of paragraph (c) of this section.
    (e) Applicability date. The rules of this section apply to tax 
returns and claims for refund for tax years beginning after December 31, 
2015, that are prepared on or after December 5, 2016. However, the rules 
relating to the determination of a taxpayer's eligibility to file as 
head of household under section 2(b) apply to tax returns and claims for 
refund for tax years beginning after December 31, 2017, that are 
prepared on or after November 7, 2018.

[T.D. 8905, 65 FR 61269, Oct. 17, 2000, as amended by T.D. 9436, 73 FR 
78448, Dec. 22, 2008; T.D. 9570, 76 FR 78819, Dec. 20, 2011; T.D. 9799, 
81 FR 87446, Dec. 5, 2016; T.D. 9842, 83 FR 55635, Nov. 7, 2018; 83 FR 
64459, Dec. 17, 2018]



Sec. 1.6696-1  Claims for credit or refund by tax return preparers
or appraisers.

    (a) Notice and demand. (1) The Internal Revenue Service (IRS) shall 
issue to each tax return preparer or appraiser one or more statements of 
notice and demand for payment for all penalties assessed against the tax 
return preparer or appraiser under section 6694 and Sec. 1.6694-1, 
under section 6695 and Sec. 1.6695-1, or under section 6695A (and any 
subsequently issued regulations).
    (2) For the definition of the term ``tax return preparer'', see 
section 7701(a)(36) and Sec. 301.7701-15 of this chapter. A person who 
prepares a claim for

[[Page 665]]

credit or refund under this section for another person, however, is not, 
with respect to that preparation, a tax return preparer as defined in 
section 7701(a)(36) and Sec. 301.7701-15 of this chapter.
    (b) Claim filed by tax return preparer or appraiser. A claim for 
credit or refund of a penalty (or penalties) assessed against a tax 
return preparer or appraiser under section 6694 and Sec. 1.6694-1, 
under section 6695 and Sec. 1.6695-1, or under section 6695A (and any 
subsequently issued regulations) may be filed under this section only by 
the tax return preparer or the appraiser (or the tax return preparer's 
or appraiser's estate) against whom the penalty (or penalties) is 
assessed and not by, for example, the tax return preparer's or 
appraiser's employer. This paragraph (b) is not intended, however, to 
impose any restrictions on the preparation of this claim for credit or 
refund. The claim may be prepared by the tax return preparer's or 
appraiser's employer or by other persons. In all cases, however, the 
claim for credit or refund shall contain the information specified in 
paragraph (d) of this section and, as required by paragraph (d) of this 
section, shall be verified by a written declaration by the tax return 
preparer or appraiser that the information is provided under penalty of 
perjury.
    (c) Separation and consolidation of claims. (1) Unless paragraph 
(c)(2) of this section applies, a tax return preparer shall file a 
separate claim for each penalty assessed in each statement of notice and 
demand issued to the tax return preparer.
    (2) A tax return preparer may file one or more consolidated claims 
for any or all penalties imposed on the tax return preparer by a single 
IRS campus or office under section 6695(a) and Sec. 1.6695-1(a) 
(relating to failure to furnish copy of return to taxpayer), section 
6695(b) and Sec. 1.6695-1(b) (relating to failure to sign), section 
6695(c) and Sec. 1.6695-1(c) (relating to failure to furnish 
identifying number), or under section 6695(d) and Sec. 1.6695-1(d) 
(relating to failure to retain copy of return or record), whether the 
penalties are asserted on a single or on separate statements of notice 
and demand. In addition, a tax return preparer may file one consolidated 
claim for any or all penalties imposed on the tax return preparer by a 
single IRS campus or office under section 6695(e) and Sec. 1.6695-1(e) 
(relating to failure to file correct information return), which are 
asserted on a single statement of notice and demand.
    (d) Content of claim. Each claim for credit or refund for any 
penalty (or penalties) paid by a tax return preparer under section 6694 
and Sec. 1.6694-1, or under section 6695 and Sec. 1.6695-1, or paid by 
an appraiser under section 6695A (and any subsequently issued 
regulations) shall include the following information, verified by a 
written declaration by the tax return preparer or appraiser that the 
information is provided under penalty of perjury:
    (1) The tax return preparer's or appraiser's name.
    (2) The tax return preparer's or appraiser's identification number. 
If the tax return preparer or appraiser is--
    (i) An individual (not described in paragraph (d)(2)(iii) of this 
section) who is a citizen or resident of the United States, the tax 
return preparer's or appraiser's social security account number (or such 
alternative number as may be prescribed by the IRS in forms, 
instructions, or other appropriate guidance) shall be provided;
    (ii) An individual who is not a citizen or resident of the United 
States and also was not employed by another tax return preparer or 
appraiser to prepare the document (or documents) with respect to which 
the penalty (or penalties) was assessed, the tax return preparer's or 
appraiser's employer identification number shall be provided; or
    (iii) A person (whether an individual, corporation, or partnership) 
that employed one or more persons to prepare the document (or documents) 
with respect to which the penalty (or penalties) was assessed, the tax 
return preparer's or appraiser's employer identification number shall be 
provided.
    (3) The tax return preparer's or appraiser's address where the IRS 
mailed the statement (or statements) of notice and demand and, if 
different, the tax return preparer's or appraiser's address shown on the 
document (or documents) with respect to which the penalty (or penalties) 
was assessed.

[[Page 666]]

    (4)(i) The address of the IRS campus or office that issued the 
statement (or statements) of notice and demand for payment of the 
penalty (or penalties).
    (ii) The date (or dates) and identifying number (or numbers) of the 
statement (or statements) of notice and demand.
    (5)(i) The identification, by amount, type, and document to which 
related, of each penalty included in the claim. Each document referred 
to in the preceding sentence shall be identified by the form title or 
number, by the taxpayer's (or nontaxable entity's) name and taxpayer 
identification number, and by the taxable year to which the document 
relates.
    (ii) The date (or dates) of payment of the amount (or amounts) of 
the penalty (or penalties) included in the claim.
    (iii) The total amount claimed.
    (6) A statement setting forth in detail--
    (i) Each ground upon which each penalty overpayment claim is based; 
and
    (ii) Facts sufficient to apprise the IRS of the exact basis of each 
such claim.
    (e) Form for filing claim. Notwithstanding Sec. 301.6402-2(c) of 
this chapter, Form 6118, ``Claim for Refund of Tax Return Preparer and 
Promoter Penalties,'' is the form prescribed for making a claim as 
provided in this section with respect to penalties under sections 6694 
and 6695. Form 843, Claim for Refund and Request for Abatement, is the 
form prescribed for making a claim as provided in this section with 
respect to a penalty under section 6695A.
    (f) Place for filing claim. A claim filed under this section shall 
be filed with the IRS campus or office that issued to the tax return 
preparer or appraiser the statement (or statements) of notice and demand 
for payment of the penalty (or penalties) included in the claim.
    (g) Time for filing claim. (1)(i) Except as provided in section 
6694(c)(1) and Sec. 1.6694-4(a)(4)(ii) and (5), and in section 6694(d) 
and Sec. 1.6694-1(d):
    (A) A claim for a penalty paid by a tax return preparer under 
section 6694 and Sec. 1.6694-1, or under section 6695 and Sec. 1.6695-
1, or by an appraiser under section 6695A (and any subsequently issued 
regulations) shall be filed within three years from the date the payment 
was made.
    (B) A consolidated claim, permitted under paragraph (c)(2) of this 
section, shall be filed within three years from the first date of 
payment of any penalty included in the claim.
    (ii) For purposes of this paragraph (g)(1), payment is considered 
made on the date payment is received by the IRS or, if applicable, on 
the date an amount is credited in satisfaction of the penalty.
    (2) For purposes of determining whether a claim is timely filed, the 
rules under sections 7502 and 7503 and the provisions of Sec. Sec. 
1.7502-1, 1.7502-2, and 1.7503-1 apply.
    (h) Application of refund to outstanding liability of tax return 
preparer or appraiser. The IRS may, within the applicable period of 
limitations, credit any amount of an overpayment by a tax return 
preparer or appraiser of a penalty (or penalties) paid under section 
6694 and Sec. 1.6694-1, under section 6695 and Sec. 1.6695-1, or under 
section 6695A (and any subsequently issued regulations) against any 
outstanding liability for any tax (or for any interest, additional 
amount, addition to the tax, or assessable penalty) owed by the tax 
return preparer or appraiser making the overpayment. If a portion of an 
overpayment is so credited, only the balance will be refunded to the tax 
return preparer or appraiser.
    (i) Interest. (1) Section 6611 and Sec. 301.6611-1 of this chapter 
apply to the payment by the IRS of interest on an overpayment by a tax 
return preparer or appraiser of a penalty (or penalties) paid under 
section 6694 and Sec. 1.6694-1, under section 6695 and Sec. 1.6695-1, 
or under section 6695A (and any subsequently issued regulations).
    (2) Section 6601 and Sec. 301.6601-1 of this chapter apply to the 
payment of interest by a tax return preparer or appraiser to the IRS on 
any penalty (or penalties) assessed against the tax return preparer 
under section 6694 and Sec. 1.6694-1, under section 6695 and Sec. 
1.6695-1, or under section 6695A (and any subsequently issued 
regulations).
    (j) Suits for refund of penalty. (1) A tax return preparer or 
appraiser may not maintain a civil action for the recovery of any 
penalty paid under section

[[Page 667]]

6694 and Sec. 1.6694-1, under section 6695 and Sec. 1.6695-1, or under 
section 6695A (and any subsequently issued regulations), unless the tax 
return preparer or appraiser has previously filed a claim for credit or 
refund of the penalty as provided in this section (and the court has 
jurisdiction of the proceeding). See sections 6694(c) and 7422.
    (2)(i) Except as provided in section 6694(c)(2) and Sec. 1.6694-
4(b), the periods of limitation contained in section 6532 and Sec. 
301.6532-1 of this chapter apply to a tax return preparer's or 
appraiser's suit for the recovery of any penalty paid under section 6694 
and Sec. 1.6694-1, under section 6695 and Sec. 1.6695-1, or under 
section 6695A (and any subsequently issued regulations).
    (ii) The rules under section 7503 and Sec. 301.7503-1 of this 
chapter apply to the timely commencement by a tax return preparer or 
appraiser of a suit for the recovery of any penalty paid under section 
6694 and Sec. 1.6694-1, under section 6695 and Sec. 1.6695-1, or under 
section 6695A (and any subsequently issued regulations).
    (k) Effective/applicability date. This section is applicable to 
returns and claims for refund filed, and advice provided, after December 
31, 2008.

[T.D. 9436, 73 FR 78449, Dec. 22, 2008, as amended at 74 FR 5105, Jan. 
29, 2009]



Sec. 1.6709-1T  Penalties with respect to mortgage credit certificates
(temporary).

    (a) Material misstatement--(1) Negligence. If any person makes a 
material misstatement in any affidavit or other statement under a 
penalty of perjury made with respect to the issuance of a mortgage 
credit certificate and such misstatement is due to the negligence of 
that person, that person shall pay a penalty of $1,000 for each mortgage 
credti certificate with respect to which that misstatement was made.
    (2) Fraud. If a misstatement described in subparagraph (1) is due to 
fraud on the part of the person making the misstatement, that person 
shall pay a penalty of $10,000 for each mortgage credit certificate with 
respect to which the fraudulent misstatement was made. The penalty 
imposed by this paragraph (a)(2) is in addition to any criminal penalty.
    (b) Reports. (1) Any person required by Sec. 1.25-8T to file a 
report with respect to any mortgage credit certificate who fails to file 
the report at the time and in the manner required by Sec. 1.25-8T shall 
pay a penalty of $200 for each mortgage credit certificate with respect 
to which that failure occurred. The preceding sentence shall not apply 
if it is shown that such failure is due to reasonable cause and not to 
willful neglect.
    (2) In the case of any report required under Sec. 1.25-8T(b), the 
aggregate amount of the penalty imposed by this paragraph shall not 
exceed $2,000.

[T.D. 8023, 50 FR 19355, May 8, 1985]

                 JEOPARDY, BANKRUPTCY, AND RECEIVERSHIPS



Sec. 1.6851-1  Termination assessments of income tax.

    (a) Authority for making--(1) In general. This section applies to 
assessments authorized by a district director under section 6851(a) 
(hereinafter referred to as termination assessments). The district 
director shall immediately authorize a termination assessment of the 
income tax for the current or preceding taxable year if the district 
director finds that a taxpayer designs to do an act which would tend to 
prejudice proceedings to collect the income tax for such year or years 
unless such proceedings are brought without delay. In addition, the 
district director shall immediately authorize such a termination 
assessment if the district director determines that the taxpayer designs 
to do any act which would tend to render such proceedings wholly or 
partially ineffective unless brought without delay. A termination 
assessment will be made if collection is determined to be in jeopardy 
because at least one of the following conditions exists.
    (i) The taxpayer is or appears to be designing quickly to depart 
from the United States or to conceal himself or herself.
    (ii) The taxpayer is or appears to be designing quickly to place 
his, her, or its property beyond the reach of the Government either by 
removing it from the United States, by concealing it, by dissipating it, 
or by transferring it to other persons.

[[Page 668]]

    (iii) The taxpayer's financial solvency is or appears to be 
imperiled.


Paragraph (a)(1)(iii) of this section does not include cases where the 
taxpayer becomes insolvent by virtue of the accrual of the proposed 
assessment of tax, and penalty, if any. A tax assessed under this 
section shall become immediately due and payable and the district 
director shall serve upon such taxpayer notice and demand for immediate 
payment of such tax.
    (2) Computation of tax. If a termination assessment of the income 
tax for the current year is made, the income tax for such year shall be 
computed for the period beginning on the first day of such year and 
ending on the day of the assessment. A credit shall be allowed for any 
tax for the taxable year previously assessed under section 6851. The 
taxpayer is entitled to a deduction for the personal exemptions (as 
limited in the case of certain non-resident aliens) without any 
proration for or because of the short taxable period.
    (3) Taxable year not affected by termination. Notwithstanding any 
termination assessment a taxpayer shall file a return in accordance with 
section 6012 and the regulations thereunder for the taxpayer's full 
taxable year. The term ``full taxable year'' means the taxpayer's usual 
annual accounting period determined without regard to any action under 
section 6851 and this section. The return shall show all items of gross 
income, deductions, and credits for such taxable year. Any tax collected 
as a result of a termination assessment will be applied against the tax 
due for the taxpayer's full taxable year. Except as provided in Sec. 
1.6851-2 (relating to departing aliens), no return is required to be 
filed for a terminated period other than a full taxable year.
    (4) Evidence of compliance with income tax obligations. Citizens of 
the United States or of possessions of the United States departing from 
the United States or its possessions will not be required to procure 
certificates of compliance or to present any other evidence of 
compliance with income tax obligations. However, for the rules relating 
to the furnishing of evidence of compliance with the income tax 
obligations by certain departing aliens, see Sec. 1.6851-2.
    (5) Section 6851 inapplicable where section 6861 applies. No 
termination assessment for the preceding taxable year shall be made 
after the due date of the taxpayer's return for such year (determined 
with regard to extensions of time to file such return).
    (b) Notice of deficiency. Where notice and demand for payment 
(following a termination assessment) takes place after February 28, 
1977, the district director shall, within 60 days after the later of:
    (1) The date the taxpayer files a return for the full taxable year; 
or
    (2) The due date of such return (determined with regard to 
extensions); send the taxpayer a notice of deficiency under section 
6212(a). The amount of the deficiency shall be computed in accordance 
with section 6211 and the regulations thereunder. In applying section 
6211, the tax imposed and the amount shown upon the return shall be 
determined on the basis of the taxpayer's full taxable year. Thus, for 
example assume that on November 1, 1979, a termination assessment 
against A, a calendar year taxpayer, is made in the amount of $18,000. 
The termination assessment is for the period from January 1, 1979 
through November 1, 1979. Further assume that on or before April 15, 
1980, A files a form 1040 showing an income tax liability for the full 
year 1979 of $10,000. If the district director determines A's liability 
for tax for 1979 is $16,000, a notice of deficiency for $6,000 shall be 
sent to A on or before June 14, 1980. Assuming that the district 
director had collected the $18,000 assessed, $2,000 shall be refunded.
    (c) Immediate payment. The district director shall make demand for 
immediate payment of the amount of the termination assessment, and the 
taxpayer shall immediately pay such amount or shall immediately file the 
bond provided in section 6863.
    (d) Abatement. The provisions of Sec. Sec. 301.6861-1(e) and 
301.6861-1(f) relating to the abatement of jeopardy assessments, shall 
apply to assessments made under section 6851.

[T.D. 7575, 43 FR 58816, Dec. 18, 1978]

[[Page 669]]



Sec. 1.6851-2  Certificates of compliance with income tax laws by 
departing aliens.

    (a) In general--(1) Requirement. The rules of this section are 
applicable, except as otherwise expressly provided, to any alien who 
departs from the United States or any of its possessions after January 
20, 1961. Except as provided in subparagraph (2) of this paragraph, no 
such alien, whether resident or nonresident, may depart from the United 
States unless he first procures a certificate that he has complied with 
all of the obligations imposed upon him by the income tax laws. In order 
to procure such a certificate, an alien who intends to depart from the 
United States (i) must file with the district director for the internal 
revenue district in which he is located the statements or returns 
required by paragraph (b) of this section to be filed before obtaining 
such certificate, (ii) must appear before such district director if the 
district director deems it necessary, and (iii) must pay any taxes 
required under paragraph (b) of this section to be paid before obtaining 
the certificate. Either such certificate of compliance, properly 
executed, or evidence that the alien is excepted under subparagraph (2) 
of this paragraph from obtaining the certificate must be presented at 
the point of departure. An alien who presents himself at the point of 
departure without a certificate of compliance, or evidence establishing 
that such a certificate is not required, will be subject at such 
departure point to examination by an internal revenue officer or 
employee and to the completion of returns and statements and payment of 
taxes as required by paragraph (b) of this section.
    (2) Exceptions--(i) Employees of foreign governments or 
international organizations--(a) Diplomatic representatives, their 
families and servants. (1) Representatives of foreign governments 
bearing diplomatic passports, whether accredited to the United States or 
other countries, and members of their households shall not, upon 
departure from the United States or any of its possessions, be examined 
as to their liability for United States income tax or be required to 
obtain a certificate of compliance. If a foreign government does not 
issue diplomatic passports but merely indicates on passports issued to 
members of its diplomatic service the status of the bearer as a member 
of such service, such passports are considered as diplomatic passports 
for income tax purposes.
    (2) Likewise, the servant of a diplomatic representative who 
accompanies any individual bearing a diplomatic passport upon departure 
from the United States or any of its possessions shall not be required, 
upon such departure, to obtain a certificate of compliance or to submit 
to examination as to his liability for United States income tax. If the 
departure of such a servant from the United States or any of its 
possessions is not made in the company of an individual bearing a 
diplomatic passport, the servant is required to obtain a certificate of 
compliance. However, such certificate will be issued to him on Form 2063 
without examination as to his income tax liability upon presentation to 
the district director for the internal revenue district in which the 
servant is located of a letter from the chief of the diplomatic mission 
to which the servant is attached certifying (i) that the name of the 
servant appears on the ``White List'', a list of employees of diplomatic 
missions, and (ii) that the servant is not obligated to the United 
States for any income tax, and will not be so obligated up to and 
including the intended date of departure.
    (b) Other employees. Any employee of an international organization 
or of a foreign government (other than a diplomatic representative to 
whom (a) of this subdivision applies) whose compensation for official 
services rendered to such organization or government is excluded from 
gross income under section 893 and who has received no gross income from 
sources within the United States, and any member of his household who 
has received no gross income from sources within the United States, 
shall not, upon departure from the United States or any of its 
possessions after November 30, 1962, be examined as to his liability for 
United States income tax or be required to obtain a certificate of 
compliance.
    (c) Effect of waiver. An alien who has filed with the Attorney 
General the

[[Page 670]]

waiver provided for under section 247(b) of the Immigration and 
Nationality Act (8 U.S.C. 1257(b)) is not entitled to the exception 
provided by this subdivision.
    (ii) Alien students, industrial trainees, and exchange visitors. A 
certificate of compliance shall not be required, and examination as to 
United States income tax liability shall not be made, upon the departure 
from the United States or any of its possessions of--
    (A) An alien student, industrial trainee, or exchange visitor, and 
any spouse and children of that alien, admitted solely on an F-1, F-2, 
H-3, H-4, J-1 or J-2 visa, who has received no gross income from sources 
inside the United States other than--
    (1) Allowances to cover expenses incident to study or training in 
the United States (including expenses for travel, maintenance, and 
tuition);
    (2) The value of any services or accommodations furnished incident 
to such study or training;
    (3) Income derived in accordance with the employment authorizations 
in 8 CFR 274a.12(b) and (c) that apply to the alien's visa; or
    (4) Interest on deposits described in section 871(i)(2)(A); or
    (B) An alien student, and any spouse or children of that alien 
admitted solely on an M-1 or M-2 visa, who has received no gross income 
from sources inside the United States other than income derived in 
accordance with the employment authorization in 8 CFR 274a.12(c)(6) or 
interest on deposits described in section 871(i)(2)(A).
    (iii) Other aliens temporarily in the United States. A certificate 
of compliance shall not be required, and examination as to United States 
income tax liability shall not be made, upon the departure from the 
United States or any of its possessions of an alien hereinafter 
described in this subdivision, unless the district director has reason 
to believe that such alien has received taxable income during the 
taxable year up to and including the date of departure or during the 
preceding taxable year and that collection of income tax from such alien 
will be jeopardized by his departure from the United States:
    (a) An alien visitor for pleasure admitted solely on a B-2 visa;
    (b) An alien visitor for business admitted on a B-1 visa, or on both 
a B-1 visa and a B-2 visa, who does not remain in the United States or a 
possession thereof for a period or periods exceeding a total of 90 days 
during the taxable year;
    (c) An alien in transit through the United States or any of its 
possessions on a C-1 visa or under a contract, including a bond 
agreement, between a transportation line and the Attorney General 
pursuant to section 238(d) of the Immigration and Nationality Act (8 
U.S.C. 1228(d));
    (d) An alien who is admitted to the United States on a border-
crossing identification card or with respect to whom passports, visas, 
and border-crossing identification cards are not required, if such alien 
is a visitor for pleasure, or if such alien is a visitor for business 
who does not remain in the United States or a possession thereof for a 
period or periods exceeding a total of 90 days during the taxable year, 
or if such alien is in transit through the United States or any of its 
possessions;
    (e) An alien military trainee admitted to the United States to 
pursue a course of instruction under the auspices of the Department of 
Defense who departs from the United States on official military travel 
orders; or
    (f) An alien resident of Canada or Mexico who commutes between such 
country and the United States at frequent intervals for the purpose of 
employment and whose wages are subject to the withholding of tax.
    (b) Issuance of certificate of compliance--(1) In general. (i) Upon 
the departure of an alien required to secure a certificate of compliance 
under paragraph (a) of this section, the district director shall 
determine whether the departure of such alien jeopardizes the collection 
of any income tax for the current or the preceding taxable year, but the 
district director may determine that jeopardy does not exist in some 
cases. If the district director finds that the departure of such an 
alien results in jeopardy, the taxable period of the alien will be 
terminated, and the alien will be required to file returns and make 
payment of tax in accordance with subparagraph (3)(iii) of

[[Page 671]]

this paragraph. On the other hand, if the district director finds that 
the departure of the alien does not result in jeopardy, the alien will 
be required to file the statement or returns required by subparagraph 
(2) or (3)(ii) of this paragraph, but will not be required to pay income 
tax before the usual time for payment.
    (ii) The departure of an alien who is a resident of the United 
States or a possession thereof (or treated as a resident under section 
6013 (g) or (h)) and who intends to continue such residence (or 
treatment as a resident) shall be treated as not resulting in jeopardy, 
and thus not requiring termination of his taxable period, except when 
the district director has information indicating that the alien intends 
by such departure to avoid the payment of his income tax. In the case of 
a nonresident alien (including a resident alien discontinuing 
residence), the fact that the alien intends to depart from the United 
States will justify termination of his taxable period unless the alien 
establishes to the satisfaction of the district director that he intends 
to return to the United States and that his departure will not 
jeopardize collection of the tax. The determination of whether the 
departure of the alien results in jeopardy will be made on examination 
of all the facts in the case. Evidence tending to establish that 
jeopardy does not result from the departure of the alien may be 
provided, for example, by information showing that the alien is engaged 
in trade or business in the United States or that he leaves sufficient 
property in the United States to secure payment of his income tax for 
the taxable year and of any income tax for the preceding year which 
remains unpaid.
    (2) Alien having no taxable income and resident alien whose taxable 
period is not terminated. A statement on Form 2063 shall be filed with 
the district director by every alien required to obtain a certificate of 
compliance:
    (i) Who is a resident of the United States and whose taxable period 
is not terminated either because he has had no taxable income for the 
taxable year up to and including the date of his departure (and for the 
preceding taxable year where the period for making the income tax return 
for such year has not expired) or because, although he has had taxable 
income for such period or periods, the district director has not found 
that this departure jeopardizes collection of the tax on such income; or
    (ii) Who is not a resident of the United States and who has had no 
taxable income for the taxable year up to and including the date of his 
departure (and for the preceding taxable year where the period for 
making the income tax return for such year has not expired).


Any alien described in subdivision (i) or (ii) of this subparagraph who 
is in default in making return of, or paying, income tax for any taxable 
year shall, in addition, file with the district director any returns 
which have not been made as required and pay to the district director 
the amount of any tax for which he is in default. Upon compliance by an 
alien with the foregoing requirements of this subparagraph, the district 
director shall execute and issue to the alien the certificate of 
compliance attached to Form 2063. The certificate of compliance so 
issued shall be effective for all departures of the alien during his 
current taxable year, subject to revocation upon any subsequent 
departure should the district director have reason to believe that such 
subsequent departure would result in jeopardy. The statement required of 
a resident alien under this subparagraph, if made before January 21, 
1961, with respect to a departure after January 20, 1961, may be made on 
a Form 1040C in lieu of a Form 2063.
    (3) Nonresident alien having taxable income and resident alien whose 
taxable period is terminated--(i) Nonresident alien having taxable 
income. Every nonresident alien required to obtain a certificate of 
compliance (but not described in subparagraph (2) of this paragraph) who 
wishes to establish that his departure does not result in jeopardy shall 
furnish to the district director such information as may be required for 
the purpose of determining whether the departure of the alien 
jeopardizes collection of the income tax and thus requires termination 
of his taxable period.

[[Page 672]]

    (ii) Nonresident alien whose taxable period is not terminated. Every 
nonresident alien described in subdivision (i) of this subparagraph 
whose taxable period is not terminated upon departure shall file with 
the district director:
    (a) A return in duplicate on Form 1040C for the taxable year of his 
intended departure, showing income received, and reasonably expected to 
be received, during the entire taxable year within which the departure 
occurs; and
    (b) Any income tax returns which have not been filed as required.


Upon compliance by the alien with the foregoing requirements of this 
subdivision, and the payment of any income tax for which he is in 
default, the district director shall execute and issue to the alien the 
certificate of compliance on the duplicate copy of Form 1040C. The 
certificate of compliance so issued shall be effective for all 
departures of the alien during his current taxable year, subject to 
revocation by the district director upon any subsequent departure if the 
taxable period of the alien is terminated on such subsequent departure.
    (iii) Alien (whether resident or nonresident) whose taxable period 
is terminated. Every alien required to obtain a certificate of 
compliance, whether resident or nonresident, whose taxable period is 
terminated upon departure shall file with the district director:
    (a) A return in duplicate on Form 1040C for the short taxable period 
resulting from such termination, showing income received, and reasonably 
expected to be received, during the taxable year up to and including the 
date of departure;
    (b) Where the period for filing has not expired, the return required 
under section 6012 and Sec. 1.6012-1 for the preceding taxable year; 
and
    (c) Any other income tax returns which have not been filed as 
required.


Upon compliance with the foregoing requirements of this subdivision, and 
payment of the income tax required to be shown on the returns filed 
pursuant to (a) and (b) of this subdivision and of any income tax due 
and owing for prior years, the departing alien will be issued the 
certificate of compliance on the duplicate copy of Form 1040C. The 
certificate of compliance so issued shall be effective only for the 
specific departure with respect to which it is issued. A departing alien 
may postpone payment of the tax required to be shown on the returns 
filed in accordance with (a) and (b) of this subdivision until the usual 
time of payment by furnishing a bond as provided in Sec. 301.6863-1.
    (4) Joint return on Form 1040C. A departing alien may not file a 
joint return on Form 1040C unless:
    (i) Such alien and his spouse may reasonably be expected to be 
eligible to file a joint return at the normal close of their taxable 
periods for which the return is made; and
    (ii) If the taxable period of such alien is terminated, the taxable 
periods of both spouses are so terminated as to end at the same time.
    (5) Annual return. Notwithstanding that Form 1040C has been filed 
for either the entire taxable year of departure or for a terminated 
period, the return required under section 6012 and Sec. 1.6012-1 for 
such taxable year shall be filed. Any income tax paid on income shown on 
the return on Form 1040C shall be applied against the tax determined to 
be due on the income required to be shown on the subsequent return under 
section 6012 and Sec. 1.6012-1.

[T.D. 6537, 26 FR 547, Jan. 20, 1961, as amended by T.D. 6620, 27 FR 
11803, Nov. 30, 1962; T.D. 7575, 43 FR 58817, Dec. 18, 1978; T.D. 7670, 
45 FR 6931, Jan. 31, 1980; T.D. 8332, 56 FR 3034, Jan. 28, 1991; T.D. 
8526, 59 FR 10067, Mar. 3, 1994]



Sec. 1.6851-3  Furnishing of bond to insure payment; cross reference.

    See section 6863 and Sec. 301.6863-1 of this chapter (regulations 
on procedure and administration) for rules relating to the furnishing of 
bond to stay collection.

[T.D. 7575, 43 FR 58817, Dec. 18, 1978]

[[Page 673]]

                              The Tax Court

 Declaratory Judgments Relating to Qualification of Certain Retirement 
                                  Plans



Sec. 1.7476-1  Interested parties.

    (a) In general--(1) Notice requirement. Before the Internal Revenue 
Service can issue an advance determination as to the qualified status of 
certain retirement plans, the applicant must provide the Internal 
Revenue Service with satisfactory evidence that such applicant has 
notified the persons who qualify as interested parties, under 
regulations prescribed under section 7476(b)(1) of the Code, of the 
application for such determination. See section 3001(a) of the Employee 
Retirement Income Security Act of 1974 (88 Stat. 995). For the rules for 
giving notice to interested parties, see Sec. 1.7476-2 and paragraph 
(o) of Sec. 601.201 of this chapter (Statement of Procedural Rules).
    (2) Declaratory judgments. Section 7476 provides a procedure for 
obtaining a declaratory judgment by the Tax Court with respect to the 
initial or continuing qualification under subchapter D of chapter 1 of 
the Code of a retirement plan defined in section 7476(d), in the case of 
an actual controversy involving:
    (i) A determination by the Internal Revenue Service with respect to 
the initial qualification or continuing qualification under such 
subchapter of such a plan, or
    (ii) A failure by the Internal Revenue Service to make a 
determination with respect to:
    (A) Such initial qualification of such a plan, or
    (B) Such continuing qualification of such a plan, if the controversy 
arises from a plan amendment or plan termination.


Under section 7476(d) the term ``retirement plan'' means a pension 
profitsharing, or stock bonus plan described in section 401(a), or a 
trust which is part of such a plan, an annuity plan described in section 
403(a), or a bond purchase plan described in section 405(a). This 
procedure is available only to the employer, the plan administrator as 
defined in section 414(g), an employee who qualifies as an interested 
party as defined in this section, or the Pension Benefit Guaranty 
Corporation, where such person has an actual controversy involving a 
determination described in paragraph (a)(2)(ii) of this section. In the 
case of an application for such a determination, this procedure is 
available only if such determination or failure to make such 
determination is with respect to an application described in paragraph 
(b)(7) of this section. In addition, in the case of such an application, 
if a petitioner was the applicant for the determination, the Tax Court 
may hold, under section 7476(b)(2), the filing of a pleading for a 
declaratory judgment to be premature unless the petitioner establishes 
to the satisfaction of the Tax Court that such petitioner has caused the 
interested parties to be notified in accordance with this section and 
Sec. 1.7476.2
    (b) Interested parties--(1) In general. If paragraphs (b) (2), (3), 
(4), and (5) of this section do not apply, then, except as otherwise 
provided in paragraphs (b)(6) (i), (ii), and (iii) of this section, the 
following persons shall be interested parties with respect to an 
application for an advance determination as to the qualified status of a 
retirement plan:
    (i) All present employees of the employer who are eligible to 
participate in the plan (as defined in paragraph (d)(2) of this 
section), and
    (ii) All other present employees of the employer whose principal 
place of employment (as defined in paragraph (d)(3) of this section) is 
the same as the principal place of employment of any employee described 
in paragraph (b)(1)(i) of this section.
    (2) Certain plans covering a principal owner. Notwithstanding 
paragraph (b)(1) of this section, where:
    (i) A principal owner (within the meaning of paragraph (d)(2) of 
Sec. 1.414(c)-3) of the employer or of a common parent of the employer 
(where the employer is a member of a parent-subsidiary group of trades 
or businesses under common control under section 414 (b) or (c)) is 
eligible to participate in the plan, and
    (ii) The number of employees employed by such employer (including 
all employees who by reason of section 414

[[Page 674]]

(b) or (c) are treated as employees of such employer) is 100 or less 
then except as otherwise provided in paragraphs (b)(6) (i), (ii), and 
(iv) of this section, all present employees of the employer shall be 
interested parties with respect to an application for an advance 
determinations as to the qualified status of the retirement plan.
    (3) Certain plan amendments. In the case of an application for an 
advance determination as to whether a plan amendment affects the 
continuing qualification of a plan, if:
    (i) There is outstanding a favorable determination letter for a plan 
year to which section 410 applies, and
    (ii) The amendment does not alter the participation provisions of 
the plan, then paragraphs (b) (1) and (2) of this section shall not 
apply, and all present employees of the employer who are eligible to 
participate in the plan (as defined in paragraph (d)(2) of this 
section), shall be interested parties. For the purpose of this paragraph 
(b)(3), if qualification of the plan is dependent upon benefits under 
the plan integrating with those benefits provided under the Social 
Security Act or a similar program, and if such integration results in 
excluding any employee or could possibly result in any participant's 
benefit being reduced to zero and the amendment alters contributions to 
or the amount of benefits payable under the plan, then the amendment 
shall be considered to alter the participation provisions of the plan.
    (4) Collectively bargained plans. In the case of an application with 
respect to a plan described in section 413(a) (relating to collectively 
bargained plans), paragraphs (b) (1), (2) and (3) of this section shall 
not apply and all present employees covered by a collective-bargaining 
agreement pursuant to which the plan is maintained shall be interested 
parties.
    (5) Plan terminations. In the case of an application for an advance 
determination with respect to whether a plan termination affects the 
continuing qualification of a retirement plan, paragraphs (b) (1), (2), 
(3) and (4) of this section shall not apply, and all present employees 
with accrued benefits under the plan, all former employees with vested 
benefits under the plan, and all beneficiaries of decreased former 
employees currently receiving benefits under the plan, shall be 
interested parties.
    (6) Exceptions. (i) In the case of an application to which paragraph 
(b) (1) or (2) of this section applies, an employee who is not eligible 
to participate in the plan shall not be an interested party if such 
employee is excluded from consideration for purposes of section 
410(b)(1) by reason of section 410(b)(2) (B) or (C).
    (ii) In the case of an application to which paragraph (b) (1) or (2) 
of this section applies, an application to which paragraph (b) (1) or 
(2) of this section applies, an employee who is not eligible to 
participate in the plan shall not be an interested party if such plan 
meets the eligibility standards of section 410(b)(1)(A).
    (iii) In the case of an application to which paragraph (b)(1) of 
this section applies, an employee who is not eligible to participate in 
the plan shall not be an interested party with respect to such plan if 
such employee is eligible to participate in any other plan of the 
employer with respect to which a favorable determination letter is 
outstanding (whether or not issued pursuant to an application to which 
this section applies), or in such a plan of another employer whose 
employees, by reason of section 414 (b) or (c), are treated as employees 
of the employer making the application.
    (iv) In the case of an application to which paragraph (b)(2) of this 
section applies, an employee who is not eligible to participate in the 
plan shall not be an interested party with respect to such plan if such 
employee is eligible to participate in a plan described in section 
413(a) (relating to collectively bargained plans) maintained by the 
employer with respect to which a favorable determination letter is 
outstanding (whether or not issued pursuant to an application to which 
this section applies), or in such a plan of another employer whose 
employees by reason of section 414 (b) or (c), are treated as employees 
of the employer making the application.
    (7) Applicability. Paragraph (b) of this section shall only apply in 
the case of an application made to the internal Revenue Service 
requesting an advance

[[Page 675]]

determination that a retirement plan as defined in section 7476(d) and 
paragraph (a) of this section meets the requirements for qualification 
for a plan year or years to which section 410 applies to such plan. See 
paragraphs (c) (4) and (5) of this section for special rules in respect 
of years to which section 410 applies.
    (c) Special rules. For purposes of paragraph (b) of this section and 
Sec. 1.7476-2:
    (1) Time of determination. The status of an individual as an 
interested party and as a present employee or former employee shall be 
determined as of a date determined by the applicant, which date shall 
not be earlier than five business days before the first date on which 
the notice of the application is given to interested parties pursuant to 
Sec. 1.7476-2 nor later than the date on which such notice is given.
    (2) Controlled groups, etc. An individual shall be considered to be 
an employee of an employer if such employee is treated as that 
employer's employee under section 414 (b) or (c).
    (3) Self-employed individuals. A self-employed individual shall be 
considered an employee.
    (4) Years to which section 410 relates. For purposes of paragraph 
(b)(7) of this section, section 410 shall be considered to apply to a 
plan year if an election has been made under section 1017(d) of the 
Employee Retirement Income Security Act of 1974 to have section 410 
apply to such plan year, whether or not the election is conditioned upon 
the issuance by the Commissioner of a favorable determination letter.
    (5) Government, church plans, etc. In the case of an organization 
described in section 410(c)(1), section 410 will be considered to apply 
to a plan year of such organization for any plan year to which section 
410(c)(2) applies to such plan.
    (d) Definitions. For the purposes of paragraph (b) of this section 
and Sec. 1.7476-2:
    (1) Employer. The term ``employer'' includes all employers who 
maintain the plan with respect to which an advance determination 
applies. A sole proprietor shall be considered such person's own 
employer and a partnership is considered to be the employer of each of 
the partners.
    (2) Eligible to participate. For purposes of this section, an 
employee is eligible to participate in a plan if such employee:
    (i) Is a participant in the plan,
    (ii) Would be a participant in the plan if such employee met the 
minimum age and service requirements of the plan or
    (iii) Would be a participant in the plan upon making mandatory 
employee contributions.


In applying this paragraph (d)(2), plan provisions (with respect to 
which the determination regarding qualification is to be based) not in 
effect on the first date on which notice is given to interested parties 
shall be treated as though they were in effect on such date.
    (3) Place of employment. A place of employment includes all 
worksites within a plant, installation, store, office, or similar 
facility. Any employee who has no principal place of employment shall be 
treated as though such employee's principal place of employment is that 
place to which such employee regularly reports to the employer.
    (e) Effective date. The provisions of this section apply to 
applications referred to in paragraph (a) of this section made on or 
after June 21, 1976.

[T.D. 7421, 41 FR 20876, May 21, 1976; 41 FR 22561, June 4, 1976, as 
amended by T.D. 8179, 53 FR 6613, Mar. 2, 1988; T.D. 9006, 67 FR 47456, 
July 19, 2002]



Sec. 1.7476-2  Notice to interested parties.

    (a) In general. Any person applying to a district director for a 
determination described in paragraph (b)(7) of Sec. 1.7476-1 shall 
cause notice of the application to be given to persons who qualify as 
interested parties under Sec. 1.7476-1 with respect to the application, 
whether or not such application is received by the Internal Revenue 
Service before the date on which section 410 applies to the plan.
    (b) Nature of notice. The notice required by this section shall--
    (1) Contain the information and be given within the time period 
prescribed in Sec. 601.201(o)(3) of this chapter; and
    (2) Be given in a manner prescribed in paragraph (c) of this 
section.

[[Page 676]]

    (c) Method of giving notice. (1) In the case of a present employee, 
former employee, or beneficiary who is an interested party, the notice 
may be provided by any method reasonably calculated to ensure that each 
interested party is notified of the application for a determination. If 
an interested party who is a present employee is in a unit of employees 
covered by a collective-bargaining agreement between employee 
representatives and one or more employers, notice shall also be given to 
the collective-bargaining representative of such interested party by any 
method that satisfies this paragraph. Whether the notice is provided in 
a manner that satisfies the requirements of this paragraph is determined 
on the basis of all the relevant facts and circumstances. Because the 
facts and circumstances differ depending on the interested party, it may 
be necessary to use more than one method of delivery in order to ensure 
timely and adequate notice to all interested parties.
    (2) If the notice to interested parties is delivered using an 
electronic medium under an electronic system that satisfies the 
applicable notice requirements of Sec. 1.401(a)-21 of this chapter, the 
notice is deemed to be provided in a manner that satisfies the 
requirements of paragraph (c)(1) of this section.
    (d) Examples. The principles of this section are illustrated by the 
following examples:

    Example 1. (i) Employer A is amending Plan C and applying for a 
determination letter. Plan C is not maintained pursuant to one or more 
collective bargaining agreements and is not being terminated. As part of 
the determination letter application process, Employer A provides the 
notice required under this section to interested parties. For present 
employees, Employer A provides the notice by posting the notice at those 
locations within the principal places of employment of the interested 
parties which are customarily used for employer notices to employees 
with regard to employment and employee benefit matters.
    (ii) In this Example 1, Employer A satisfies the notice to 
interested parties requirement described in this section.
    Example 2. (i) Employer B is amending Plan D and applying for a 
determination letter. As part of the determination letter application 
process, Employer B provides the notice required under this section to 
interested parties.
    (ii) Employer B has multiple worksites. Employer B's employees 
located at worksites 1 through 4 have reasonable access to computers at 
their workplace. However, Employer B's employees located at worksite 5 
do not have access to computers.
    (iii) For present employees with reasonable access to computers 
(worksites 1 through 4), Employer B provides the notice by posting the 
notice on Employer B's web site (Internet or intranet). Employees at 
worksites 1 through 4 customarily receive employer notification with 
regard to employment and employee benefit matters from the Employer B's 
web site. For present employees without access to computers (worksite 
5), Employer B provides the notice by posting the notice at worksite 5 
in a location that is customarily used for employer notices to employees 
with regard to employment and employee benefit matters.
    (iv) Employer B also sends the notice by e-mail to each collective-
bargaining representative of interested parties who are present 
employees of Employer B covered by a collective-bargaining agreement 
between employee representatives and Employer B, using the e-mail 
address previously provided to Employer B by such collective-bargaining 
representative.
    (v) In this Example 2, Employer B satisfies the notice to interested 
parties requirement described in this section.
    Example 3. (i) Employer C is terminating Plan E and applying for a 
determination letter as to whether the plan termination affects the 
continuing qualification of Plan E. As part of the determination letter 
application process, Employer C provides the notice required under this 
section to interested parties.
    (ii) All of Employer C's employees have reasonable access to 
computers. Each employee has an e-mail address where he or she can 
receive messages from Employer C. Employees of Employer C customarily 
receive employer notices regarding employment and employee benefit 
matters by e-mail.
    (iii) For present employees, Employer C provides the notice by 
sending the notice by e-mail.
    (iv) Employer C also sends the notice by e-mail to each collective-
bargaining representative of interested parties who are present 
employees of Employer C covered by a collective-bargaining agreement 
between employee representatives and Employer C, using the e-mail 
address previously provided to Employer C by such collective-bargaining 
representative.
    (v) In addition, Employer C sends the notice by e-mail to each 
interested party who is a former employee or beneficiary, using the e-
mail address previously provided to Employer C by such interested party. 
For

[[Page 677]]

any former employee or beneficiary who did not provide an e-mail 
address, Employer C sends the notice by regular mail to the last known 
address of such former employee or beneficiary.
    (vi) In this Example 3, Employer C satisfies the notice to 
interested parties requirement described in this section.

    (e) Effective date. (1) The provisions of this section shall apply 
to applications referred to in Sec. 1.7476-1(a) made on or after 
January 1, 2003.
    (2) For applications made on or after June 21, 1976 and before 
January 1, 2003, Sec. 1.7476-2 (as it appeared in the April 1, 2002 
edition of 26 CFR part 1) applies.

[T.D. 7421, 41 FR 20876, May 21, 1976, as amended at T.D. 9006, 67 FR 
47456, July 19, 2002; T.D. 9294, 71 FR 61888, Oct. 20, 2006]



Sec. 1.7476-3  Notice of determination.

    (a) In general. Under section 7476(b)(5) if a district director 
sends to the employer, the plan administrator, an interested party with 
respect to the plan, or the Pension Benefit Guaranty Corporation (or in 
the case of certain individuals who qualify as interested parties under 
paragraph (b) of Sec. 1.7476-1, to the person described under paragraph 
(c) of this section as the representative of such individuals) by 
certified or registered mail a notice of determination with respect to 
the qualification of a retirement plan described in section 7476(d), no 
proceeding for a declaratory judgment by the United States Tax Court 
with respect to the qualification of such plan may be initiated by such 
person unless the pleading initiating such proceeding is filed by such 
person with such Court before the ninety-first day after the day after 
such notice is mailed.
    (b) Address for notice of determination--(1) Applicant. In the case 
of the applicant for a determination, a notice of determination referred 
to in section 7476(b)(5) shall be sufficient if mailed to such person at 
the address set forth on the application for the determination.
    (2) Interested party. In the case of an interested party or parties 
who, pursuant to section 3001(b) of the Employee Retirement Income 
Security Act of 1974 (88 Stat. 995), submitted a comment to a district 
director with respect to the qualification of the plan, a notice of 
determination referred to in section 7476(b)(5) shall be sufficient if 
mailed to the address designated in the comment as the address to which 
correspondence should be sent.
    (c) Representative of interested parties. (1) In the case of an 
interested party who, in accordance with section 3001(b) of the Employee 
Retirement Income Security Act of 1974 (88 Stat. 995), requests the 
Secretary of Labor to submit a comment to a district director on matters 
respecting the qualification of the plan, where pursuant to such request 
such Secretary does in fact submit such a comment, the Administrator of 
Pension and Welfare Benefit Programs, Department of Labor, shall be the 
representative of such interested party for purposes of receiving the 
notice referred to in section 7476(b)(5) with respect to those matters 
on which the Secretary of Labor commented.
    (2) In the event a single comment with respect to the qualification 
of the plan is submitted to a district director by two or more 
interested parties, the representative designated in the comment for 
receipt of correspondence shall be the representative of all the 
interested parties submitting the comment for purposes of receiving the 
notice referred to in section 7476(b)(5) on behalf of all of them. Such 
designated representative must be either one of the interested parties 
who submitted the comment or a person described in paragraph (e)(6) (i), 
(ii) or (iii) of Sec. 601.201 of this chapter (Statement of Procedural 
Rules). If one person is not designated in the comment as the 
representative for receipt of correspondence, a notice of determination 
mailed to any interested party who submitted the comment shall be notice 
to all the interested parties who submitted the comment for purposes of 
section 7476(b)(5).

[T.D. 7421, 41 FR 20877, May 21, 1976]



Sec. 1.7519-0T  Table of contents (temporary).

    This section lists the captions that appear in the temporary 
regulations under section 7519.

  Sec. 1.7519-1T Required payments for entities electing not to have 
                       required year (temporary).

    (a) In general.
    (1) Applicability.

[[Page 678]]

    (2) Returns and required payments.
    (3) Required payment.
    (4) Examples.
    (b) Definitions and special rules.
    (1) Applicable percentage.
    (i) In general.
    (ii) Exception for certain applicable election years beginning after 
1987.
    (iii) Example.
    (2) Adjusted highest section 1 rate.
    (i) General rule.
    (ii) Period for determining highest section rate.
    Base year.
    (4) Special rules for certain applicable election years.
    (i) First applicable election year of new entities.
    (ii) Applicable election years ending prior to the required taxable 
year.
    (5) Net base year income.
    (i) In general.
    (ii) Partnership net income.
    (A) In general.
    (B) Treatment of deductions and losses.
    (C) Partner limitations disregarded.
    (iii) S corporation net income.
    (A) In general.
    (B) Treatment of deductions and losses.
    (C) Shareholder limitations disregarded.
    (iv) Applicable payments.
    (A) In general.
    (B) Exceptions.
    (C) Special rule for corporation electing S status.
    (D) Special rules for certain payments.
    (1) Certain indirect payments.
    (2) Payments by a downstream controlled partnership.
    (i) In general.
    (ii) Definition of a downstream controlled partnership.
    (3) Examples.
    (v) Special rule for base year of less than twelve months.
    (A) In general.
    (B) Annualized short base year income.
    (vi) Examples.
    (c) Refunds of required payments.
    (d) Examples.

    Sec. 1.7519-2T Required payments--procedures and administration 
                              (temporary).

    (a) Payment and return required.
    (1) In general.
    (2) Return required.
    (i) In general.
    (ii) Procedure if amount for applicable election year (and all 
preceding years) is not greater than $500.
    (3) Time and place for filing return.
    (i) Applicable election years beginning in 1987.
    (A) Taxpayers that would otherwise file Form 720 for the second 
quarter of 1988.
    (B) Other taxpayers.
    (ii) Applicable election years beginning after 1987.
    (A) Return made on Form 720.
    (B) Return made on form other than Form 720.
    (iii) Special rule for back-up section 444 election.
    (4) Time and place for making required payment.
    (i) Applicable election years beginning in 1987.
    (ii) Applicable election years beginning after 1987.
    (iii) Special rule for back-up section 444 election.
    (5) Penalties for failure to pay.
    (6) Refund of required payment.
    (i) In general.
    (ii) Procedures for claiming refund.
    (iii) Interest on refund.
    (b) Assessment and collection of payment.
    (c) Termination due to willful failure.
    (d) Negligence and fraud penalties made applicable.

               Sec. 1.7519.3T Effective date (temporary).



Sec. 1.7519-1T  Required payments for entities electing not to have 
required year (temporary).

    (a) In general--(1) Applicability. This section applies to any 
taxable year that a partnership or S corporation has an election under 
section 444 in effect (an ``applicable election year'').
    (2) Returns and required payments. For each applicable election 
year, a partnership or S corporation must--
    (i) File a return as provided in Sec. 1.7519-2T(a)(2), and
    (ii) Make a required payment (as defined in paragraph (a)(3) of this 
section) as provided in Sec. 1.7519-2T.


However, if the required payment for an applicable election year is not 
more than $500 and the partnership or S corporation has not been 
required to make a required payment for a prior year, the partnership or 
S corporation should not make a required payment for such applicable 
election year.
    (3) Required payment. The term ``required payment'' means, with 
respect to any applicable election year, an amount equal to the excess 
of--
    (i) The product of the applicable percentage of the adjusted highest 
section 1 rate, multiplied by the net base year income (as defined in 
paragraph (b)(5) of this section) of the entity over
    (ii) The cumulative amount of required payments actually made for 
all

[[Page 679]]

preceding applicable election years (reduced by the cumulative amount of 
such payments refundable under section 7519(c) for all such preceding 
years).


Furthermore, the amount of the required payment is determined without 
regard to the required payment of any other partnership or S 
corporation. See example (3) in paragraph (d) of this section.
    (4) Examples. The provisions of paragraph (a) of this section may be 
illustrated by the following examples.

    Example 1. A, a partnership, makes a section 444 election to retain 
its taxable year ending September 30. For A's first applicable election 
year, A's required payment, as defined in paragraph (a)(3) of this 
section, is $400. Thus, A does not have to make a required payment for 
that year. However, A is required to file the return prescribed by Sec. 
1.7519-2T(a)(2).
    Example 2. The facts are the same as in example (1), and, in 
addition to those facts, for A's second applicable election year, the 
amount determined under paragraph (a)(3)(i) of this section is $800. 
Because A did not actually make a required payment for A's first 
applicable election year, A's required payment is $800 for its second 
applicable election year. Since the required payment is greater than 
$500, A must make a required payment for its second applicable election 
year. Furthermore, A must file the return prescribed by Sec. 1.7519-
2T(a)(2).
    Example 3. The facts are the same as in example (2), and, in 
addition to those facts, for A's third applicable election year, the 
amount determined under paragraph (a)(3)(i) of this section is $1,200. 
Thus, A's required payment is $400 ($1,200 determined under paragraph 
(a)(3)(i) of this section less $800 determined under paragraph 
(a)(3)(ii) of this section). Although A's required payment for its third 
applicable election year is not more than $500, A must make its required 
payment for such year because the required payment for a preceding 
applicable election year exceeded $500. A must also file the return 
prescribed by Sec. 1.7519-2T(a)(2) for its third applicable election 
year.

    (b) Definitions and special rules--(1) Applicable percentage--(i) In 
general. Except as provided in paragraph (b)(1)(ii) of this section, the 
term ``applicable percentage'' means the percentage determined in 
accordance with the following table:

------------------------------------------------------------------------
 If the applicable election year of the partnership or   The applicable
             S corporation begins during--               percentage is--
------------------------------------------------------------------------
1987..................................................               .25
1988..................................................               .50
1989..................................................               .75
1990 or thereafter....................................               100
------------------------------------------------------------------------

    (ii) Exception for certain applicable election years beginning after 
1987. [Reserved]
    (iii) Example. The provisions of paragraph (b)(1) of this section 
may be illustrated by the following example.

    Example. B is a corporation that has historically used a June 30 
taxable year. For its taxable year beginning July 1, 1987, B elects to 
be an S corporation and elects under Sec. 1.444-1T(b)(3) to retain its 
June 30 taxable year. Had B changed to a calendar year, its required 
year under section 1378, B's shareholders would not have been entitled 
to the 4-year spread under section 806(e)(2)(C) of the Tax Reform Act of 
1986 because B was not an S corporation for its taxable year beginning 
in 1986. Nevertheless, for purposes of determining the required payment 
for B's applicable election year beginning July 1, 1987, the applicable 
percentage is 25 percent.

    (2) Adjusted highest section 1 rate--(i) General rule. For any 
applicable election year, the term ``adjusted highest section 1 rate'' 
means the highest rate of tax under section 1 applicable to the period 
defined in paragraph (b)(2)(ii) of this section, plus 1 percentage 
point. Notwithstanding the preceding sentence, the adjusted highest 
section 1 rate is 36 percent for applicable election years beginning in 
1987. For purposes of this section, the highest rate of tax is 
determined without regard to the effect of section 1(g), relating to the 
phaseout of the 15-percent rate and personal exemptions.
    (ii) Period for determining highest section 1 rate. For purposes of 
paragraph (b)(2)(i) of this section, the period for determining the 
highest rate of tax under section 1 is the 12 month period that--
    (A) Ends with the required taxable year for the applicable election 
year, and
    (B) Includes the end of the base year.


For example, assume that a partnership's applicable election year begins 
on October 1, 1988 and that the required taxable year for such 
applicable election year is December 31. Based upon these facts, the 
period for determining

[[Page 680]]

the highest section 1 rate is the 12-month period ending December 31, 
1988.
    (3) Base year. The term ``base year'' means, with respect to any 
applicable election year, the taxable year of the partnership or S 
corporation preceding such applicable election year.
    (4) Special rules for certain applicable election years--(i) First 
applicable election year of new entities. If an applicable election year 
is a partnership's or S corporation's first year in existence (i.e., the 
partnership or S corporation is newly formed and therefore does not have 
a base year), the required payment for such applicable election year is 
zero.
    (ii) Applicable election years ending prior to the required taxable 
year. If a partnership or S corporation makes a section 444 election and 
the resulting applicable election year (the ``first applicable election 
year'') of the partnership or S corporation ends prior to the last day 
of the required year, the required payment for the first applicable 
election year is zero. See example (5) in paragraph (b)(5)(vi) of this 
section.
    (5) Net base year income--(i) In general. Except as provided in 
paragraph (b)(5)(v) of this section (relating to short base years), the 
net base year income of a partnership or S corporation is the sum of--
    (A) The deferral ratio multiplied by the partnership's or S 
corporation's net income for the base year, plus
    (B) The excess (if any) of--
    (1) The deferral ratio multiplied by the aggregate amount of 
applicable payments made by the partnership or S corporation during the 
base year, over
    (2) The aggregate amount of such applicable payments made during the 
deferral period of the base year.


The term ``deferral ratio'' means the ratio which the number of months 
in the deferral period (as defined in Sec. 1.444-1T (b)(4)) of the 
applicable election year bears to 12 months.
    (ii) Partnership net income. For purposes of paragraph (b)(5)(i) of 
this section--
    (A) In general. The net income of the partnership is the amount (not 
below zero) determined by taking into account the aggregate amount of 
the partnership's items described in section 702(a), except for--
    (1) Credits,
    (2) Tax-exempt income, and
    (3) Guaranteed payments under section 707(c).
    (B) Treatment of deductions and losses. For purposes of determining 
the aggregate amount of partnership items, deductions and losses are 
treated as negative income. Thus, for example, if under section 702(a) a 
partnership has $1,000 of ordinary taxable income, $500 of specially 
allocated deductions, and $300 of capital loss, the net income of the 
partnership is $200 ($1,000-$500-$300).
    (C) Partner limitations disregarded. Any limitation on the amount of 
a partnership item described in section 702(a) which may be taken into 
account for purposes of computing the taxable income of a partner shall 
be disregarded in computing the net income of the partnership.
    (iii) S corporation net income. For purposes of paragraph (b)(5)(i) 
of this section--
    (A) In general. The net income of an S corporation is the amount 
(not below zero) determined by taking into account the aggregate amount 
of the S corporation's items described in section 1366(a) (other than 
credits and tax-exempt income). If the S corporation was a C corporation 
for the base year, the taxable income of the C corporation shall be 
treated as the net income of the S corporation for such year.
    (B) Treatment of deductions and losses. For purposes of determining 
the aggregate amount of S corporation items, deductions and losses are 
treated as negative income. Thus, for example, if under section 1366(a) 
an S corporation has $2,000 of ordinary taxable income, $1,000 of 
deductions described in section 1366(a)(1)(A) of the Code, and $500 of 
capital loss, the net income of the S corporation is $500 ($2,000-
$1,000-$500).
    (C) Shareholder limitations disregarded. Any limitation on any 
amount described in section 1366(a) which may be taken into account for 
purposes of computing the taxable income of a shareholder shall be 
disregarded in computing the net income of the S corporation.
    (iv) Applicable payments--(A) In general. The term applicable 
payment means any amount deductible in the

[[Page 681]]

base year that is includable at any time, directly or indirectly, in the 
gross income of a taxpayer that during the base year is a partner or 
shareholder.
    (B) Exceptions. The term applicable payment does not include any 
guaranteed payments under section 707(c).
    (C) Special rule for corporation electing S status. If an S 
corporation was a C corporation for the base year, the corporation shall 
be treated as if it were an S corporation for the base year for purposes 
of determining the amount of applicable payments under this section. 
Thus, amounts deductible by the C corporation in the base year that are 
includable at any time in the gross income of a taxpayer that is a 
shareholder during the base year are treated as if from an S 
corporation, and therefore within the meaning of the term ``applicable 
payments.''
    (D) Special rules for certain payments--(1) Certain indirect 
payments. For purposes of paragraph (b)(5)(iv)(A) of this section, an 
amount is indirectly includable in the gross income of a partner or 
shareholder of a partnership or S corporation that has a section 444 
election in effect (an electing partnership or S corporation) if the 
amount is includable in the gross income of--
    (i) The spouse (other than a spouse who is legally separated from 
the partner or shareholder under a decree of divorce or separate 
maintenance) or child (under age 14) of such partner or shareholder, or
    (ii) A corporation more than 50 percent (measured by fair market 
value) of which is owned in the aggregate by partners or shareholders 
(and individuals related under paragraph (b)(5)(iv)(D)(1)(i) of this 
section to any such partners or shareholders), of the electing 
partnership or S corporation, or
    (iii) A partnership more than 50 percent of the profits and capital 
of which is owned in the aggregate by partners or shareholders (and 
individuals related under paragraph (b)(5)(iv)(D)(1)(i) of this section 
to any such partners or shareholders) of the electing partnership or S 
corporation, or
    (iv) A trust more than 50 percent of the beneficial ownership of 
which is owned in the aggregate by partners or shareholders (and 
individuals related under paragraph (b)(5)(iv)(D)(1)(i) of this section 
to any such partners or shareholders), of the electing partnership or S 
corporation.


For purposes of this paragraph (b)(5)(iv)(D)(1), ownership by any person 
described in this paragraph (b)(5)(iv)(D)(1) shall be treated as 
ownership by the partners or shareholders of the electing partnership or 
S corporation. This paragraph (b)(5)(iv)(D)(1) does not apply to amounts 
deductible by a partnership or S corporation that has made a section 444 
election (the ``deducting partnership'') and included in the gross 
income of a partnership or S corporation defined in paragraphs 
(b)(5)(iv)(D)(1) (ii) or (iii) of this section (the ``including 
partnership''), if the including partnership has the same taxable year 
as the deducting partnership and the including partnership has a section 
444 election in effect. Furthermore, notwithstanding the general 
effective date provided in Sec. 1.7519-3T, this paragraph 
(b)(5)(iv)(D)(1) is effective for amounts deductible on or after June 1, 
1988.
    (2) Payments by a downstream controlled partnership--(i) In general. 
If a partnership or S corporation has made a section 444 election, any 
amounts deducted by a downstream controlled partnership will be 
considered deducted by the partnership or S corporation that has made 
the section 444 election for purposes of determining the applicable 
payments of the partnership or S corporation that has made the section 
444 election.
    (ii) Definition of a downstream controlled partnership. If a 
partnership or S corporation that has made a section 444 election owns 
more than 50 percent of a partnership's profits and capital, such owned 
partnership is considered a downstream controlled partnership for 
purposes of paragraph (b)(5)(iv)(D)(2)(i) of this section. Furthermore, 
if more than 50 percent of a partnership's profits and capital are owned 
by a downstream controlled partnership, such owned partnership is 
considered a downstream controlled partnership for purposes of paragraph 
(b)(5)(iv)(D)(2)(i) of this section.

[[Page 682]]

    (3) Examples. The provisions of this paragraph (b)(5)(iv)(D) may be 
illustrated by the following examples.

    Example 1. I1 and I2, calendar year individuals, own 100 percent of 
the profits and capital of C1, a partnership. In addition to owning C1, 
I1 and I2 also own 100 percent of the profits and capital of C2, a 
calendar year partnership. For its taxable years beginning February 1, 
1987, 1988, and 1989, C1 has a section 444 election in effect to use a 
January 31 taxable year. During its base years beginning February 1, 
1986, 1987, and 1988, C1 deducted $10,000, $11,000, and $12,000, 
respectively that was included in C2's gross income. Furthermore, of the 
$12,000 deducted by C1 for its taxable year beginning February 1, 1988, 
$7,000 was deducted during the period June 1, 1988 to January 31, 1989. 
Pursuant to paragraph (b)(5)(iv)(D)(1) of this section, the $7,000 
deducted by C1 on or after June 1, 1988, and included in C2's gross 
income is considered an applicable payment for C1's base year beginning 
February 1, 1988. Amounts deducted by C1 prior to June 1, 1988, are not 
subject to paragraph (b)(5)(iv)(D)(1) of this section.
    Example 2. The facts are the same as in example (1), except that I1 
and I2 own only 51 percent of C2's profits and capital. Since the two 
partners in C1 (i.e., I1 and I2) own more than 50 percent of C2's 
profits and capital, C2 is considered controlled by the partners of C1 
pursuant to paragraph (b)(5)(iv)(D)(1)(iii) of this section. Thus, the 
conclusions in example (1) are unchanged. Furthermore, if the $7,000 
deducted by C1 was included in the income of a partnership more than 50 
percent of the profits and capital of which is owned by C2, such $7,000 
would be considered an applicable payment for its base year beginning 
February 1, 1988.
    Example 3. The facts are the same as in example (1), except that for 
its taxable years beginning February 1, 1987, 1988, and 1989, C2 has a 
section 444 election in effect to use a January 31 taxable year. Since 
both C1 and C2 have the same taxable year and both have section 444 
elections in effect, paragraph (b)(5)(iv)(D)(1) of this section does not 
apply to the $7,000 deducted by C1 for its base year beginning February 
1, 1988.
    Example 4. I3 and I4, calendar year individuals, own 100 percent of 
the profits and capital of C3, a partnership. C3 has made a section 444 
election to retain a year ending June 30 for its taxable year beginning 
July 1, 1987. Furthermore, C3 owns more than 50 percent of the profits 
and capital of C4, a partnership that historically used a June 30 
taxable year. Pursuant to Sec. 1.706-3T(b), C4 retains its year ending 
June 30 for its taxable year beginning July 1, 1987. For its taxable 
year beginning July 1, 1986, C4 deducted $20,000 that was included in 
I3's gross income. Pursuant to paragraph (b)(5)(iv)(D)(2) of this 
section, the $20,000 deducted by C4 is considered an applicable payment 
by C3 for its base year beginning July 1, 1986.
    Example 5. The facts are the same as in example (4), except that the 
$20,000 deducted by C4 is included in the gross income of a calendar 
year partnership 100 percent owned by I3 and I4. Pursuant to paragraphs 
(b)(5)(v)(D) (1) and (2) of this section, the $20,000 deducted by C4 is 
considered an applicable payment by C3 for its base year beginning July 
1, 1986.
    Example 6. The facts are the same as in example (4), except that 
instead of directly owning a portion of C4, C3 owns more than 50 percent 
of the profits and capital of C5. Furthermore, C5 owns more than 50 
percent of the profits and capital of C4. Pursuant to paragraph 
(b)(5)(iv)(D)(2)(ii) of this section, both C5 and C4 are considered 
downstream controlled partnerships of C3. Thus, pursuant to paragraph 
(b)(5)(iv)(D)(2)(i) of this section, the $20,000 deducted by C4 is 
considered an applicable payment by C3 for its base year beginning July 
1, 1986.

    (v) Special rule for base year of less than twelve months--(A) In 
general. If a base year is a taxable year of less than twelve months (a 
``short base year''), net base year income for such year is an amount 
equal to the excess, if any, of--
    (1) The deferral ratio multiplied by the annualized short base year 
income, over
    (2) Applicable payments made during the deferral period of the 
applicable election year following the base year.
    (B) Annualized short base year income. The annualized short base 
year income is determined by--
    (1) Increasing the net income for the short base year by applicable 
payments deductible in the short base year, and
    (2) Multiplying the short base year income as increased in paragraph 
(b)(5)(v)(B)(1) of this section by twelve, and dividing the result by 
the number of months in the short base year.
    (vi) Examples. The provisions of paragraph (b)(5) of this section 
may be illustrated by the following examples.

    Example 1. D, a partnership, is owned 10 percent by a C corporation 
with a September 30 taxable year and 90 percent by calendar year 
individuals. D has historically used a September 30 taxable year. For 
its taxable year beginning October 1, 1987, D makes a section 444 
election to retain its September 30 taxable year. For the base year from 
October 1, 1986 to September 30, 1987, D has net

[[Page 683]]

income of $200,000 and no applicable payments. D's deferral ratio is \3/
12\ (the ratio of the number of months in the deferral period to 12 
months). Based upon these facts, D has net base year income of $50,000 
($200,000 x \3/12\).
    Example 2. The facts are the same as in example (1) except that D's 
net income for the base year is $140,000, after applicable payments of 
$60,000. Of the applicable payments $15,000 were deductible during the 
deferral period of the base year. Based upon these facts, D has net base 
year income of $35,000, determined as follows:

------------------------------------------------------------------------
 
------------------------------------------------------------------------
Net income multiplied by deferral ratio..   $140,000
                                            x \3/12\
                                          -----------
                                           .........  ........   $35,000
Plus the excess, if any, of applicable       $60,000
 payments multiplied by deferral ratio...
                                            x \3/12\
                                          -----------
                                           .........   $15,000
Over aggregate amount of applicable        .........   $15,000         0
 payments deductible during deferral
 period of base year.....................
                                                               ---------
  Net base year income...................  .........  ........   $35,000
                                                               =========
------------------------------------------------------------------------

    Example 3. The facts are the same as in example (2) except that of 
the $60,000 applicable payments only $10,000 are deductible during the 
deferral period of the base year. Based on these facts, D has net base 
year income of $40,000, determined as follows:

------------------------------------------------------------------------
 
------------------------------------------------------------------------
Net income multiplied by deferral ratio..   $140,000
                                              x 3/12
                                          -----------
                                           .........  ........   $35,000
Plus the excess, if any, of applicable       $60,000
 payments multiplied by deferral ratio...
                                              x 3/12
                                          -----------
                                           .........   $15,000  ........
Over aggregate amount of applicable        .........   $10,000
 payments deductible during deferral
 period of base year.....................
                                           .........  ........    $5,000
                                                               ---------
  Net base year income...................  .........  ........   $40,000
                                                               =========
------------------------------------------------------------------------

    Example 4. E is a C corporation that has historically used a January 
31 taxable year. For its taxable year beginning February 1, 1987, E 
makes an election to be an S corporation and also makes a section 444 
election to retain its January 31 taxable year. E's taxable income for 
the taxable year beginning February 1, 1986 to January 31, 1987 is 
$120,000. Pursuant to paragraph (b)(5)(iii)(A) of this section, the base 
year for X's first applicable election year is the taxable year 
beginning February 1, 1986 and ending January 31, 1987. Thus, E's net 
income for the base year is $120,000. During the base year, E pays its 
sole shareholder, A, a salary of $5,000 a month plus a $30,000 bonus on 
January 15, 1987. Thus, under paragraph (b)(5)(iv)(C) of this section, 
E's applicable payments for the base year are $90,000, of which $55,000 
are applicable payments deductible during the deferral period of the 
base year (February 1 to December 31, 1986). Based upon these facts, E's 
net base year income is $137,500, determined as follows:

------------------------------------------------------------------------
 
------------------------------------------------------------------------
Net income multiplied by deferral ratio.   $120,000
                                            x 11/12
                                         -----------
                                          .........  ........   $110,000
Plus the excess, if any, of applicable      $90,000
 payments multiplied by the deferral
 ratio..................................
                                             x11/12
                                         -----------
                                          .........   $82,500
Over aggregate amount of applicable       .........   $55,000    $27,500
 payments deductible during deferral
 period of base year....................
                                                              ----------
  Net base year income..................  .........  ........   $137,500
                                                              ==========
------------------------------------------------------------------------

    Example 5. E, a corporation that has historically used a taxable 
year ending July 31, makes an election to be an S corporation for its 
taxable year beginning August 1, 1987. For that year, E also makes a 
section 444 election to use a taxable year ending September 30. Thus, E 
has two applicable election years beginning in 1987, the first beginning 
August 1, 1987 and ending September 30, 1987, and the second beginning 
October 1, 1987 and ending September 30, 1988. E's required year under 
section 1378 is the calendar year. Because E's first applicable election 
year ends prior to the last day of E's required year (i.e., December 31, 
1987), the required payment for E's first applicable election year is 
zero. However, E is required to file a return for such year as provided 
in Sec. 1.7519-2T.
    Example 6. The facts are the same as in example (5). E's second 
applicable election year is the year from October 1, 1987 to September 
30, 1988, and the base year for the second applicable election year is a 
period of less than 12 months (i.e., August 1, 1987 to September 30, 
1987). Thus, E must compute its net base year income using the special 
rule for short base years provided in paragraph (b)(5)(v) of this 
section. Assume E's net income for the short base year is $50,000, and 
E's applicable payments for the short base year are $15,000. Pursuant to 
paragraph (b)(5)(v)(B) of this section, E's annualized short base year 
net income is $390,000 ($65,000 x 12/2). Furthermore, assume E's 
applicable payments for

[[Page 684]]

the deferral period of its second applicable election year are $20,000. 
Based on these facts, the net base year income for the applicable 
election year beginning October 1, 1987 is $77,500, computed as follows:

------------------------------------------------------------------------
 
------------------------------------------------------------------------
Annualized short base year income multiplied by       $390,000
 deferral ratio....................................
                                                        x 3/12
                                                    -----------
                                                     .........   $97,500
Less:
  Applicable payments for deferral period..........  .........   $20,000
                                                               ---------
    Net base year income...........................  .........   $77,500
                                                               =========
------------------------------------------------------------------------

    (c) Refunds of required payments. A partnership of S corporation is 
entitled to make a claim for refund, in accordance with the procedures 
provided in Sec. 1.7519-2T(a)(6), if--
    (1) The amount specified in paragraph (a)(3)(i) of this section is 
less than the amount specified in paragraph (a)(3)(ii) of this section; 
or
    (2) The partnership or S corporation terminates its section 444 
election, within the meaning of Sec. 1.444-1T(a)(5).
    (d) Example. The provisions of this section may be illustrated by 
the following examples.

    Example 1. G, a partnership, is owned 10 percent by a C corporation 
with a June 30 taxable year, and 90 percent by calendar year 
individuals. G has historically used a June 30 taxable year. For its 
taxable year beginning July 1, 1987, G makes a section 444 election to 
retain its June 30 taxable year. For the base year from July 1, 1986 to 
June 30, 1987, G has net income of $300,000 and no applicable payments. 
G's deferral ratio is 6/12 (the ratio of the number of months in the 
deferral period to 12 months). Based on these facts, G's net base year 
income is $150,000 ($300,000 x 6/12). Thus, G's required payment for its 
first applicable election year is $13,500 ($150,000 of net base year 
income multiplied by 9 percent (the product of the applicable percentage 
for 1987, 25 percent, and the highest section 1 rate for 1987, 36 
percent)).
    Example 2. The facts are the same as in example (1). In addition, G 
continues its section 444 election for the taxable year beginning July 
1, 1988, and G's net base year income for the year beginning July 1, 
1987 is $150,000. The required payment for G's second applicable 
election year is $8,250 ($150,000 of net base year income multiplied by 
14.5 percent (the product of the applicable percentage for 1988 
applicable election years, 50 percent, and the adjusted highest section 
1 rate for 1988, 29 percent) less G's $13,500 required payment for the 
first applicable election year).
    Example 3. H, a partnership with a taxable year ending September 30, 
desires to make a section 444 election for its taxable year beginning 
October 1, 1987. H is 15 percent owned by I, a partnership with a 
taxable year ending September 30, and 85 percent owned by calendar year 
individuals. Assume H and I are qualified to make section 444 elections 
as a result of the ``same taxable year exception'' provided in Sec. 
1.444-2T(e). If H and I make section 444 elections, they must each make 
a required payment (assuming the amount computed under paragraph (a)(3) 
of this section is greater than $500). Pursuant to paragraph (a)(3) of 
this section, the required payments of H and I are calculated 
independent of each other. Thus, in determining the amount of its 
required payment, I may not exclude its income attributable to H, even 
though H must also make a required payment on the same income.
    Example 4. The facts are the same as in example (1) except that H is 
90 percent owned by I and 10 percent owned by calendar year individuals. 
Pursuant to Sec. 1.706-3T, if I makes a section 444 election to retain 
its taxable year ending September 30, H's required year will be 
September 30, because H's majority interest partner will have a 
September 30 taxable year. Thus, H is not required to make a section 444 
election and a required payment in order to use a September 30 taxable 
year. I, however, must make a required payment.

[T.D. 8205, 53 FR 19706, May 27, 1988]



Sec. 1.7519-2T  Required payments--procedures and administration 
(temporary).

    (a) Payment and return required--(1) In general. With respect to any 
taxable year for which a partnership or S corporation has a section 444 
election in effect (an ``applicable election year''), the partnership or 
S corporation shall file a return as provided in paragraphs (a) (2) and 
(3) of this section and make a payment, if required, as provided in 
paragraph (a)(4) of this section.
    (2) Return required--(i) In general. A return showing the required 
payment shall be made, even if the required payment for the applicable 
election year is zero. For an applicable election year beginning in 
1987, the return shall be made on Form 720, ``Quarterly Federal Excise 
Tax Return.'' For an applicable election year beginning after 1987, the 
return shall also be made on Form 720 unless another form is prescribed 
by the Commissioner.
    (ii) Procedure if amount for applicable election year (and all 
proceeding years) is

[[Page 685]]

not greater than $500. If a partnership or S corporation is not required 
to make a payment under section 7519 for an applicable election year, 
the partnership or S corporation should type or legibly print ``zero'' 
on the appropriate line of the prescribed form.
    (3) Time and place for filing return--(i) Applicable election years 
beginning in 1987. For an applicable election year beginning in 1987, 
the Form 720 must be filed with the Service Center indicated by the 
instructions for the Form 720. The date for filing such form is as 
follows--
    (A) Taxpayers that would otherwise file Form 720 for the second 
quarter of 1988. Taxpayers that are required, without regard to this 
section, to file Form 720 for the second quarter of 1988 (e.g., 
taxpayers reporting liability for manufacturers excise tax) must file 
Form 720 by the normal due date of such form for the second quarter of 
1988. Thus, such taxpayers must generally file Form 720 on or before 
July 31, 1988. However, if such taxpayers must also report tax imposed 
by section 4251 (relating to communications services tax), sections 4261 
and 4271 (relating to air transportation tax), or section 4986 (relating 
to windfall profits tax) for the second quarter of 1988, they must file 
Form 720 on or before August 31, 1988.
    (B) Other taxpayers. Taxpayers that are not described in paragraph 
(a)(3)(i)(A) of this section (i.e., taxpayers that but for this section 
would not be required to file Form 720 for the second quarter of 1988) 
must file Form 720 on or before July 31, 1988.
    (ii) Applicable election years beginning after 1987--(A) Return made 
on Form 720. [Reserved]
    (B) Return made on form other than Form 720. For an applicable 
election year beginning after 1987, the return showing the required 
payment is to be filed with the Service Center indicated by the 
instructions for the form prescribed for payment. The return must be 
filed on or before the date prescribed by the instructions to the form.
    (iii) Special rule for back-up section 444 election. See Sec. 
1.444-3T(b)(4)(iii) for a special rule that may extend the due date for 
filing a return required by paragraph (a)(2) of this section.
    (4) Time and place for making required payment--(i) Applicable 
election years beginning in 1987. For an applicable election year 
beginning in 1987, the required payment is due and payable without 
assessment and notice on or before the date the taxpayer's Form 720 for 
the second quarter is due (as specified in paragraph (a)(3) of this 
section). The required payment must be paid by check or money order, and 
such check or money order must indicate the partnership's or S 
corporation's taxpayer identification number and must include the 
statement: ``IRS NO. 11 PAYMENT.'' The check or money order must be 
sent, together with Form 720, to the Service Center indicated by the 
instructions for the Form 720.
    (ii) Applicable election years beginning after 1987. For an 
applicable election year beginning after 1987, the required payment is 
due and payable without assessment or notice, on or before May 15 of the 
calendar year following the calendar year in which the applicable 
election year begins.
    (iii) Special rule for back-up section 444 election. See Sec. 
1.444-3T(b)(4)(iii) for a special rule that may extend the due date for 
making a required payment.
    (5) Penalties for failure to pay. In the case of any failure by a 
partnership or S corporation to pay the required payment on or before 
the date prescribed in paragraph (a)(4) of this section, there shall be 
assessed on such partnership or S corporation a penalty of 10 percent of 
the underpayment. For purposes of this section, the term 
``underpayment'' means the excess of the amount of the payment required 
under this section over the amount (if any) of such payment paid on or 
before the date prescribed in paragraph (a)(4) of this section.
    (6) Refund of required payment--(i) In general. If a partnership or 
S corporation is entitled to make a claim for refund pursuant to Sec. 
1.7519-1T(c), such partnership or S corporation should file a claim for 
refund, as provided in paragraph (a)(6)(ii) of this section. However, in 
no event shall a refund be made prior to April 15 of the second calendar 
year that follows the calendar year in which an applicable election year 
begins. For example, assume a partnership made a section 444 election

[[Page 686]]

to retain its taxable year for its taxable year beginning October 1, 
1987, and as a result made a required payment for such year. Further 
assume that the partnership terminates its election for its taxable year 
beginning October 1, 1988. Based on these facts, the partnership will be 
entitled to a refund, but no earlier than April 15, 1989.
    (ii) Procedures for claiming refund. [Reserved]
    (iii) Interest on refund. No interest shall be allowed with respect 
to any refund of a required payment under Sec. 1.7519-1T(C).
    (b) Assessment and collection of payment. A required payment shall 
be assessed and collected in the same manner as if it were a tax imposed 
by subtitle C. Furthermore, no deduction shall be allowable to a 
partnership or S corporation (or their owners) with respect to the 
required payment.
    (c) Termination due to willful failure. See Sec. 1.444-
1T(a)(5)(i)(C), which provides that willful failure to comply with the 
requirements of this section will result in the termination of the 
section 444 election.
    (d) Negligence and fraud penalties made applicable. For purposes of 
section 6653, relating to additions to tax for negligence and fraud, any 
payment required by this section shall be treated as a tax.

[T.D. 8205, 53 FR 19709, May 27, 1988]



Sec. 1.7519-3T  Effective date (temporary).

    The provisions of Sec. Sec. 1.7519-1T through Sec. 1.7519-3T are 
effective for taxable years beginning after December 31, 1986.

[T.D. 8205, 53 FR 19710, May 27, 1988]

                      general actuarial valuations



Sec. 1.7520-1  Valuation of annuities, unitrust interests, 
interests for life or terms of years, and remainder or reversionary
interests.

    (a) General actuarial valuations. (1) Except as otherwise provided 
in this section and in Sec. 1.7520-3 (relating to exceptions to the use 
of prescribed tables under certain circumstances), in the case of 
certain transactions after April 30, 1989, subject to income tax, the 
fair market value of annuities, interests for life or for a term of 
years (including unitrust interests), remainders, and reversions is 
their present value determined under this section. See Sec. 20.2031-
7(d) of this chapter (and, for periods prior to May 1, 2009, Sec. 
20.2031-7A) for the computation of the value of annuities, unitrust 
interests, life estates, terms for years, remainders, and reversions, 
other than interests described in paragraphs (a)(2) and (a)(3) of this 
section.
    (2) For a transfer to a pooled income fund, see Sec. 1.642(c)-6(e) 
(or, for periods prior to May 1, 2009, Sec. 1.642(c)-6A) with respect 
to the valuation of the remainder interest.
    (3) For a transfer to a charitable remainder annuity trust after 
April 30, 1989, see Sec. 1.664-2 with respect to the valuation of the 
remainder interest. See Sec. 1.664-4 with respect to the valuation of 
the remainder interest in property transferred to a charitable remainder 
unitrust.
    (b) Components of valuation--(1) Interest rate component--(i) 
Section 7520 Interest rate. The section 7520 interest rate is the rate 
of return, rounded to the nearest two-tenths of one percent, that is 
equal to 120 percent of the applicable Federal mid-term rate, compounded 
annually, for purposes of section 1274(d)(1), for the month in which the 
valuation date falls. In rounding the rate to the nearest two-tenths of 
a percent, any rate that is midway between one two-tenths of a percent 
and another is rounded up to the higher of those two rates. For example, 
if 120 percent of the applicable Federal mid-term rate is 10.30, the 
section 7520 interest rate component is 10.4. The section 7520 interest 
rate is published monthly by the Internal Revenue Service in the 
Internal Revenue Bulletin (see Sec. 601.601(d)(2)(ii)(b) of this 
chapter).
    (ii) Valuation date. Except as provided in Sec. 1.7520-2, the 
valuation date is the date on which the transaction takes place.
    (2) Mortality component. The mortality component reflects the 
mortality data most recently available from the United States census. As 
new mortality data becomes available after each decennial census, the 
mortality component described in this section will be revised and the 
revised mortality component tables will be published in the regulations 
at that time.

[[Page 687]]

For transactions with valuation dates on or after May 1, 2009, the 
mortality component table (Table 2000CM) is contained in Sec. 20.2031-
7(d)(7) of this chapter. See Sec. 20.2031-7A for mortality component 
tables applicable to transactions for which the valuation date falls 
before May 1, 2009.
    (c) Tables. The present value on the valuation date of an annuity, 
life estate, term of years, remainder, or reversion is computed by using 
the section 7520 interest rate component that is described in paragraph 
(b)(1) of this section and the mortality component that is described in 
paragraph (b)(2) of this section. Actuarial factors for determining 
these present values are included in tables in these regulations and in 
publications by the Internal Revenue Service. If a special factor is 
required in order to value an interest, the Internal Revenue Service 
will furnish the factor upon a request for a ruling. The request for a 
ruling must be accompanied by a recitation of the facts, including the 
date of birth for each measuring life and copies of relevant 
instruments. A request for a ruling must comply with the instructions 
for requesting a ruling published periodically in the Internal Revenue 
Bulletin (see Rev. Proc. 94-1, 1994-1 I.R.B. 10, and subsequent updates, 
and Sec. Sec. 601.201 and 601.601(d)(2)(ii)(b) of this chapter) and 
include payment of the required user fee.
    (1) Regulation sections containing tables with interest rates 
between 0.2 and 14 percent for valuation dates on or after May 1, 2009. 
Section 1.642(c)-6(e)(6) contains Table S used for determining the 
present value of a single life remainder interest in a pooled income 
fund as defined in Sec. 1.642(c)-5. See Sec. 1.642(c)-6A for actuarial 
factors for one life applicable to valuation dates before May 1, 2009. 
Section 1.664-4(e)(6) contains Table F (payout factors) and Table D 
(actuarial factors used in determining the present value of a remainder 
interest postponed for a term of years). Section 1.664-4(e)(7) contains 
Table U(1) (unitrust single life remainder factors). These tables are 
used in determining the present value of a remainder interest in a 
charitable remainder unitrust as defined in Sec. 1.664-3. See Sec. 
1.664-4A for unitrust single life remainder factors applicable to 
valuation dates before May 1, 2009. Section 20.2031-7(d)(6) of this 
chapter contains Table B (actuarial factors used in determining the 
present value of an interest for a term of years), Table J (term certain 
annuity beginning-of-interval adjustment factors), and Table K (annuity 
end-of-interval adjustment factors). Section 20.2031-7(d)(7) contains 
Table S (single life remainder factors), and Table 2000CM (mortality 
components). These tables are used in determining the present value of 
annuities, life estates, remainders, and reversions. See Sec. 20.2031-
7A for single life remainder factors for one life and mortality 
components applicable to valuation dates before May 1, 2009.
    (2) Internal Revenue Service publications containing tables with 
interest rates between 0.2 and 22 percent for valuation dates on or 
after May 1, 2009. The following documents are available, at no charge, 
electronically via the IRS Internet site at http://www.irs.gov:
    (i) Internal Revenue Service Publication 1457, ``Actuarial 
Valuations Version 3A'' (2009). This publication includes tables of 
valuation factors, as well as examples that show how to compute other 
valuation factors, for determining the present value of annuities, life 
estates, terms of years, remainders, and reversions, measured by one or 
two lives. These factors must also be used in the valuation of interests 
in a charitable remainder annuity trust as defined in Sec. 1.664-2 and 
a pooled income fund as defined in Sec. 1.642(c)-5.
    (ii) Internal Revenue Service Publication 1458, ``Actuarial 
Valuations Version 3B'' (2009). This publication includes term certain 
tables and tables of one and two life valuation factors for determining 
the present value of remainder interests in a charitable remainder 
unitrust as defined in Sec. 1.664-3.
    (iii) Internal Revenue Service Publication 1459, ``Actuarial 
Valuations Version 3C'' (2009). This publication includes tables for 
computing depreciation adjustment factors. See Sec. 1.170A-12.

[[Page 688]]

    (d) Effective/applicability date. This section applies on and after 
May 1, 2009.

[T.D. 8540, 59 FR 30149, June 10, 1994, as amended by T.D. 8819, 64 FR 
23210, 23229, Apr. 30, 1999; T.D. 8886, 65 FR 36928, 36943, June 12, 
2000; T.D. 9448, 74 FR 21483, May 7, 2009; T.D. 9540, 76 FR 49611, Aug. 
10, 2011]



Sec. 1.7520-2  Valuation of charitable interests.

    (a) In general--(1) Valuation. Except as otherwise provided in this 
section and in Sec. 1.7520-3 (relating to exceptions to the use of 
prescribed tables under certain circumstances), the fair market value of 
annuities, interests for life or for a term of years, remainders, and 
reversions for which an income tax charitable deduction is allowable is 
the present value of such interests determined under Sec. 1.7520-1.
    (2) Prior-month election rule. If any part of the property interest 
transferred qualifies for an income tax charitable deduction under 
section 170(c), the taxpayer may elect (under paragraph (b) of this 
section) to compute the present value of the interest transferred by use 
of the section 7520 interest rate for the month during which the 
interest is transferred or the section 7520 interest rate component for 
either of the 2 months preceding the month during which the interest is 
transferred. Paragraph (b) of this section explains how a prior-month 
election is made. The interest rate for the month so elected is the 
applicable section 7520 interest rate. If the actuarial factor for 
either or both of the 2 months preceding the month during which the 
interest is transferred is based on a mortality experience that is 
different from the mortality experience at the date of the transfer and 
if the taxpayer elects to use the section 7520 rate for a prior month 
with the different mortality experience, the taxpayer must use the 
actuarial factor derived from the mortality experience in effect during 
the month of the section 7520 rate elected. All actuarial computations 
relating to the transfer must be made by applying the interest rate 
component and the mortality component of the month elected by the 
taxpayer.
    (3) Transfers of more than one interest in the same property. If a 
taxpayer transfers more than one interest in the same property at the 
same time, for purposes of valuing the transferred interests, the 
taxpayer must use the same interest rate and mortality component for 
each interest in the property transferred. If more than one interest in 
the same property is transferred in two or more separate transfers at 
different times, the value of each interest is determined by the use of 
the interest rate component and mortality component in effect during the 
month of the transfer of that interest or, if applicable under paragraph 
(a)(2) of this section, either of the two months preceding the month of 
the transfer.
    (4) Information required with tax return. The following information 
must be attached to the income tax return (or to the amended return) if 
the taxpayer claims a charitable deduction for the present value of a 
temporary or remainder interest in property--
    (i) A complete description of the interest that is transferred, 
including a copy of the instrument of transfer;
    (ii) The valuation date of the transfer;
    (iii) The names and identification numbers of the beneficiaries of 
the transferred interest;
    (iv) The names and birthdates of any measuring lives, a description 
of any relevant terminal illness condition of any measuring life, and 
(if applicable) an explanation of how any terminal illness condition was 
taken into account in valuing the interest; and
    (v) A computation of the deduction showing the applicable section 
7520 interest rate that is used to value the transferred interest.
    (5) Place for filing returns. See section 6091 of the Internal 
Revenue Code and the regulations thereunder for the place for filing the 
return or other document required by this section.
    (b) Election of interest rate component--(1) Time for making 
election. A taxpayer makes a prior-month election under paragraph (a)(2) 
of this section by attaching the information described in paragraph 
(b)(2) of this section to the taxpayer's income tax return or to an 
amended return for that year that is

[[Page 689]]

filed within 24 months after the later of the date the original return 
for the year was filed or the due date for filing the return.
    (2) Manner of making election. A statement that the prior-month 
election under section 7520(a) of the Internal Revenue Code is being 
made and that identifies the elected month must be attached to the 
income tax return (or to the amended return).
    (3) Revocability. The prior-month election may be revoked by filing 
an amended return within 24 months after the later of the date the 
original return of tax for the year was filed or the due date for filing 
the return. The revocation must be filed in the place referred to in 
paragraph (a)(5) of this section.
    (c) Effective dates. Paragraph (a) of this section is effective as 
of May 1, 1989. Paragraph (b) of this section is effective for elections 
made after June 10, 1994.

[T.D. 8540, 59 FR 30149, June 10, 1994]



Sec. 1.7520-3  Limitation on the application of section 7520.

    (a) Internal Revenue Code sections to which section 7520 does not 
apply. Section 7520 of the Internal Revenue Code does not apply for 
purposes of--
    (1) Part I, subchapter D of subtitle A (section 401 et. seq.), 
relating to the income tax treatment of certain qualified plans. 
(However, section 7520 does apply to the estate and gift tax treatment 
of certain qualified plans and for purposes of determining excess 
accumulations under section 4980A);
    (2) Sections 72 and 101(b), relating to the income taxation of life 
insurance, endowment, and annuity contracts, unless otherwise provided 
for in the regulations under sections 72, 101, and 1011 (see, 
particularly, Sec. Sec. 1.101-2(e)(1)(iii)(b)(2), and 1.1011-2(c), 
Example 8);
    (3) Sections 83 and 451, unless otherwise provided for in the 
regulations under those sections;
    (4) Section 457, relating to the valuation of deferred compensation, 
unless otherwise provided for in the regulations under section 457;
    (5) Sections 3121(v) and 3306(r), relating to the valuation of 
deferred amounts, unless otherwise provided for in the regulations under 
those sections;
    (6) Section 6058, relating to valuation statements evidencing 
compliance with qualified plan requirements, unless otherwise provided 
for in the regulations under section 6058;
    (7) Section 7872, relating to income and gift taxation of interest-
free loans and loans with below-market interest rates, unless otherwise 
provided for in the regulations under section 7872; or
    (8) Section 2702(a)(2)(A), relating to the value of a nonqualified 
retained interest upon a transfer of an interest in trust to or for the 
benefit of a member of the transferor's family; and
    (9) Any other sections of the Internal Revenue Code to the extent 
provided by the Internal Revenue Service in revenue rulings or revenue 
procedures. (See Sec. Sec. 601.201 and 601.601 of this chapter).
    (b) Other limitations on the application of section 7520--(1) In 
general--(i) Ordinary beneficial interests. For purposes of this 
section:
    (A) An ordinary annuity interest is the right to receive a fixed 
dollar amount at the end of each year during one or more measuring lives 
or for some other defined period. A standard section 7520 annuity factor 
for an ordinary annuity interest represents the present worth of the 
right to receive $1.00 per year for a defined period, using the interest 
rate prescribed under section 7520 for the appropriate month. If an 
annuity interest is payable more often than annually or is payable at 
the beginning of each period, a special adjustment must be made in any 
computation with a standard section 7520 annuity factor.
    (B) An ordinary income interest is the right to receive the income 
from, or the use of, property during one or more measuring lives or for 
some other defined period. A standard section 7520 income factor for an 
ordinary income interest represents the present worth of the right to 
receive the use of $1.00 for a defined period, using the interest rate 
prescribed under section 7520 for the appropriate month.
    (C) An ordinary remainder or reversionary interest is the right to 
receive an interest in property at the end of one or more measuring 
lives or some

[[Page 690]]

other defined period. A standard section 7520 remainder factor for an 
ordinary remainder or reversionary interest represents the present worth 
of the right to receive $1.00 at the end of a defined period, using the 
interest rate prescribed under section 7520 for the appropriate month.
    (ii) Certain restricted beneficial interests. A restricted 
beneficial interest is an annuity, income, remainder, or reversionary 
interest that is subject to a contingency, power, or other restriction, 
whether the restriction is provided for by the terms of the trust, will, 
or other governing instrument or is caused by other circumstances. In 
general, a standard section 7520 annuity, income, or remainder factor 
may not be used to value a restricted beneficial interest. However, a 
special section 7520 annuity, income, or remainder factor may be used to 
value a restricted beneficial interest under some circumstances. See 
paragraph (b)(4) Example 2 of this section, which illustrates a 
situation where a special section 7520 actuarial factor is needed to 
take into account the shorter life expectancy of the terminally ill 
measuring life. See Sec. 1.7520-1(c) for requesting a special factor 
from the Internal Revenue Service.
    (iii) Other beneficial interests. If, under the provisions of this 
paragraph (b), the interest rate and mortality components prescribed 
under section 7520 are not applicable in determining the value of any 
annuity, income, remainder, or reversionary interest, the actual fair 
market value of the interest (determined without regard to section 7520) 
is based on all of the facts and circumstances if and to the extent 
permitted by the Internal Revenue Code provision applicable to the 
property interest.
    (2) Provisions of governing instrument and other limitations on 
source of payment--(i) Annuities. A standard section 7520 annuity factor 
may not be used to determine the present value of an annuity for a 
specified term of years or the life of one or more individuals unless 
the effect of the trust, will, or other governing instrument is to 
ensure that the annuity will be paid for the entire defined period. In 
the case of an annuity payable from a trust or other limited fund, the 
annuity is not considered payable for the entire defined period if, 
considering the applicable section 7520 interest rate at the valuation 
date of the transfer, the annuity is expected to exhaust the fund before 
the last possible annuity payment is made in full. For this purpose, it 
must be assumed that it is possible for each measuring life to survive 
until age 110. For example, for a fixed annuity payable annually at the 
end of each year, if the amount of the annuity payment (expressed as a 
percentage of the initial corpus) is less than or equal to the 
applicable section 7520 interest rate at the date of the transfer, the 
corpus is assumed to be sufficient to make all payments. If the 
percentage exceeds the applicable section 7520 interest rate and the 
annuity is for a definite term of years, multiply the annual annuity 
amount by the Table B term certain annuity factor, as described in Sec. 
1.7520-1(c)(1), for the number of years of the defined period. If the 
percentage exceeds the applicable section 7520 interest rate and the 
annuity is payable for the life of one or more individuals, multiply the 
annual annuity amount by the Table B annuity factor for 110 years minus 
the age of the youngest individual. If the result exceeds the limited 
fund, the annuity may exhaust the fund, and it will be necessary to 
calculate a special section 7520 annuity factor that takes into account 
the exhaustion of the trust or fund. This computation would be modified, 
if appropriate, to take into account annuities with different payment 
terms. See Sec. 25.7520-3(b)(2)(v) Example 5 of this chapter, which 
provides an illustration involving an annuity trust that is subject to 
exhaustion.
    (ii) Income and similar interests--(A) Beneficial enjoyment. A 
standard section 7520 income factor for an ordinary income interest may 
not be used to determine the present value of an income or similar 
interest in trust for a term of years or for the life of one or more 
individuals unless the effect of the trust, will, or other governing 
instrument is to provide the income beneficiary with that degree of 
beneficial enjoyment of the property during the term of the income 
interest that the principles of the law of trusts accord to

[[Page 691]]

a person who is unqualifiedly designated as the income beneficiary of a 
trust for a similar period of time. This degree of beneficial enjoyment 
is provided only if it was the transferor's intent, as manifested by the 
provisions of the governing instrument and the surrounding 
circumstances, that the trust provide an income interest for the income 
beneficiary during the specified period of time that is consistent with 
the value of the trust corpus and with its preservation. In determining 
whether a trust arrangement evidences that intention, the treatment 
required or permitted with respect to individual items must be 
considered in relation to the entire system provided for in the 
administration of the subject trust. Similarly, in determining the 
present value of the right to use tangible property (whether or not in 
trust) for one or more measuring lives or for some other specified 
period of time, the interest rate component prescribed under section 
7520 and Sec. 1.7520-1 may not be used unless, during the specified 
period, the effect of the trust, will or other governing instrument is 
to provide the beneficiary with that degree of use, possession, and 
enjoyment of the property during the term of interest that applicable 
state law accords to a person who is unqualifiedly designated as a life 
tenant or term holder for a similar period of time.
    (B) Diversions of income and corpus. A standard section 7520 income 
factor for an ordinary income interest may not be used to value an 
income interest or similar interest in property for a term of years or 
for one or more measuring lives if--
    (1) The trust, will, or other governing instrument requires or 
permits the beneficiary's income or other enjoyment to be withheld, 
diverted, or accumulated for another person's benefit without the 
consent of the income beneficiary; or
    (2) The governing instrument requires or permits trust corpus to be 
withdrawn from the trust for another person's benefit during the income 
beneficiary's term of enjoyment without the consent of and 
accountability to the income beneficiary for such diversion.
    (iii) Remainder and reversionary interests. A standard section 7520 
remainder interest factor for an ordinary remainder or reversionary 
interest may not be used to determine the present value of a remainder 
or reversionary interest (whether in trust or otherwise) unless, 
consistent with the preservation and protection that the law of trusts 
would provide for a person who is unqualifiedly designated as the 
remainder beneficiary of a trust for a similar duration, the effect of 
the administrative and dispositive provisions for the interest or 
interests that precede the remainder or reversionary interest is to 
assure that the property will be adequately preserved and protected 
(e.g., from erosion, invasion, depletion, or damage) until the remainder 
or reversionary interest takes effect in possession and enjoyment. This 
degree of preservation and protection is provided only if it was the 
transferor's intent, as manifested by the provisions of the arrangement 
and the surrounding circumstances, that the entire disposition provide 
the remainder or reversionary beneficiary with an undiminished interest 
in the property transferred at the time of the termination of the prior 
interest.
    (iv) Pooled income fund interests. In general, pooled income funds 
are created and administered to achieve a special rate of return. A 
beneficial interest in a pooled income fund is not ordinarily valued 
using a standard section 7520 income or remainder interest factor. The 
present value of a beneficial interest in a pooled income fund is 
determined according to rules and special remainder factors prescribed 
in Sec. 1.642(c)-6 and, when applicable, the rules set forth in 
paragraph (b)(3) of this section, if the individual who is the measuring 
life is terminally ill at the time of the transfer.
    (3) Mortality component. The mortality component prescribed under 
section 7520 may not be used to determine the present value of an 
annuity, income interest, remainder interest, or reversionary interest 
if an individual who is a measuring life is terminally ill at the time 
of the transaction. For purposes of this paragraph (b)(3), an individual 
who is known to have an incurable illness or other deteriorating

[[Page 692]]

physical condition is considered terminally ill if there is at least a 
50 percent probability that the individual will die within 1 year. 
However, if the individual survives for eighteen months or longer after 
the date of the transaction, that individual shall be presumed to have 
not been terminally ill at the time of the transaction unless the 
contrary is established by clear and convincing evidence.
    (4) Examples. The provisions of this paragraph (b) are illustrated 
by the following examples:

    Example 1. Annuity funded with unproductive property. The taxpayer 
transfers corporation stock worth $1,000,000 to a trust. The trust 
provides for a 6 percent ($60,000 per year) annuity in cash or other 
property to be paid to a charitable organization for 25 years and for 
the remainder to be distributed to the donor's child. The trust 
specifically authorizes, but does not require, the trustee to retain the 
shares of stock. The section 7520 interest rate for the month of the 
transfer is 8.2 percent. The corporation has paid no dividends on this 
stock during the past 5 years, and there is no indication that this 
policy will change in the near future. Under applicable state law, the 
corporation is considered to be a sound investment that satisfies 
fiduciary standards. Therefore, the trust's sole investment in this 
corporation is not expected to adversely affect the interest of either 
the annuitant or the remainder beneficiary. Considering the 6 percent 
annuity payout rate and the 8.2 percent section 7520 interest rate, the 
trust corpus is considered sufficient to pay this annuity for the entire 
25-year term of the trust, or even indefinitely. Although it appears 
that neither beneficiary would be able to compel the trustee to make the 
trust corpus produce investment income, the annuity interest in this 
case is considered to be an ordinary annuity interest, and the standard 
section 7520 annuity factor may be used to determine the present value 
of the annuity. In this case, the section 7520 annuity factor would 
represent the right to receive $1.00 per year for a term of 25 years.
    Example 2. Terminal illness. The taxpayer transfers property worth 
$1,000,000 to a charitable remainder unitrust described in section 
664(d)(2) and Sec. 1.664-3. The trust provides for a fixed-percentage 7 
percent unitrust benefit (each annual payment is equal to 7 percent of 
the trust assets as valued at the beginning of each year) to be paid 
quarterly to an individual beneficiary for life and for the remainder to 
be distributed to a charitable organization. At the time the trust is 
created, the individual beneficiary is age 60 and has been diagnosed 
with an incurable illness and there is at least a 50 percent probability 
of the individual dying within 1 year. Assuming the presumption in 
paragraph (b)(3) of this section does not apply, because there is at 
least a 50 percent probability that this beneficiary will die within 1 
year, the standard section 7520 unitrust remainder factor for a person 
age 60 from the valuation tables may not be used to determine the 
present value of the charitable remainder interest. Instead, a special 
unitrust remainder factor must be computed that is based on the section 
7520 interest rate and that takes into account the projection of the 
individual beneficiary's actual life expectancy.

    (5) Additional limitations. Section 7520 does not apply to the 
extent as may otherwise be provided by the Commissioner.
    (c) Effective date. Section 1.7520-3(a) is effective as of May 1, 
1989. The provisions of paragraph (b) of this section are effective with 
respect to transactions after December 13, 1995.

[T.D. 8540, 59 FR 30150, June 10, 1994, as amended by T.D. 8630, 60 FR 
63915, Dec. 13, 1995]



Sec. 1.7520-4  Transitional rules.

    (a) Reliance. If the valuation date is after April 30, 1989, and 
before June 10, 1994, a taxpayer can rely on Notice 89-24, 1989-1 C.B. 
660, or Notice 89-60, 1989-1 C.B. 700 (See Sec. 601.601(d)(2)(ii)(b) of 
this chapter), in valuing the transferred interest.
    (b) Effective date. This section is effective as of May 1, 1989.

[T.D. 8540, 59 FR 30150, June 10, 1994]



Sec. 1.7701-1  Definitions; spouse, husband and wife, husband, 
wife, marriage.

    (a) In general. For the definition of the terms spouse, husband and 
wife, husband, wife, and marriage, see Sec. 301.7701-18 of this 
chapter.
    (b) Applicability date. The rules of this section apply to taxable 
years ending on or after September 2, 2016.

[T.D. 9785, 81 FR 60616, Sept. 2, 2016]



Sec. 1.7701(l)-0  Table of contents.

    This section lists captions that appear in Sec. Sec. 1.7701(l)-1 
and 1.7701(l)-3:

            Sec. 1.7701(l)-1 Conduit financing arrangements.

  Sec. 1.7701(l)-3 Recharacterizing financing arrangements involving 
                             fast-pay stock.

    (a) Purpose and scope.

[[Page 693]]

    (b) Definitions.
    (1) Fast-pay arrangement.
    (2) Fast-pay stock.
    (i) Defined.
    (ii) Determination.
    (3) Benefited stock.
    (c) Recharacterization of certain fast-pay arrangements.
    (1) Scope.
    (2) Recharacterization.
    (i) Relationship between benefited shareholders and fast-pay 
shareholders.
    (ii) Relationship between benefited shareholders and corporation.
    (iii) Relationship between fast-pay shareholders and corporation.
    (3) Other rules.
    (i) Character of the financing instruments.
    (ii) Multiple types of benefited stock.
    (iii) Transactions affecting benefited stock.
    (A) Sale of benefited stock.
    (B) Transactions other than sales.
    (iv) Adjustment to basis for amounts accrued or paid in taxable 
years ending before February 27, 1997.
    (d) Prohibition against affirmative use of recharacterization by 
taxpayers.
    (e) Examples.
    (f) Reporting requirement.
    (1) Filing requirements.
    (i) In general.
    (ii) Controlled foreign corporation.
    (iii) Foreign personal holding company.
    (iv) Passive foreign investment company.
    (2) Statement.
    (g) Effective date.
    (1) In general.
    (2) Election to limit taxable income attributable to a 
recharacterized fast-pay arrangement for periods before April 1, 2000.
    (i) Limit.
    (ii) Adjustment and statement.
    (iii) Examples.
    (3) Rule to comply with this section.
    (4) Reporting requirements.

[T.D. 8853, 65 FR 1313, Jan. 10, 2000]



Sec. 1.7701(l)-1  Conduit financing arrangements.

    Section 7701(l) authorizes the issuance of regulations that 
recharacterize any multiple-party financing transaction as a transaction 
directly among any two or more of such parties where the Secretary 
determines that such recharacterization is appropriate to prevent 
avoidance of any tax imposed by title 26 of the United States Code.

[T.D. 8611, 60 FR 41015, Aug. 11, 1995, as amended by T.D. 8735, 62 FR 
53502, Oct. 14, 1997]



Sec. 1.7701(l)-3  Recharacterizing financing arrangements involving 
fast-pay stock.

    (a) Purpose and scope. This section is intended to prevent the 
avoidance of tax by persons participating in fast-pay arrangements (as 
defined in paragraph (b)(1) of this section) and should be interpreted 
in a manner consistent with this purpose. This section applies to all 
fast-pay arrangements. Paragraph (c) of this section recharacterizes 
certain fast-pay arrangements to ensure the participants are taxed in a 
manner reflecting the economic substance of the arrangements. Paragraph 
(f) of this section imposes reporting requirements on certain 
participants.
    (b) Definitions--(1) Fast-pay arrangement. A fast-pay arrangement is 
any arrangement in which a corporation has fast-pay stock outstanding 
for any part of its taxable year.
    (2) Fast-pay stock--(i) Defined. Stock is fast-pay stock if it is 
structured so that dividends (as defined in section 316) paid by the 
corporation with respect to the stock are economically (in whole or in 
part) a return of the holder's investment (as opposed to only a return 
on the holder's investment). Unless clearly demonstrated otherwise, 
stock is presumed to be fast-pay stock if--
    (A) It is structured to have a dividend rate that is reasonably 
expected to decline (as opposed to a dividend rate that is reasonably 
expected to fluctuate or remain constant); or
    (B) It is issued for an amount that exceeds (by more than a de 
minimis amount, as determined under the principles of Sec. 1.1273-1(d)) 
the amount at which the holder can be compelled to dispose of the stock.
    (ii) Determination. The determination of whether stock is fast-pay 
stock is based on all the facts and circumstances, including any related 
agreements such as options or forward contracts. A related agreement 
includes any direct or indirect agreement or understanding, oral or 
written, between the holder of the stock and the issuing corporation, or 
between the holder of the stock and one or more other shareholders in 
the corporation. To determine if it is fast-pay stock, stock is examined 
when issued, and, for

[[Page 694]]

stock that is not fast-pay stock when issued, when there is a 
significant modification in the terms of the stock or the related 
agreements or a significant change in the relevant facts and 
circumstances. Stock is not fast-pay stock solely because a redemption 
is treated as a dividend as a result of section 302(d) unless there is a 
principal purpose of achieving the same economic and tax effect as a 
fast-pay arrangement.
    (3) Benefited stock. With respect to any fast-pay stock, all other 
stock in the corporation (including other fast-pay stock having any 
significantly different characteristics) is benefited stock.
    (c) Recharacterization of certain fast-pay arrangements--(1) Scope. 
This paragraph (c) applies to any fast-pay arrangement--
    (i) In which the corporation that has outstanding fast-pay stock is 
a regulated investment company (RIC) (as defined in section 851) or a 
real estate investment trust (REIT) (as defined in section 856); or
    (ii) If the Commissioner determines that a principal purpose for the 
structure of the fast-pay arrangement is the avoidance of any tax 
imposed by the Internal Revenue Code. Application of this paragraph 
(c)(1)(ii) is at the Commissioner's discretion, and a determination 
under this paragraph (c)(1)(ii) applies to all parties to the fast-pay 
arrangement, including transferees.
    (2) Recharacterization. A fast-pay arrangement described in 
paragraph (c)(1) of this section is recharacterized as an arrangement 
directly between the benefited shareholders and the fast-pay 
shareholders. The inception and resulting relationships of the 
recharacterized arrangement are deemed to be as follows:
    (i) Relationship between benefited shareholders and fast-pay 
shareholders. The benefited shareholders issue financial instruments 
(the financing instruments) directly to the fast-pay shareholders in 
exchange for cash equal to the fair market value of the fast-pay stock 
at the time of issuance (taking into account any related agreements). 
The financing instruments have the same terms (other than issuer) as the 
fast-pay stock. Thus, for example, the timing and amount of the payments 
made with respect to the financing instruments always match the timing 
and amount of the distributions made with respect to the fast-pay stock.
    (ii) Relationship between benefited shareholders and corporation. 
The benefited shareholders contribute to the corporation the cash they 
receive for issuing the financing instruments. Distributions made with 
respect to the fast-pay stock are distributions made by the corporation 
with respect to the benefited shareholders' benefited stock.
    (iii) Relationship between fast-pay shareholders and corporation. 
For purposes of determining the relationship between the fast-pay 
shareholders and the corporation, the fast-pay stock is ignored. The 
corporation is the paying agent of the benefited shareholders with 
respect to the financing instruments.
    (3) Other rules--(i) Character of the financing instruments. The 
character of a financing instrument (for example, stock or debt) is 
determined under general tax principles and depends on all the facts and 
circumstances.
    (ii) Multiple types of benefited stock. If any benefited stock has 
any significantly different characteristics from any other benefited 
stock, the recharacterization rules of this paragraph (c) apply among 
the different types of benefited stock as appropriate to match the 
economic substance of the fast-pay arrangement.
    (iii) Transactions affecting benefited stock--(A) Sale of benefited 
stock. If one person sells benefited stock to another--
    (1) In addition to any consideration actually paid and received for 
the benefited stock, the buyer is deemed to pay and the seller is deemed 
to receive the amount necessary to terminate the seller's position in 
the financing instruments at fair market value; and
    (2) The buyer is deemed to issue financing instruments to the fast-
pay shareholders in exchange for the amount necessary to terminate the 
seller's position in the financing instruments.
    (B) Transactions other than sales. Except for transactions subject 
to paragraph (c)(3)(iii)(A) of this section, in

[[Page 695]]

the case of any transaction affecting benefited stock, the parties to 
the transaction must make appropriate adjustments to properly take into 
account the fast-pay arrangement as characterized under paragraph (c)(2) 
of this section.
    (iv) Adjustment to basis for amounts accrued or paid in taxable 
years ending before February 27, 1997. In the case of a fast-pay 
arrangement involving amounts accrued or paid in taxable years ending 
before February 27, 1997, and recharacterized under this paragraph (c), 
a benefited shareholder must decrease its basis in any benefited stock 
(as determined under paragraph (c)(2)(ii) of this section) by the amount 
(if any) that--
    (A) Its income attributable to the benefited stock (reduced by 
deductions attributable to the financing instruments) for taxable years 
ending before February 27, 1997, computed by recharacterizing the fast-
pay arrangement under this paragraph (c) and by treating the financing 
instruments as debt; exceeds
    (B) Its income attributable to such stock for taxable years ending 
before February 27, 1997, computed without applying the rules of this 
paragraph (c).
    (d) Prohibition against affirmative use of recharacterization by 
taxpayers. A taxpayer may not use the rules of paragraph (c) of this 
section if a principal purpose for using such rules is the avoidance of 
any tax imposed by the Internal Revenue Code. Thus, with respect to such 
taxpayer, the Commissioner may depart from the rules of this section and 
recharacterize (for all purposes of the Internal Revenue Code) the fast-
pay arrangement in accordance with its form or its economic substance. 
For example, if a foreign person acquires fast-pay stock in a REIT and a 
principal purpose for acquiring such stock is to reduce United States 
withholding taxes by applying the rules of paragraph (c) of this 
section, the Commissioner may, for purposes of determining the foreign 
person's United States tax consequences (including withholding tax), 
depart from the rules of paragraph (c) of this section and treat the 
foreign person as holding fast-pay stock in the REIT.
    (e) Examples. The following examples illustrate the rules of 
paragraph (c) of this section:

    Example 1. Decline in dividend rate. (i) Facts. Corporation X issues 
100 shares of A Stock and 100 shares of B Stock for $1,000 per share. By 
its terms, a share of B Stock is reasonably expected to pay a $110 
dividend in years 1 through 10 and a $30 dividend each year thereafter. 
If X liquidates, the holder of a share of B Stock is entitled to a 
preference equal to the share's issue price. Otherwise, the B Stock 
cannot be redeemed at either X's or the shareholder's option.
    (ii) Analysis. When issued, the B Stock has a dividend rate that is 
reasonably expected to decline from an annual rate of 11 percent of its 
issue price to an annual rate of 3 percent of its issue price. Since the 
B Stock is structured to have a declining dividend rate, the B Stock is 
fast-pay stock, and the A Stock is benefited stock.
    Example 2. Issued at a premium. (i) Facts. The facts are the same as 
in Example 1 of this paragraph (e) except that a share of B Stock is 
reasonably expected to pay an annual $110 dividend as long as it is 
outstanding, and Corporation X has the right to redeem the B Stock for 
$400 a share at the end of year 10.
    (ii) Analysis. The B Stock is structured so that the issue price of 
the B Stock ($1,000) exceeds (by more than a de minimis amount) the 
price at which the holder can be compelled to dispose of the stock 
($400). Thus, the B Stock is fast-pay stock, and the A Stock is 
benefited stock.
    Example 3. Planned section 302(d) redemptions. (i) Facts. 
Corporation L, a subchapter C corporation, issues 220 shares of common 
stock for $1,000 per share. No other stock is authorized, but L can 
issue warrants entitling the holder to acquire L common stock for $3,000 
per share until such time as L adopts a plan of liquidation. L can adopt 
a plan of liquidation if approved by 90 percent of its shareholders. 
Half of L's stock is purchased by Corporation M, and half by 
Organization N, which is tax exempt. At the time of purchase, M and N 
agree that for a period of ten years L will annually redeem (and N will 
tender) ten shares of stock in exchange for $12,100 and ten warrants. It 
is anticipated that, under sections 302 and 301, the annual payment to N 
will be a distribution of property that is a dividend.
    (ii) Analysis. Considering all the facts and circumstances, 
including the agreement between M and N, L's redemption of N's stock is 
undertaken with a principal purpose of achieving the same economic and 
tax effect as a fast-pay arrangement. Thus, N's stock is fast-pay stock, 
M's stock is benefited stock, and the parties have entered into a fast-
pay arrangement. Because L is neither a RIC nor a REIT, whether this 
fast-pay arrangement is recharacterized under paragraph (c) of this

[[Page 696]]

section depends on whether the Commissioner determines, under paragraph 
(c)(1)(ii) of this section, that a principal purpose for the structure 
of the fast-pay arrangement is the avoidance of any tax imposed by the 
Internal Revenue Code.
    Example 4. Recharacterization illustrated. (i) Facts. On formation, 
REIT Y issues 100 shares of C Stock and 100 shares of D Stock for $1,000 
per share. By its terms, a share of D Stock is reasonably expected to 
pay a $110 dividend in years 1 through 10 and a $30 dividend each year 
thereafter. In years 1 through 10, persons holding a majority of the D 
Stock must consent before Y may take any action that would result in Y 
liquidating or dissolving, merging or consolidating, losing its REIT 
status, or selling substantially all of its assets. Thereafter, Y may 
take these actions without consent so long as the D Stock shareholders 
receive $400 in exchange for their D Stock.
    (ii) Analysis. When issued, the D Stock has a dividend rate that is 
reasonably expected to decline from an annual rate of 11 percent of its 
issue price to an annual rate of 3 percent of its issue price. In 
addition, the $1,000 issue price of a share of D Stock exceeds the price 
at which the shareholder can be compelled to dispose of the stock 
($400). Thus, the D Stock is fast-pay stock, and the C Stock is 
benefited stock. Because Y is a REIT, the fast-pay arrangement is 
recharacterized under paragraph (c) of this section.
    (iii) Recharacterization. The fast-pay arrangement is 
recharacterized as follows:
    (A) Under paragraph (c)(2)(i) of this section, the C Stock 
shareholders are treated as issuing financing instruments to the D Stock 
shareholders in exchange for $100,000 ($1,000, the fair market value of 
each share of D Stock, multiplied by 100, the number of shares).
    (B) Under paragraph (c)(2)(ii) of this section, the C Stock 
shareholders are treated as contributing $200,000 to Y (the $100,000 
received for the financing instruments, plus the $100,000 actually paid 
for the C Stock) in exchange for the C Stock.
    (C) Under paragraph (c)(2)(ii) of this section, each distribution 
with respect to the D Stock is treated as a distribution with respect to 
the C Stock.
    (D) Under paragraph (c)(2)(iii) of this section, the C Stock 
shareholders are treated as making payments with respect to the 
financing instruments, and Y is treated as the paying agent of the 
financing instruments for the C Stock shareholders.
    Example 5. Transfer of benefited stock illustrated. (i) Facts. The 
facts are the same as in Example 4 of this paragraph (e). Near the end 
of year 5, a person holding one share of C Stock sells it for $1,300. 
The buyer is unrelated to REIT Y or to any of the D Stock shareholders. 
At the time of the sale, the amount needed to terminate the seller's 
position in the financing instruments at fair market value is $747.
    (ii) Benefited shareholder's treatment on sale. Under paragraph 
(c)(3)(iii)(A) of this section, the seller's amount realized is $2,047 
($1,300, the amount actually received, plus $747, the amount necessary 
to terminate the seller's position in the financing instruments at fair 
market value). The seller's gain on the sale of the common stock is $47 
($2,047, the amount realized, minus $2,000, the seller's basis in the 
common stock). The seller has no income or deduction with respect to 
terminating its position in the financing instruments.
    (iii) Buyer's treatment on purchase. Under paragraph (c)(3)(iii)(A) 
of this section, the buyer's basis in the share of D Stock is $2,047 
($1,300, the amount actually paid, plus $747, the amount needed to 
terminate the seller's position in the financing instruments at fair 
market value). Under paragraph (c)(3)(iii)(B) of this section, 
simultaneous with the sale, the buyer is treated as issuing financing 
instruments to the fast-pay shareholders in exchange for $747, the 
amount necessary to terminate the seller's position in the financing 
instruments at fair market value.
    Example 6. Fast-pay arrangement involving amounts accrued or paid in 
a taxable year ending before February 27, 1997. (i) Facts. Y is a 
calendar year taxpayer. In June 1996, Y acquires shares of REIT T 
benefited stock for $15,000. In December 1996, Y receives dividends of 
$100. Under the recharacterization rules of paragraph (c)(2) of this 
section, Y's 1996 income attributable to the benefited stock is $1,200, 
Y's 1996 deduction attributable to the financing instruments is $500, 
and Y's basis in the benefited stock is $25,000.
    (ii) Analysis. Under paragraph (c)(3)(iv) of this section, Y's basis 
in the benefited stock is reduced by $600. This is the amount by which 
Y's 1996 income from the fast-pay arrangement as recharacterized under 
this section ($1,200 of income attributable to the benefited stock less 
$500 of deductions attributable to the financing instruments), exceeds 
Y's 1996 income from the fast-pay arrangement as not recharacterized 
under this section ($100 of income attributable to the benefited stock). 
Thus, in 1997 when the fast-pay arrangement is recharacterized, Y's 
basis in the benefited stock is $24,400.

    (f) Reporting requirement--(1) Filing requirements--(i) In general. 
A corporation that has fast-pay stock outstanding at any time during the 
taxable year must attach the statement described in paragraph (f)(2) of 
this section to its federal income tax return for such taxable year. 
This paragraph (f)(1)(i) does not apply to a corporation described in

[[Page 697]]

paragraphs (f)(1)(ii), (iii), or (iv) of this section.
    (ii) Controlled foreign corporation. In the case of a controlled 
foreign corporation (CFC), as defined in section 957, that has fast-pay 
stock outstanding at any time during its taxable year (during which time 
it was a CFC), each controlling United States shareholder (within the 
meaning of Sec. 1.964-1(c)(5)) must attach the statement described in 
paragraph (f)(2) of this section to the shareholder's Form 5471 for the 
CFC's taxable year. The provisions of section 6038 and the regulations 
under section 6038 apply to any statement required by this paragraph 
(f)(1)(ii).
    (iii) Foreign personal holding company. In the case of a foreign 
personal holding company (FPHC), as defined in section 552, that has 
fast-pay stock outstanding at any time during its taxable year (during 
which time it was a FPHC), each United States citizen or resident who is 
an officer, director, or 10-percent shareholder (within the meaning of 
section 6035(e)(1)) of such FPHC must attach the statement described in 
paragraph (f)(2) of this section to his or her Form 5471 for the FPHC's 
taxable year. The provisions of sections 6035 and 6679 and the 
regulations under sections 6035 and 6679 apply to any statement required 
by this paragraph (f)(1)(iii).
    (iv) Passive foreign investment company. In the case of a passive 
foreign investment company (PFIC), as defined in section 1297, that has 
fast-pay stock outstanding at any time during its taxable year (during 
which time it was a PFIC), each shareholder that has elected (under 
section 1295) to treat the PFIC as a qualified electing fund and knows 
or has reason to know that the PFIC has outstanding fast-pay stock must 
attach the statement described in paragraph (f)(2) of this section to 
the shareholder's Form 8621 for the PFIC's taxable year. Each 
shareholder owning 10 percent or more of the shares of the PFIC (by vote 
or value) is presumed to know that the PFIC has issued fast-pay stock. 
The provisions of sections 1295(a)(2) and 1298(f) and the regulations 
under those sections (including Sec. 1.1295-1T(f)(2)) apply to any 
statement required by this paragraph (f)(1)(iv).
    (2) Statement. The statement required under this paragraph (f) must 
say, ``This fast-pay stock disclosure statement is required by Sec. 
1.7701(l)-3(f) of the income tax regulations.'' The statement must also 
identify the corporation that has outstanding fast-pay stock and must 
contain the date on which the fast-pay stock was issued, the terms of 
the fast-pay stock, and (to the extent the filing person knows or has 
reason to know such information) the names and taxpayer identification 
numbers of the shareholders of any stock that is not traded on an 
established securities market (as described in Sec. 1.7704-1(b)).
    (g) Effective date--(1) In general. Except as provided in paragraph 
(g)(4) of this section (relating to reporting requirements), this 
section applies to taxable years ending after February 26, 1997. Thus, 
all amounts accrued or paid during the first taxable year ending after 
February 26, 1997, are subject to this section.
    (2) Election to limit taxable income attributable to a 
recharacterized fast-pay arrangement for periods before April 1, 2000--
(i) Limit. For periods before April 1, 2000, provided the shareholder 
recharacterizes the fast-pay arrangement consistently for all such 
periods, a shareholder may limit its taxable income attributable to a 
fast-pay arrangement recharacterized under paragraph (c) of this section 
to the taxable income that results if the fast-pay arrangement is 
recharacterized under either--
    (A) Notice 97-21, 1997-1 C.B. 407, see Sec. 601.601(d)(2) of this 
chapter; or
    (B) Paragraph (c) of this section, computed by assuming the 
financing instruments are debt.
    (ii) Adjustment and statement. A shareholder that limits its taxable 
income to the amount determined under paragraph (g)(2)(i)(A) of this 
section must include as an adjustment to taxable income the excess, if 
any, of the amount determined under paragraph (g)(2)(i)(B) of this 
section, over the amount determined under paragraph (g)(2)(i)(A) of this 
section. This adjustment to taxable income must be made in the 
shareholder's first taxable year that includes April 1, 2000. A 
shareholder to which this paragraph (g)(2)(ii) applies

[[Page 698]]

must include a statement in its books and records identifying each fast-
pay arrangement for which an adjustment must be made and providing the 
amount of the adjustment for each such fast-pay arrangement.
    (iii) Examples. The following examples illustrate the rules of this 
paragraph (g)(2). For purposes of these examples, assume that a 
shareholder may limit its taxable income under this paragraph (g)(2) for 
periods before January 1, 2000.

    Example 1. Fast-pay arrangement recharacterized under Notice 97-21; 
REIT holds third-party debt. (i) Facts. (A) REIT Y is formed on January 
1, 1997, at which time it issues 1,000 shares of fast-pay stock and 
1,000 shares of benefited stock for $100 per share. Y and all of its 
shareholders are U.S. persons and have calendar taxable years. All 
shareholders of Y have elected to accrue market discount based on a 
constant interest rate, to include the market discount in income as it 
accrues, and to amortize bond premium.
    (B) For years 1 through 5, the fast-pay stock has an annual dividend 
rate of $17 per share ($17,000 for all fast-pay stock); in later years, 
the fast-pay stock has an annual dividend rate of $1 per share ($1,000 
for all fast-pay stock). At the end of year 5, and thereafter, a share 
of fast-pay stock can be acquired by Y in exchange for $50 ($50,000 for 
all fast-pay stock).
    (C) On the day Y is formed, it acquires a five-year mortgage note 
(the note) issued by an unrelated third party for $200,000. The note 
provides for annual interest payments on December 31 of $18,000 (a 
coupon interest rate of 9.00 percent, compounded annually), and one 
payment of principal at the end of 5 years. The note can be prepaid, in 
whole or in part, at any time.
    (ii) Recharacterization under Notice 97-21--(A) In general. One way 
to recharacterize the fast-pay arrangement under Notice 97-21 is to 
treat the fast-pay shareholders and the benefited shareholders as if 
they jointly purchased the note from the issuer with the understanding 
that over the five-year term of the note the benefited shareholders 
would use their share of the interest to buy (on a dollar-for-dollar 
basis) the fast-pay shareholders' portion of the note. The benefited 
shareholders' and the fast-pay shareholders' yearly taxable income under 
Notice 97-21 can then be calculated after determining their initial 
portions of the note and whether those initial portions are purchased at 
a discount or premium.
    (B) Determining initial portions of the debt instrument. The fast-
pay shareholders' and the benefited shareholders' initial portions of 
the note can be determined by comparing the present values of their 
expected cash flows. As a group, the fast-pay shareholders expect to 
receive cash flows of $135,000 (five annual payments of $17,000, plus a 
final payment of $50,000). As a group, the benefited shareholders expect 
to receive cash flows of $155,000 (five annual payments of $1,000, plus 
a final payment of $150,000). Using a discount rate equal to the yield 
to maturity (as determined under Sec. 1.1272-1(b)(1)(i)) of the 
mortgage note (9.00 percent, compounded annually), the present value of 
the fast-pay shareholders' cash flows is $98,620, and the present value 
of the benefited shareholders' cash flows is $101,380. Thus, the fast-
pay shareholders initially acquire 49 percent of the note at a $1,380 
premium (that is, they paid $100,000 for $98,620 of principal in the 
note). The benefited shareholders initially acquire 51 percent of the 
note at a $1,380 discount (that is, they paid $100,000 for $101,380 of 
principal in the note). Under section 171, the fast-pay shareholders' 
premium is amortizable based on their yield in their initial portion of 
the note (8.574 percent, compounded annually). The benefited 
shareholders' discount accrues based on the yield in their initial 
portion of the note (9.353 percent, compounded annually).
    (C) Taxable income under Notice 97-21--(1) Fast-pay shareholders. 
Under Notice 97-21, the fast-pay shareholders compute their taxable 
income attributable to the fast-pay arrangement for periods before 
January 1, 2000, by subtracting the amortizable premium from the accrued 
interest on the fast-pay shareholders' portion of the note. For purposes 
of paragraph (g)(2)(i)(A) of this section, the fast-pay shareholders' 
taxable income as a group is as follows:

------------------------------------------------------------------------
                                     Interest   Amortizable    Taxable
          Taxable period              income      premium       income
------------------------------------------------------------------------
1/1/97-12/31/97..................       $8,876       ($302)       $8,574
1/1/98-12/31/98..................        8,145        (293)        7,852
1/1/99-12/31/99..................        7,348        (281)        7,067
                                  --------------------------------------
    Total........................       24,369        (876)       23,493
------------------------------------------------------------------------

    (2) Benefited shareholders. Under Notice 97-21, the benefited 
shareholders compute their taxable income attributable to the fast-pay 
arrangement for periods before January 1, 2000, by adding the accrued 
discount to the accrued interest on the benefited shareholders' portion 
of the note. For purposes of paragraph (g)(2)(i)(A) of this section, the 
benefited shareholders' taxable income as a group is as follows:

------------------------------------------------------------------------
                                     Interest     Accrued      Taxable
          Taxable period              income      discount      income
------------------------------------------------------------------------
1/1/97-12/31/97..................       $9,124         $229       $9,353
1/1/98-12/31/98..................        9,855          251       10,106
1/1/99-12/31/99..................       10,652          274       10,926
                                  --------------------------------------
    Total........................       29,631          754       30,385
------------------------------------------------------------------------


[[Page 699]]

    (iii) Taxable income under the recharacterization of this section--
(A) Fast-pay shareholders. Under paragraphs (c) and (g)(2)(i)(B) of this 
section, the fast-pay shareholders' taxable income attributable to the 
fast-pay arrangement for periods before January 1, 2000, is the interest 
deemed paid on the financing instruments. For purposes of paragraph 
(g)(2)(i)(B) of this section, the fast-pay shareholders' taxable income 
as a group is as follows:

------------------------------------------------------------------------
                                                                 Taxable
                        Taxable period                           income
------------------------------------------------------------------------
1/1/97-12/31/97...............................................    $8,574
1/1/98-12/31/98...............................................     7,852
1/1/99-12/31/99...............................................     7,067
 
  Total.......................................................    23,493
------------------------------------------------------------------------

    (B) Benefited shareholders. Under paragraphs (c) and (g)(2)(i)(B) of 
this section, the benefited shareholders compute their taxable income 
attributable to the fast-pay arrangement for periods before January 1, 
2000, by subtracting the interest deemed paid on the financing 
instruments from the dividends actually and deemed paid on the benefited 
stock. For purposes of paragraph (g)(2)(i)(B) of this section, the 
benefited shareholders' taxable income as a group is as follows:

------------------------------------------------------------------------
                                    Dividends     Interest
                                     paid on      paid on      Taxable
          Taxable period            benefited    financing      income
                                      stock     instruments
------------------------------------------------------------------------
1/1/97-12/31/97..................      $18,000     ($8,574)       $9,426
1/1/98-12/31/98..................       18,000      (7,852)       10,148
1/1/99-12/31/99..................       18,000      (7,067)       10,933
                                  --------------------------------------
    Total........................       54,000     (23,493)       30,507
------------------------------------------------------------------------

    (iv) Limit on taxable income under paragraph (g)(2)(i) of this 
section--(A) Fast-pay shareholders. For periods before January 1, 2000, 
the fast-pay shareholders have the same taxable income under the 
recharacterization of Notice 97-21 and paragraph (g)(2)(i)(A) of this 
section ($23,493) as they have under the recharacterization of 
paragraphs (c) and (g)(2)(i)(B) of this section ($23,493). Thus, under 
paragraph (g)(2)(i) of this section, the fast-pay shareholders may limit 
their taxable income attributable to the fast-pay arrangement for 
periods before January 1, 2000, to $23,493 (as a group).
    (B) Benefited shareholders. For periods before January 1, 2000, the 
benefited shareholders have taxable income attributable to the fast-pay 
arrangement of $30,385 under the recharacterization of Notice 97-21 and 
paragraph (g)(2)(i)(A) of this section, and taxable income of $30,507 
under the recharacterization of paragraphs (c) and (g)(2)(i)(B) of this 
section. Thus, under paragraph (g)(2)(i) of this section, the benefited 
shareholders may limit their taxable income attributable to the fast-pay 
arrangement for periods before January 1, 2000, to either $30,385 (as a 
group) or $30,507 (as a group).
    (v) Adjustment to taxable income under paragraph (g)(2)(ii) of this 
section. Under paragraph (g)(2)(ii) of this section, any benefited 
shareholder that limited its taxable income to the amount determined 
under paragraph (g)(2)(i)(A) of this section must include as an 
adjustment to taxable income the excess, if any, of the amount 
determined under paragraph (g)(2)(i)(B) of this section, over the amount 
determined under paragraph (g)(2)(i)(A) of this section. If all 
benefited shareholders limited their taxable income to the amount 
determined under paragraph (g)(2)(i)(A) of this section, then as a group 
their adjustment to income is $122 ($30,507, minus $30,385). Each 
shareholder must include its adjustment in income for the taxable year 
that includes January 1, 2000.
    Example 2. REIT holds debt issued by a benefited shareholder. (i) 
Facts. The facts are the same as in Example 1 of this paragraph (g)(2) 
except that corporation Z holds 800 shares (80 percent) of the benefited 
stock, and Z, instead of a third party, issues the mortgage note 
acquired by Y.
    (ii) Recharacterization under Notice 97-21. Because Y holds a debt 
instrument issued by Z, the fast-pay arrangement is recharacterized 
under Notice 97-21 as an arrangement in which Z issued one or more 
instruments directly to the fast-pay shareholders and the other 
benefited shareholders.
    (A) Fast-pay shareholders. Consistent with this recharacterization, 
Z is treated as issuing a debt instrument to the fast-pay shareholders 
for $100,000. The debt instrument provides for five annual payments of 
$17,000 and an additional payment of $50,000 in year five. Thus, the 
debt instrument's yield to maturity is 8.574 percent per annum, 
compounded annually.
    (B) Benefited shareholders. Z is also treated as issuing a debt 
instrument to the other benefited shareholders for $20,000 (200 shares 
multiplied by $100, or 20 percent of the $100,000 paid to Y by the 
benefited shareholders as a group). This debt instrument provides for 
five annual payments of $200 and an additional payment of $30,000 in 
year five. The debt instrument's yield to maturity is 9.304 percent per 
annum, compounded annually.
    (C) Issuer's interest expense under Notice 97-21. Under Notice 97-
21, Z's interest expense attributable to the fast-pay arrangement for 
periods before January 1, 2000, equals the interest accrued on the debt 
instrument held by the fast-pay shareholders, plus the interest accrued 
on the debt instrument held by the benefited shareholders other than Z. 
For purposes of paragraph (g)(2)(i)(A) of this section, Z's interest 
expense is as follows:

[[Page 700]]



------------------------------------------------------------------------
                                                  Accrued
                                    Accrued      interest       Total
         Taxable period            interest        other       interest
                                   fast-pay      benefited     expense
                                 shareholders  shareholders
------------------------------------------------------------------------
1/1/97-12/31/97................      ($8,574)      ($1,861)    ($10,435)
1/1/98-12/31/98................       (7,852)       (2,015)      (9,867)
1/1/99-12/31/99................       (7,067)       (2,184)      (9,251)
                                ----------------------------------------
    Total......................      (23,493)       (6,060)     (29,553)
------------------------------------------------------------------------

    (iii) Recharacterization under this section. Under paragraphs (c) 
and (g)(2)(i)(B) of this section, Z's taxable income attributable to the 
fast-pay arrangement for periods before January 1, 2000, equals Z's 
share of the dividends actually and deemed paid on the benefited stock 
(80 percent of the outstanding benefited stock), reduced by the sum of 
the interest accrued on the note held by Y and the interest accrued on 
the financing instruments deemed to have been issued by Z. For purposes 
of paragraph (g)(2)(i)(B) of this section, Z's taxable income is as 
follows:

----------------------------------------------------------------------------------------------------------------
                                                                                      Accrued
                                                     Dividends        Accrued        interest         Taxable
                 Taxable period                      benefited      interest on      financing        expense
                                                       stock      debt held by Y    instruments
----------------------------------------------------------------------------------------------------------------
1/1/97-12/31/97.................................         $14,400       ($18,000)        ($6,859)       ($10,459)
1/1/98-12/31/98.................................          14,400        (18,000)         (6,281)         (9,881)
1/1/99-12/31/99.................................          14,400        (18,000)         (5,654)         (9,254)
                                                 ---------------------------------------------------------------
    Total.......................................          43,200        (54,000)        (18,794)        (29,594)
----------------------------------------------------------------------------------------------------------------

    (iv) Limit on taxable income under this paragraph (g)(2). For 
periods before January 1, 2000, Z has a taxable loss attributable to the 
fast-pay arrangement of $29,553 under the recharacterization of Notice 
97-21 and paragraph (g)(2)(i)(A) of this section, and a taxable loss of 
$29,594 under the recharacterization of paragraphs (c) and (g)(2)(i)(B) 
of this section. Thus, under paragraph (g)(2)(i) of this section, Z may 
report a taxable loss attributable to the fast-pay arrangement for 
periods before January 1, 2000, of either $29,553 or $29,594. Under 
paragraph (g)(2)(ii), Z has no adjustment to its taxable income for its 
taxable year that includes January 1, 2000.

    (3) Rule to comply with this section. To comply with this section 
for each taxable year in which it failed to do so, a taxpayer should 
file an amended return. For taxable years ending before Janaury 10, 
2000, a taxpayer that has complied with Notice 97-21, 1997-1 C.B. 407 
(see Sec. 601.601(d)(2) of this chapter), for all such taxable years is 
considered to have complied with this section and limited its taxable 
income under paragraph (g)(2)(i)(A) of this section.
    (4) Reporting requirements. The reporting requirements of paragraph 
(f) of this section apply to taxable years (of the person required to 
file the statement) ending after January 10, 2000.

[T.D. 8853, 65 FR 1313, Jan. 10, 2000; 65 FR 16317, Mar. 28, 2000]



Sec. 1.7701(l)-4  Rules regarding inversion transactions.

    (a) Overview. This section provides rules applicable to United 
States shareholders of controlled foreign corporations after certain 
inversion transactions. Paragraph (b) of this section defines specified 
transactions and provides the scope of the rules in this section. 
Paragraph (c) of this section provides rules recharacterizing certain 
specified transactions. Paragraph (d) of this section sets forth rules 
governing transactions that affect the stock of an expatriated foreign 
subsidiary following a recharacterized specified transaction. Paragraph 
(e) of this section sets forth a rule concerning the treatment of 
amounts included in income as a result of a specified transaction as 
foreign personal holding company income. Paragraph (f) of this section 
sets forth definitions that apply for purposes of this section. 
Paragraph (g) of this section sets forth examples illustrating these 
rules. Paragraph (h) of this section provides applicability dates. See 
Sec. 1.367(b)-4(e) and (f) for rules concerning certain other exchanges 
after an inversion transaction. See also Sec. 1.956-2(a)(4), (c)(5), 
and (d)(2) for additional rules applicable to United States property 
held by controlled foreign corporations after an inversion transaction.
    (b) Specified transaction--(1) In general. Except as provided in 
paragraph

[[Page 701]]

(b)(2) of this section, paragraph (c) of this section applies to 
specified transactions. For purposes of this section, a specified 
transaction is, with respect to an expatriated foreign subsidiary, a 
transaction in which stock of the expatriated foreign subsidiary is 
issued or transferred to a person that immediately before the issuance 
or transfer is a specified related person, provided the transaction 
occurs during the applicable period. However, a specified transaction 
does not include a transaction in which stock of the expatriated foreign 
subsidiary is deemed issued pursuant to section 304.
    (2) Exceptions. Paragraph (c) of this section does not apply to a 
specified transaction--
    (i) That is a fast-pay arrangement that is recharacterized under 
Sec. 1.7701(l)-3(c)(2);
    (ii) In which the specified stock was transferred by a shareholder 
of the expatriated foreign subsidiary, and the shareholder either--
    (A) Pursuant to Sec. 1.367(b)-4(e)(1), both--
    (1) Included in gross income as a deemed dividend the section 1248 
amount attributable to the specified stock; and
    (2) After taking into account the increase in basis provided in 
Sec. 1.367(b)-2(e)(3)(ii) resulting from the deemed dividend (if any), 
recognized all realized gain with respect to the stock that otherwise 
would not have been recognized; or
    (B) Included in gross income all of the gain recognized on the 
transfer of the specified stock (including gain included in gross income 
as a dividend pursuant to section 964(e), section 1248(a), or section 
356(a)(2)); or
    (iii) In which--
    (A) Immediately after the specified transaction and any related 
transaction, the expatriated foreign subsidiary is a controlled foreign 
corporation;
    (B) The post-transaction ownership percentage with respect to the 
expatriated foreign subsidiary is at least 90 percent of the pre-
transaction ownership percentage with respect to the expatriated foreign 
subsidiary; and
    (C) The post-transaction ownership percentage with respect to any 
lower-tier expatriated foreign subsidiary is at least 90 percent of the 
pre-transaction ownership percentage with respect to the lower-tier 
expatriated foreign subsidiary. See Example 3 and Example 4 of paragraph 
(g) of this section.
    (c) Recharacterization of specified transactions--(1) In general. 
Except as otherwise provided, a specified transaction that is 
recharacterized under this paragraph (c) is recharacterized for all 
purposes of the Internal Revenue Code as of the date on which the 
specified transaction occurs, unless and until the rules of paragraph 
(d) of this section apply to alter or terminate the recharacterization. 
For purposes of paragraphs (c)(2) and (3) and (d) of this section, stock 
is considered owned by a section 958(a) U.S. shareholder if it is owned 
within the meaning of section 958(a) by the section 958(a) U.S. 
shareholder.
    (2) Specified transactions through stock issuance. A specified 
transaction in which the specified stock is issued by an expatriated 
foreign subsidiary to a specified related person is recharacterized as 
follows--
    (i) The transferred property is treated as having been transferred 
by the specified related person to the persons that were section 958(a) 
U.S. shareholders of the expatriated foreign subsidiary immediately 
before the specified transaction, in proportion to the stock of the 
expatriated foreign subsidiary owned by each section 958(a) U.S. 
shareholder, in exchange for deemed instruments in the section 958(a) 
U.S. shareholders; and
    (ii) The transferred property treated as transferred to the section 
958(a) U.S. shareholders pursuant to paragraph (c)(2)(i) of this section 
is treated as having been contributed by the section 958(a) U.S. 
shareholders (through intermediate entities, if any, in exchange for 
equity in the intermediate entities) to the expatriated foreign 
subsidiary in exchange for deemed issued stock in the expatriated 
foreign subsidiary. See Example 1, Example 2, and Example 6 of paragraph 
(g) of this section.
    (3) Specified transactions through shareholder transfer. A specified 
transaction in which specified stock is

[[Page 702]]

transferred by shareholders of the expatriated foreign subsidiary to a 
specified related person is recharacterized as follows--
    (i) The transferred property is treated as having been transferred 
by the specified related person to the persons that were section 958(a) 
U.S. shareholders of the expatriated foreign subsidiary immediately 
before the specified transaction, in proportion to the specified stock 
owned by each section 958(a) U.S. shareholder, in exchange for deemed 
instruments in the section 958(a) U.S. shareholders; and
    (ii) To the extent the section 958(a) U.S. shareholders are not the 
transferring shareholders, the transferred property treated as 
transferred to the section 958(a) U.S. shareholders pursuant to 
paragraph (c)(3)(i) of this section is treated as having been 
contributed by the section 958(a) U.S. shareholders (through 
intermediate entities, if any, in exchange for equity in the 
intermediate entities) to the transferring shareholder in exchange for 
equity in the transferring shareholder. See Example 5 of paragraph (g) 
of this section.
    (4) Treatment of deemed instruments following a recharacterized 
specified transaction--(i) Deemed instruments. The deemed instruments 
described in paragraphs (c)(2) and (3) of this section have the same 
terms as the specified stock issued or transferred pursuant to the 
specified transaction (that is, the disregarded specified stock), other 
than the issuer. When a distribution is made with respect to the 
disregarded specified stock, matching seriatim distributions with 
respect to the deemed issued stock are treated as made by the 
expatriated foreign subsidiary, through intermediate entities, if any, 
to the section 958(a) U.S. shareholders, which, in turn, then are 
treated as making corresponding payments with respect to the deemed 
instruments to the specified related person.
    (ii) Paying agent. The expatriated foreign subsidiary is treated as 
the paying agent of the section 958(a) U.S. shareholder with respect to 
the deemed instruments treated as issued by the section 958(a) U.S. 
shareholder to the specified related person.
    (d) Transactions affecting ownership of stock of an expatriated 
foreign subsidiary following a recharacterized specified transaction--
(1) Transfers of stock other than specified stock. When, after a 
specified transaction with respect to an expatriated foreign subsidiary 
that is recharacterized under paragraph (c)(2) or (3) of this section, 
stock of the expatriated foreign subsidiary, other than disregarded 
specified stock, that is owned by a section 958(a) U.S. shareholder is 
transferred, the deemed issued stock treated as owned by the section 
958(a) U.S. shareholder as a result of the specified transaction 
continues to be treated as directly owned by the holder, as are the 
deemed instruments treated as issued to the specified related person as 
a result of the specified transaction.
    (2) Transactions in which the expatriated foreign subsidiary ceases 
to be a foreign related person. When, after a specified transaction with 
respect to an expatriated foreign subsidiary that is recharacterized 
under paragraph (c)(2) or (3) of this section, there is a transaction 
that affects the ownership of the stock (including disregarded specified 
stock) of the expatriated foreign subsidiary, and, immediately after the 
transaction, the expatriated foreign subsidiary is not a foreign related 
person (determined without taking into account the recharacterization 
under paragraph (c)(2) or (3) of this section), then, immediately before 
the transaction--
    (i) Each section 958(a) U.S. shareholder that is treated as owning 
deemed issued stock in the expatriated foreign subsidiary under 
paragraph (c)(2) or (3) of this section is treated as transferring the 
deemed issued stock (after the deemed issued stock is deemed to be 
transferred to the section 958(a) U.S. shareholder through intermediate 
entities, if any, in redemption of equity deemed issued by the 
intermediate entities pursuant to paragraph (c)(2) or (3) of this 
section) to the specified related person that is treated as holding the 
deemed instruments issued by the section 958(a) U.S. shareholder under 
paragraph (c)(2) or (3) of this section, in redemption of the deemed 
instruments; and
    (ii) The deemed issued stock that is treated as transferred pursuant 
to paragraph (d)(2)(i) of this section is

[[Page 703]]

treated as recapitalized into the disregarded specified stock actually 
held by the specified related person, which immediately thereafter is 
treated as specified stock owned by the specified related person for all 
purposes of the Internal Revenue Code. See Example 8, Example 9, and 
Example 12 of paragraph (g) of this section.
    (3) Transfers in which disregarded specified stock ceases to be held 
by a foreign related person, specified related person, or expatriated 
entity. When, after a specified transaction with respect to an 
expatriated foreign subsidiary that is recharacterized under paragraph 
(c)(2) or (3) of this section, there is a direct or indirect transfer of 
the disregarded specified stock in the expatriated foreign subsidiary, 
and immediately after the transfer, the expatriated foreign subsidiary 
is a foreign related person, then, to the extent that, as a result of 
the transfer, the disregarded specified stock is actually held 
(determined without taking into account the recharacterization under 
paragraph (c)(2) or (3) of this section) by a person that is not a 
foreign related person, a specified related person, or an expatriated 
entity, immediately before the transfer--
    (i) Each section 958(a) U.S. shareholder that is treated as owning 
all or a portion of the deemed issued stock in the expatriated foreign 
subsidiary is treated as transferring the deemed issued stock that is 
allocable to the transferred disregarded specified stock that is out-of-
group transferred disregarded specified stock (after the deemed issued 
stock is deemed to be transferred to the section 958(a) U.S. shareholder 
through intermediate entities, if any, in redemption of equity deemed 
issued by the intermediate entities pursuant to paragraph (c)(2) or (3) 
of this section) to the specified related person that is treated as 
holding the deemed instruments allocable to the out-of-group transferred 
disregarded specified stock, in redemption of the deemed instruments 
that are allocable to the out-of-group transferred disregarded specified 
stock; and
    (ii) The deemed issued stock that is treated as transferred pursuant 
to paragraph (d)(3)(i) of this section is treated as recapitalized into 
the disregarded specified stock actually held by the specified related 
person, which immediately thereafter is treated as specified stock owned 
by the specified related person for all purposes of the Internal Revenue 
Code. See Example 7 and Example 11 of paragraph (g) of this section.
    (4) Certain direct transfers of disregarded specified stock to which 
unwind rules do not apply. When a specified related person directly 
transfers the disregarded specified stock of the expatriated foreign 
subsidiary and paragraphs (d)(2) and (3) of this section do not apply 
with respect to the transfer, the specified related person is deemed to 
transfer the deemed instruments allocable to the transferred disregarded 
specified stock, whether it is in-group transferred disregarded 
specified stock or out-of-group transferred disregarded specified stock, 
to the transferee of the specified stock, in lieu of the disregarded 
specified stock, in exchange for the consideration provided by the 
transferee for the disregarded specified stock. See Example 10 of 
paragraph (g) of this section.
    (5) Determination of deemed issued stock and deemed instruments 
allocable to transferred disregarded specified stock--(i) Out-of-group 
transfers of disregarded specified stock. For purposes of paragraphs 
(d)(3) and (4) of this section, the portion of the deemed issued stock 
treated as owned, and of the deemed instruments treated as issued, by 
each section 958(a) U.S. shareholder as a result of the specified 
transaction that is allocable to out-of-group transferred disregarded 
specified stock is the amount that is proportionate to the ratio of the 
amount of the out-of-group transferred disregarded specified stock to 
the amount of disregarded specified stock of the expatriated foreign 
subsidiary that is actually held by the specified related person 
immediately before the transfer referred to in paragraph (d)(3) or (4) 
of this section as a result of the specified transaction.
    (ii) In-group direct transfers of disregarded specified stock. For 
purposes of paragraph (d)(4) of this section, the portion of the deemed 
issued stock treated as owned by each section 958(a) U.S. shareholder as 
a result of the specified transaction that is allocable to

[[Page 704]]

in-group transferred disregarded specified stock is the amount that is 
proportionate to the ratio of the amount of the in-group transferred 
disregarded specified stock to the amount of disregarded specified stock 
of the expatriated foreign subsidiary that is actually held by the 
specified related person immediately before the transfer described in 
paragraph (d)(4) of this section as a result of the specified 
transaction.
    (e) Certain exception from foreign personal holding company income 
not available. An amount included in the gross income of a controlled 
foreign corporation as a dividend with respect to stock transferred in a 
specified transaction does not qualify for the exception from foreign 
personal holding company income provided by section 954(c)(6) (to the 
extent in effect).
    (f) Definitions. In addition to the definitions in Sec. 1.7874-12, 
the following definitions and special rules apply for purposes of this 
section:
    (1) Deemed instruments mean, with respect to a specified 
transaction, instruments deemed issued by a section 958(a) U.S. 
shareholder in exchange for transferred property in the specified 
transaction.
    (2) Deemed issued stock means, with respect to a specified 
transaction, stock of an expatriated foreign subsidiary deemed issued to 
a section 958(a) U.S. shareholder (or an intermediate entity) in the 
specified transaction.
    (3) Disregarded specified stock means, with respect to a specified 
transaction, specified stock that is actually held by a specified 
related person but that is disregarded for all purposes of the Internal 
Revenue Code pursuant to paragraph (c)(2) or (3) of this section.
    (4) Indirect ownership. To determine indirect ownership of the stock 
of a corporation for purposes of calculating a pre-transaction ownership 
percentage or post-transaction ownership percentage with respect to that 
corporation, the principles of section 958(a) apply without regard to 
whether an intermediate entity is foreign or domestic. For this purpose, 
stock of the corporation that is directly or indirectly (applying the 
principles of section 958(a) without regard to whether an intermediate 
entity is foreign or domestic) owned by a domestic corporation that is 
an expatriated entity is not treated as indirectly owned by a non-EFS 
foreign related person.
    (5) In-group transferred disregarded specified stock means 
disregarded specified stock that is directly transferred to a foreign 
related person, a specified related person, or an expatriated entity.
    (6) A lower-tier expatriated foreign subsidiary means an expatriated 
foreign subsidiary, stock of which is directly or indirectly owned by an 
expatriated foreign subsidiary.
    (7) Out-of-group transferred disregarded specified stock means 
disregarded specified stock that, as a result of a transfer of 
disregarded specified stock, is actually held by a person that is not a 
foreign related person, a specified related person, or an expatriated 
entity.
    (8) Pre-transaction ownership percentage means, with respect to a 
corporation, 100 percent less the percentage of stock (by value) in the 
corporation that, immediately before a specified transaction and any 
related transaction, is owned, in the aggregate, directly or indirectly 
by non-EFS foreign related persons.
    (9) Post-transaction ownership percentage means, with respect to a 
corporation, 100 percent less the percentage of stock (by value) in the 
corporation that, immediately after the specified transaction and any 
related transaction, is owned, in the aggregate, directly or indirectly 
by non-EFS foreign related persons.
    (10) A section 958(a) U.S. shareholder means, with respect to an 
expatriated foreign subsidiary, a United States shareholder with respect 
to the expatriated foreign subsidiary that owns (within the meaning of 
section 958(a)) stock of the expatriated foreign subsidiary and that is 
an expatriated entity.
    (11) Specified stock means the stock of the expatriated foreign 
subsidiary that is issued or transferred to a specified related person 
in a specified transaction.
    (12) Transferred property means the property transferred by the 
specified related person in exchange for specified stock in a specified 
transaction.

[[Page 705]]

    (g) Examples. The following examples illustrate the regulations 
described in this section. Except as otherwise provided, FA, a foreign 
corporation, wholly owns DT, a domestic corporation, which, in turn, 
wholly owns FT, a foreign corporation that is a controlled foreign 
corporation. FA also wholly owns FS, a foreign corporation that is a 
controlled foreign corporation for its taxable year beginning January 1, 
2017, but not for prior taxable years. FA acquired DT in an inversion 
transaction that was completed on January 1, 2015. Accordingly, DT is 
the domestic entity and a section 958(a) U.S. shareholder with respect 
to FT, FT is an expatriated foreign subsidiary, and FA and FS are non-
EFS foreign related persons and specified related persons. All entities 
have a calendar year tax year for U.S. tax purposes.

    Example 1. (i) Facts. On February 1, 2015, FA acquires $6x of FT 
stock, representing 60% of the total voting power and value of the stock 
of FT, from FT in a stock issuance, in exchange for $6x of cash.
    (ii) Analysis. (A) Under paragraph (b) of this section, FA's 
acquisition of the FT specified stock from FT is a specified transaction 
because stock of an expatriated foreign subsidiary was issued to a 
specified related person (FA) during the applicable period. Furthermore, 
the exceptions to recharacterization in paragraph (b)(2) of this section 
do not apply to the transaction.
    (B) FA's acquisition of the FT specified stock is recharacterized 
under paragraphs (c)(1) and (2) of this section as follows, with the 
result that FT continues to be a CFC even before its taxable year 
beginning January 1, 2017:
    (1) DT is treated as having issued deemed instruments to FA in 
exchange for $6x of cash.
    (2) DT is treated as having contributed the $6x of cash to FT in 
exchange for deemed issued stock of FT.
    (C) Under paragraph (c)(4)(i) of this section, any distribution with 
respect to the FT specified stock issued to FA will be treated as a 
distribution to DT, which, in turn, will be treated as making a matching 
distribution with respect to the deemed instruments that DT is treated 
as having issued to FA. Under paragraph (c)(4)(ii) of this section, FT 
is treated as the paying agent of DT with respect to the deemed 
instruments issued by DT to FA.
    Example 2. (i) Facts. DT owns stock of FT representing 60% of the 
total voting power and value of the stock of FT, and the remaining stock 
of FT, representing 40% of the total voting power and value, is owned by 
USP, a domestic corporation that is not an expatriated entity. On 
February 1, 2015, FA acquires $6x of FT stock, representing 60% of the 
total voting power and value of the stock of FT, from FT in a stock 
issuance, in exchange for $6x of cash.
    (ii) Analysis. (A) Under paragraph (b) of this section, FA's 
acquisition of the FT specified stock from FT is a specified transaction 
because stock of an expatriated foreign subsidiary was issued to a 
specified related person (FA) during the applicable period. Furthermore, 
the exceptions to recharacterization in paragraph (b)(2) of this section 
do not apply to the transaction.
    (B) FA's acquisition of the FT specified stock is recharacterized 
under paragraphs (c)(1) and (2) of this section as follows, with the 
result that FT continues to be a CFC even before its taxable year 
beginning January 1, 2017:
    (1) DT is treated as having issued deemed instruments to FA in 
exchange for $6x of cash.
    (2) DT is treated as having contributed the $6x of cash to FT in 
exchange for deemed issued stock of FT.
    (3) DT is treated as owning $8.40x of the stock of FT, representing 
84% of the total voting power and value of the stock of FT. USP owns 
$1.60x of the stock of FT, representing 16% of the total voting power 
and value of the stock of FT.
    (C) Under paragraph (c)(4)(i) of this section, any distribution with 
respect to the FT specified stock issued to FA will be treated as a 
distribution to DT, which, in turn, will be treated as making a matching 
distribution with respect to the deemed instruments that DT is treated 
as having issued to FA. Under paragraph (c)(4)(ii) of this section, FT 
is treated as the paying agent of DT with respect to the deemed 
instruments issued by DT to FA.
    Example 3. (i) Facts. DT owns stock of FT representing 50% of the 
total voting power and value of the $8x of stock of FT outstanding, and 
the remaining stock of FT, representing 50% of the total voting power 
and value, is owned by USP, a domestic corporation that is not an 
expatriated entity. On April 30, 2016, FA and USP each simultaneously 
acquire $1x of FT stock from FT in a stock issuance, in exchange for $1x 
of cash each.
    (ii) Analysis. (A) Under paragraph (b) of this section, FA's 
acquisition of the FT specified stock from FT is a specified transaction 
because stock of an expatriated foreign subsidiary was issued to a 
specified related person (FA) during the applicable period.
    (B) However, the specified transaction is not recharacterized under 
paragraphs (c)(1) and (2) of this section because the exception in 
paragraph (b)(2)(iii) of this section applies. The exception applies 
because FT remains a

[[Page 706]]

controlled foreign corporation immediately after the specified 
transaction and any related transaction, and the post-transaction 
ownership percentage with respect to FT is 90% (90%/100%), or at least 
90%, of the pre-transaction ownership percentage with respect to FT. The 
rule in paragraph (b)(2)(iii)(C) of this section does not apply because 
there is no lower-tier expatriated foreign subsidiary. Although FA (a 
non-EFS foreign related person) indirectly owns $4x of FT stock both 
immediately before and after the specified transaction and any related 
transaction, all of that stock is directly owned by DT (a domestic 
corporation), and as a result, under paragraph (f)(4) of this section, 
none of that stock is treated as directly or indirectly owned by FA for 
purposes of calculating the pre-transaction ownership percentage and the 
post-transaction ownership percentage with respect to FT. Accordingly, 
under paragraph (f)(8) of this section, the pre-transaction ownership 
percentage with respect to FT (100% less the percentage of stock (by 
value) in FT that, immediately before the specified transaction with 
respect to FT and any related transaction, is owned by non-EFS foreign 
related persons) is 100 (100%-0%). Under paragraph (f)(9) of this 
section, the post-transaction ownership percentage with respect to FT 
(100% less the percentage of stock (by value) in FT that, immediately 
after the specified transaction with respect to FT and any related 
transaction, is owned by non-EFS foreign related persons) is 90 (100%-
10% ($1x/$10x)).
    Example 4. (i) Facts. On February 1, 2015, FA acquires 60% of the FT 
stock owned by DT in exchange for $2.40x of cash in a fully taxable 
transaction. DT recognizes and includes in income all of the gain 
(including any gain treated as a deemed dividend pursuant to section 
1248(a)) with respect to the FT stock transferred to FA.
    (ii) Analysis. (A) Under paragraph (b) of this section, FA's 
acquisition of the FT specified stock is a specified transaction because 
stock of an expatriated foreign subsidiary was transferred to a 
specified related person (FA) during the applicable period.
    (B) However, the specified transaction is not recharacterized under 
paragraphs (c)(1) and (c)(3) of this section because the exception in 
paragraph (b)(2)(ii) of this section applies. The exception applies 
because DT recognizes and includes in income all of the gain (including 
any gain treated as a deemed dividend pursuant to section 1248(a)) with 
respect to the FT specified stock transferred to FA.
    Example 5. (i) Facts. On February 1, 2015, DT and FA organize FPRS, 
a foreign partnership, with nominal capital. DT transfers all of the 
stock of FT to FPRS in exchange for 40% of the capital and profits 
interests in the partnership. Furthermore, FA contributes property to 
FPRS in exchange for the other 60% of the capital and profits interests.
    (ii) Analysis. (A) Under paragraph (b) of this section, DT's 
transfer of the FT specified stock is a specified transaction, because 
stock of an expatriated foreign subsidiary was transferred to a 
specified related person (FPRS) during the applicable period. The 
exceptions to recharacterization in paragraph (b)(2) of this section do 
not apply to the transaction.
    (B) DT's transfer of the FT specified stock is recharacterized under 
paragraphs (c)(1) and (c)(3) of this section as follows, with the result 
that FT continues to be a CFC even before its taxable year beginning 
January 1, 2017:
    (1) FPRS is treated as having issued 40% of its capital and profits 
interests to DT in exchange for deemed instruments treated as having 
been issued by DT.
    (2) DT is treated as continuing to own all of the stock of FT, as 
well as the FPRS interests.
    (C) Under paragraph (c)(4)(i) of this section, any distribution with 
respect to the FT specified stock transferred to FPRS will be treated as 
a distribution to DT, which, in turn, will be treated as making a 
matching distribution with respect to the deemed instruments that DT is 
treated as having issued to FPRS. Under paragraph (c)(4)(ii) of this 
section, FT is treated as the paying agent of DT with respect to the 
deemed instruments issued by DT to FPRS.
    Example 6. (i) Facts. DT wholly owns FT2, a foreign corporation that 
is a controlled foreign corporation. FT and FT2 each own 50% of the 
capital and profits interests in DPRS, a domestic partnership. DPRS 
wholly owns FT3, a foreign corporation that is a controlled foreign 
corporation. FT2 and FT3 are expatriated foreign subsidiaries. On April 
30, 2016, FS acquires $9x of the stock of each of FT and FT2, 
representing 9% of the total voting power and value of the stock of FT 
and FT2, from FT and FT2, respectively, in a stock issuance, in exchange 
for cash of $9x each. Also on April 30, 2016, in a related transaction, 
FS acquires $9x of the stock of FT3, representing 9% of the total voting 
power and value of the stock of FT3, from FT3 in a stock issuance, in 
exchange for cash of $9x.
    (ii) Analysis. (A) Under paragraph (b) of this section, the 
acquisitions by FS of the specified stock of each of FT, FT2, and FT3 
from FT, FT2, and FT3 are specified transactions with respect to each of 
FT, FT2, and FT3, respectively, because stock of an expatriated foreign 
subsidiary was issued to a specified related person (FS) during the 
applicable period.
    (B) If FS had acquired only stock of FT and FT2, and had not 
acquired stock of FT3 in a related transaction, the specified 
transactions resulting from the acquisitions with

[[Page 707]]

respect to FT and FT2 would not have been recharacterized under 
paragraphs (c)(1) and (2) of this section, because the exception from 
recharacterization in paragraph (b)(2)(iii) of this section would have 
applied. FT and FT2 remain controlled foreign corporations immediately 
after each specified transaction and any related transaction. Under 
paragraph (f)(9) of this section, the post-transaction ownership 
percentage with respect to each of FT, FT2, and FT3 (a lower-tier 
expatriated foreign subsidiary of FT and FT2) would have been 91% 
((100%-9%)/(100%-0%)), or at least 90%, of the pre-transaction ownership 
percentage determined under paragraph (f)(8) of this section with 
respect to each of FT, FT2, and FT3 (100%).
    (C) However, for the specified transactions with respect to FT, FT2, 
and FT3, the post-transaction ownership percentage determined under 
paragraph (f)(9) of this section with respect to FT3 (the lower-tier 
expatriated foreign subsidiary of FT and FT2), 100% less the percentage 
of stock (by value) in FT3 that, immediately after each of the specified 
transactions with respect to each of FT and FT2 and any related 
transaction, is owned by the non-EFS foreign related persons, is 82.81 
(100% - (9% x 50% x 91%)-(9% x 50% x 91%)-9%). Accordingly, the post-
transaction ownership percentage with respect to FT3 is 82.81% (82.81/
(100%-0%)), which is less than 90%, of the pre-transaction ownership 
percentage determined under paragraph (f)(8) of this section with 
respect to FT3. Thus, the exception from recharacterization in paragraph 
(b)(2)(iii) of this section does not apply with respect to the specified 
transactions with respect to FT, FT2, or FT3.
    (D) The specified transactions with respect to FT and FT2 are 
recharacterized under paragraphs (c)(1) and (2) of this section as 
follows:
    (1) DT is treated as having issued 2 deemed instruments worth $9x 
each to FA in exchange for $18x ($9x + $9x) of cash.
    (2) DT is treated as having contributed $9x of cash to each of FT 
and FT2 in exchange for deemed issued stock of FT and FT2.
    (3) DT is treated as continuing to own all of the stock of FT and 
FT2.
    (E) Under paragraph (c)(4)(i) of this section, any distribution with 
respect to the FT and FT2 specified stock issued to FS will be treated 
as a distribution to DT, which, in turn, will be treated as making a 
matching distribution with respect to the deemed instruments that DT is 
treated as having issued to FS. Under paragraph (c)(4)(ii) of this 
section, FT and FT2 are treated as the paying agents of DT with respect 
to the deemed instruments issued by DT to FS.
    (F) The specified transaction with respect to FT3 is recharacterized 
under paragraphs (c)(1) and (2) of this section as follows:
    (1) DPRS is treated as having issued a deemed instrument worth $9x 
to FA in exchange for $9x of cash.
    (2) DPRS is treated as having contributed $9x of cash to FT3 in 
exchange for deemed issued stock of FT3.
    (3) DPRS is treated as continuing to own all of the stock of FT3.
    (G) Under paragraph (c)(4)(i) of this section, any distribution with 
respect to the FT3 specified stock issued to FS will be treated as a 
distribution to DPRS, which, in turn, will be treated as making a 
matching distribution with respect to the deemed instruments that DPRS 
is treated as having issued to FS. Under paragraph (c)(4)(ii) of this 
section, FT3 is treated as the paying agent of DPRS with respect to the 
deemed instrument issued by DPRS to FS.
    Example 7. (i) Facts. The facts are the same as in Example 1 of this 
paragraph (g). On April 30, 2016, FA transfers $4x of the FT disregarded 
specified stock that it acquired on February 1, 2015 to USP, a domestic 
corporation that is not an expatriated entity, in exchange for $4x of 
cash.
    (ii) Results. After the transfer, FT remains a foreign related 
person. Therefore, paragraph (d)(2) of this section does not apply. 
However, the $4x of FT disregarded specified stock transferred to USP 
ceases to be held by a foreign related person, a specified related 
person, or an expatriated entity (determined without taking into account 
paragraph (c)(2) or (3) of this section). Therefore, under paragraph 
(d)(3) of this section, immediately before the transfer of the 
disregarded specified stock, DT is deemed to transfer $4x ($6x x ($4x/
$6x)) of the FT deemed issued stock that it is treated as owning to FA, 
the specified related person, in redemption of $4x ($6x x ($4x/$6x)) of 
the DT deemed instruments that FA is treated as owning, and the $4x of 
FT deemed issued stock deemed transferred to FA is deemed recapitalized 
into disregarded specified stock actually held by FA, which is 
thereafter treated as owned by FA for all purposes of the Code until the 
transfer to USP.
    Example 8. (i) Facts. The facts are the same as in Example 7 of this 
paragraph (g), except that on April 30, 2016, FA transfers all $6x of 
the FT disregarded specified stock to USP in exchange for $6x of cash.
    (ii) Results. After the transfer, FT ceases to be a foreign related 
person (determined without taking into account paragraph (c)(2) or (3) 
of this section). Therefore, under paragraph (d)(2) of this section, 
immediately before the transfer of the disregarded specified stock, DT 
is deemed to transfer the $6x of FT deemed issued stock that it is 
treated as owning to FA, the specified related person, in redemption of 
the $6x of DT deemed instruments that FA is treated as owning, and the 
$6x of FT deemed issued stock deemed transferred to FA is deemed 
recapitalized

[[Page 708]]

into disregarded specified stock actually held by FA, which is 
thereafter treated as owned by FA for all purposes of the Code until the 
transfer to USP.
    Example 9. (i) Facts. The facts are the same as in Example 7 of this 
paragraph (g), except that on April 30, 2016, FA transfers $5.5x of the 
FT disregarded specified stock to USP in exchange for $5.5x of cash.
    (ii) Results. After the transfer, FT ceases to be a foreign related 
person (determined without taking into account paragraph (c)(2) or (3) 
of this section). Therefore, under paragraph (d)(2) of this section, 
immediately before the transfer of the disregarded specified stock, DT 
is deemed to transfer the $6x of FT deemed issued stock that it is 
treated as owning to FA, the specified related person, in redemption of 
the $6x of DT deemed instruments that FA is treated as owning, and the 
$6x of FT deemed issued stock deemed transferred to FA is deemed 
recapitalized into disregarded specified stock actually held by FA, 
which is thereafter treated as owned by FA for all purposes of the Code 
and $5.5x of which is transferred to USP. The remaining $0.5x of the 
specified stock continues to be treated as owned by FA for all purposes 
of the Code.
    Example 10. (i) Facts. The facts are the same as in Example 1 of 
this paragraph (g). On April 30, 2016, FA transfers $5x of the FT 
disregarded specified stock that it acquired on February 1, 2015 to DS, 
a domestic corporation wholly owned by DT, in exchange for $5x of cash.
    (ii) Results. After the transfer, FT remains a foreign related 
person because DS is wholly owned by DT. Therefore, paragraph (d)(2) of 
this section does not apply. Furthermore, the $5x of FT disregarded 
specified stock is not, as a result of the transfer, held by a person 
that is not a foreign related person, a specified related person, or an 
expatriated entity. Therefore, paragraph (d)(3) of this section does not 
apply. Because FA, a specified related person, directly transferred 
disregarded specified stock of FT in a transaction to which paragraphs 
(d)(2) and (3) of this section do not apply, under paragraph (d)(4) of 
this section, FA is treated as transferring the $5x of deemed 
instruments of DT allocable to the $5x of in-group transferred 
disregarded specified stock ($6x x ($5x/$6x)) to DS.
    Example 11. (i) Facts. On February 1, 2015, FS acquires $6x of FT 
stock, representing 60% of the total voting power and value of the stock 
of FT, from FT in a stock issuance, in exchange for $6x of cash. The $6x 
of FT stock is specified stock, and the transaction is recharacterized 
under paragraph (c)(2) of this section. See Example 1 of this paragraph 
(g). On April 30, 2016, FA transfers stock of FS representing 60% of the 
total voting power and value of the stock of FS to USP, a domestic 
corporation that is not an expatriated entity. As a result of the 
transfer, FS ceases to be a foreign related person.
    (ii) Results. After the February 1, 2015 transfer, FT remains a 
foreign related person because the FT stock is acquired by FS, a foreign 
related person with respect to DT at that time. Therefore, paragraph 
(d)(2) of this section does not apply. However, after the April 30, 2016 
transfer, because FS ceases to be a foreign related person, it ceases to 
be a specified related person. Furthermore, the $6x of disregarded 
specified stock held before the transaction continues to be held by FS 
after the transaction, and therefore is not held by a foreign related 
person, a specified related person, or an expatriated entity after the 
transaction. Accordingly, under paragraph (d)(3) of this section, 
immediately before the transfer of FS disregarded specified stock, DT is 
deemed to transfer $6x ($6x x ($6x/$6x)) of the FT deemed issued stock 
that it is treated as owning to FS, the specified related person, in 
redemption of $6x ($6x x ($6x/$6x)) of the DT deemed instruments that FS 
is treated as owning, and the $6x of FT deemed issued stock deemed 
transferred to FS is deemed recapitalized into disregarded specified 
stock actually held by FS, which thereafter is treated as owned by FS 
for all purposes of the Code, including after the transfer of 60% of the 
FS stock to USP.
    Example 12. (i) Facts. The facts are the same as in Example 1 of 
this paragraph (g). On April 30, 2016, FP, a foreign corporation that is 
not a foreign related person acquires $15x of FT stock, representing 60% 
of the total voting power and value of the stock of FT, from FT in a 
stock issuance, in exchange for $15x of cash.
    (ii) Results. After the transaction, FT ceases to be a foreign 
related person. Therefore, under paragraph (d)(2) of this section, 
immediately before the issuance of FT stock to FP, DT is deemed to 
transfer the $6x of FT deemed issued stock that it is treated as owning 
to FA, the specified related person, in redemption of the $6x of DT 
deemed instruments that FA is treated as owning, and the $6x of FT 
deemed issued stock deemed transferred to FA is deemed recapitalized 
into disregarded specified stock actually held by FA, which thereafter 
is treated as owned by FA for all purposes of the Code.
    Example 13. (i) Facts. The facts are the same as in Example 1 of 
this paragraph (g). On April 30, 2016, FS acquires $4x of the FT stock 
owned by DT in exchange for $4x of cash in a fully taxable transaction. 
DT recognizes and includes in income all of the gain (including any gain 
treated as a deemed dividend pursuant to section 1248(a)) with respect 
to the FT stock transferred to FS.
    (ii) Results. (A) The transfer of FT stock by DT to FS is a 
specified transaction, but it is not recharacterized under paragraphs 
(c)(1) and (3) of this section because the exception

[[Page 709]]

in paragraph (b)(2)(ii) of this section applies. See Example 4 of this 
paragraph (g).
    (B) After the transfer, FT remains a foreign related person. 
Therefore, paragraph (d)(2) of this section does not apply. The 
disregarded specified stock of FT is not, as a result of the transfer, 
held by a person that is not a foreign related person, a specified 
related person, or an expatriated entity. Therefore, paragraph (d)(3) of 
this section does not apply. There has been no direct transfer of 
specified stock. Therefore, paragraph (d)(4) of this section also does 
not apply.
    (C) Under paragraph (d)(1) of this section, the $6x of deemed issued 
stock treated as owned by DT as a result of the specified transaction in 
which FA acquired FT stock continues to be treated as owned by DT, and 
the $6x of deemed instruments treated as issued by DT to FA continue to 
be treated as owned by FA.

    (h) Applicability date. Except as otherwise provided in this 
paragraph (h), this section applies to specified transactions completed 
on or after September 22, 2014, but only if the inversion transaction 
was completed on or after September 22, 2014. Paragraph (b)(2)(ii)(A)(2) 
of this section applies to specified transactions completed on or after 
November 19, 2015, but only if the inversion transaction was completed 
on or after September 22, 2014. Paragraphs (d) and (f)(5), (7), and (10) 
of this section apply to specified transactions completed on or after 
April 4, 2016, but only if the inversion transaction was completed on or 
after September 22, 2014. For inversion transactions completed on or 
after September 22, 2014, however, taxpayers may elect to apply 
paragraphs (d) and (f)(5), (7), and (10) of this section to specified 
transactions completed before April 4, 2016. In addition, for inversion 
transactions completed on or after September 22, 2014, in lieu of 
applying paragraphs (d) and (f)(5) and (7) of this section to specified 
transactions completed on or after September 22, 2014, and before April 
4, 2016, taxpayers may elect to apply the principles of Sec. 1.7701(l)-
3(c)(3)(iii). Furthermore, for inversion transactions completed on or 
after September 22, 2014, in lieu of applying paragraph (f)(10) of this 
section to specified transactions completed on or after September 22, 
2014, and before April 4, 2016, taxpayers may elect to define a section 
958(a) U.S. shareholder as a United States shareholder with respect to 
the expatriated foreign subsidiary that owns (within the meaning of 
section 958(a)) stock in the expatriated foreign subsidiary, but only if 
such United States shareholder is related (within the meaning of section 
267(b) or 707(b)(1)) to the specified related person or is under the 
same common control (within the meaning of section 482) as the specified 
related person.

[T.D. 9834, 83 FR 32538, July 12, 2018]



Sec. 1.7702-0  Table of contents.

    This section lists the captions that appear in Sec. Sec. 1.7702-1, 
1.7702-2, and 1.7702-3.

                    Sec. 1.7702-1 Mortality charges.

    (a) General rule.
    (b) Reasonable mortality charges.
    (1) Actually expected to be imposed.
    (2) Limit on charges.
    (c) Safe harbors.
    (1) 1980 C.S.O. Basic Mortality Tables.
    (2) Unisex tables and smoker/nonsmoker tables.
    (3) Certain contracts based on 1958 C.S.O. table.
    (d) Definitions.
    (1) Prevailing commissioners' standard tables.
    (2) Substandard risk.
    (3) Nonparticipating contract.
    (4) Charge reduction mechanism.
    (5) Plan of insurance.
    (e) Effective date.

   Sec. 1.7702-2 Attained age of the insured under a life insurance 
                                contract.

    (a) In general.
    (b) Contract insuring a single life.
    (c) Contract insuring multiple lives on a last-to-die basis.
    (1) In general.
    (2) Modifications to cash value and future mortality charges upon 
the death of insured.
    (d) Contract insuring multiple lives on a first-to-die basis.
    (e) Examples.
    (f) Effective dates.
    (1) In general.
    (2) Contracts issued before the general effective date.

                       Sec. 1.7702-3 Definitions.

    (a) In general.
    (b) Cash value.
    (1) In general.
    (2) Amounts excluded from cash value.
    (c) Death benefit.
    (1) In general.
    (2) Qualified accelerated death benefit treated as death benefit.

[[Page 710]]

    (d) Qualified accelerated death benefit.
    (1) In general.
    (2) Determination of present value of the reduction in death 
benefit.
    (3) Examples.
    (e) Terminally ill defined.
    (f) Certain other additional benefits.
    (1) In general.
    (2) Examples.
    (g) Adjustments under section 7702(f)(7).
    (h) Cash surrender value.
    (1) In general.
    (2) For purposes of section 7702(f)(7).
    (i) Net surrender value.
    (j) Effective date and special rules.
    (1) In general.
    (2) Provision of certain benefits before July 1, 1993.
    (i) Not treated as cash value.
    (ii) No effect on date of issuance.
    (iii) Special rule for addition of benefit or loan provision after 
December 15, 1992.
    (3) Addition of qualified accelerated death benefit.
    (4) Addition of other additional benefits.

[T.D. 9287, 71 FR 53970, Sept. 13, 2006]



Sec. 1.7702-2  Attained age of the insured under a life insurance 
contract.

    (a) In general. This section provides guidance on determining the 
attained age of an insured under a contract that is a life insurance 
contract under the applicable law, for purposes of determining the 
guideline level premium of the contract under section 7702(c)(4), 
applying the cash value corridor of section 7702(d) or applying the 
computational rules of section 7702(e), as applicable.
    (b) Contract insuring a single life. (1) If a contract insures the 
life of a single individual, either of the following two ages may be 
treated as the attained age of the insured with respect to that 
contract--
    (i) The insured's age determined by reference to the individual's 
actual birthday as of the date of determination (actual age); or
    (ii) The insured's age determined by reference to contract 
anniversary (rather than the individual's actual birthday), so long as 
the age assumed under the contract (contract age) is within 12 months of 
the actual age as of that date.
    (2) Once determined under paragraph (b)(1) of this section, the 
attained age with respect to an individual insured under a contract 
changes annually. Moreover, the same attained age must be used for 
purposes of applying sections 7702(c)(4), 7702(d), and 7702(e), as 
applicable.
    (c) Contract insuring multiple lives on a last-to-die basis--(1) In 
general. Except as provided in paragraph (c)(2) of this section, if a 
contract insures the lives of more than one individual on a last-to-die 
basis, the attained age of the insured is determined by applying 
paragraph (b) of this section as if the youngest individual were the 
only insured under the contract for purposes of sections 7702(c)(4), 
7702(d), and 7702(e), as applicable.
    (2) Modifications to cash value and future mortality charges upon 
the death of insured. If both the cash value and future mortality 
charges under a contract change by reason of the death of one or more 
insureds to no longer take into account the attained age of the deceased 
insured or insureds, the youngest surviving insured shall thereafter be 
treated as the only insured under the contract.
    (d) Contract insuring multiple lives on a first-to-die basis. If a 
contract insures the lives of more than one individual on a first-to-die 
basis, the attained age of the insured is determined by applying 
paragraph (b) of this section as if the oldest individual were the only 
insured under the contract for purposes of sections 7702(c)(4), 7702(d), 
and 7702(e), as applicable.
    (e) Examples. The following examples illustrate the determination of 
the attained age of the insured for purposes of sections 7702(c)(4), 
7702(d), and 7702(e), as applicable. The examples are as follows:

    Example 1. (i) X was born on May 1, 1947. X became 60 years old on 
May 1, 2007. On January 1, 2008, X purchases from IC a contract insuring 
X's life. January 1 is the contract anniversary date for all future 
years. IC determines X's annual premiums on an age-last-birthday basis. 
Based on the method used by IC to determine age, X has an attained age 
of 60 for the first contract year, 61 for the second contract year, and 
so on.
    (ii) Section 1.7702-2(b)(1) permits the determination of attained 
age under either of two alternative approaches. Section 1.7702-
2(b)(1)(i) provides that, if a contract insures the life of a single 
insured individual, the attained age may be determined by reference to 
the individual's actual birthday as of the date of determination. Under 
this provision,

[[Page 711]]

X has an attained age of 60 for the first contract year, 61 for the 
second contract year, and so on. Alternatively, Sec. 1.7702-2(b)(1)(ii) 
provides that the insured's age may be determined by reference to 
contract anniversary (rather than the individual's actual birthday), so 
long as the age assumed under the contract is within 12 months of the 
actual age as of that date. If IC determines X's attained age under 
Sec. 1.7702-2(b)(1)(ii), X likewise has an attained age of 60 for the 
first contract year, 61 for the second contract year, and so on. 
Whichever provision IC uses to determine X's attained age must be used 
consistently from year to year for purposes of sections 7702(c)(4), 
7702(d), and 7702(e), as applicable.
    Example 2. (i) The facts are the same as in Example 1 except that, 
under the contract, X's annual premiums are determined on an age-
nearest-birthday basis. X's nearest birthday to January 1, 2008, is May 
1, 2008, when X will become 61 years old. Based on the method used by IC 
to determine age, X has an attained age of 61 for the first contract 
year, 62 for the second contract year, and so on.
    (ii) Section 1.7702-2(b)(1) permits the determination of attained 
age under either of two alternative approaches. Section 1.7702-
2(b)(1)(i) provides that, if a contract insures the life of a single 
insured individual, the attained age may be determined by reference to 
the individual's actual birthday as of the date of determination. Under 
this provision, X has an attained age of 60 for the first contract year, 
61 for the second contract year, and so on. Alternatively, Sec. 1.7702-
2(b)(1)(ii) provides that the insured's age may be determined by 
reference to contract anniversary (rather than the individual's actual 
birthday), so long as the age assumed under the contract is within 12 
months of the actual age as of that date. If IC determines X's attained 
age under Sec. 1.7702-2(b)(1)(ii), X has an attained age of 61 for the 
first contract year, 62 for the second contract year, and so on. 
Whichever provision IC uses to determine X's attained age must be used 
consistently from year to year for purposes of sections 7702(c)(4), 
7702(d), and 7702(e), as applicable.
    Example 3. (i) The facts are the same as in Example 1 except that 
the face amount of the contract is increased on May 15, 2011. During the 
contract year beginning January 1, 2011, the age assumed under the 
contract on an age-last-birthday basis is 63 years. However, X has an 
actual age of 64 as of the date the face amount of the contract is 
increased.
    (ii) Section 1.7702-2(b)(1)(ii) provides that the insured's age may 
be determined by reference to contract anniversary (rather than the 
individual's actual birthday), so long as the age assumed under the 
contract is within 12 months of the actual age. Section 1.7702-2(b)(2) 
provides that, once determined under paragraph (b)(1) of this section, 
the attained age with respect to an individual insured under a contract 
changes annually. Accordingly, X continues to be 63 years old throughout 
the contract year beginning January 1, 2011, for purposes of sections 
7702(c)(4), 7702(d), and 7702(e), as applicable.
    Example 4. (i) The facts are the same as in Example 1 except that in 
addition to X (born in 1947), the insurance contract also insures the 
life of Y, born on September 1, 1942. The death benefit will be paid 
when the second of the two insureds dies.
    (ii) Section 1.7702-2(c)(1) provides that if a life insurance 
contract insures the lives of more than one individual on a last-to-die 
basis, the attained age of the insured is determined by applying Sec. 
1.7702-2(b) as if the youngest individual were the only insured under 
the contract. Because X is younger than Y, the attained age of X must be 
used for purposes of sections 7702(c)(4), 7702(d), and 7702(e), as 
applicable.
    Example 5. (i) The facts are the same as Example 4 except that X 
(the younger of the two insureds) dies in 2012. After X's death, both 
the cash value and mortality charges of the life insurance contract are 
adjusted to take into account only the life of Y.
    (ii) Section 1.7702-2(c)(1) provides that if a life insurance 
contract insures the lives of more than one individual on a last-to-die 
basis, the attained age of the insured is determined by applying Sec. 
1.7702-2(b) as if the youngest individual were the only insured under 
the contract. Paragraph (c)(2) of this section provides that if both the 
cash value and future mortality charges under a contract change by 
reason of the death of an insured to no longer take into account the 
attained age of the deceased insured, the youngest surviving insured is 
thereafter treated as the only insured under the contract. Because both 
the cash value and mortality charges are adjusted after X's death to 
take into account only the life of Y, only the attained age of Y is 
taken into account after X's death for purposes of sections 7702(c)(4), 
7702(d), and 7702(e), as applicable.
    Example 6. (i) The facts are the same as Example 1 except that in 
addition to X (born in 1947), the insurance contract also insures the 
life of Z, born on September 1, 1952. The death benefit will be paid 
when the first of the two insureds dies.
    (ii) Section 1.7702-2(d) provides that if a life insurance contract 
insures the lives of more than one individual on a first-to-die basis, 
the attained age of the insured is determined by applying Sec. 1.7702-
2(b) as if the oldest individual were the only insured under the 
contract. Because X is older than Z, the attained age of X must be used 
for purposes of sections 7702(c)(4), 7702(d), and 7702(e), as 
applicable.

    (f) Effective dates--(1) In general. Except as provided in paragraph 
(f)(2) of

[[Page 712]]

this section, these regulations apply to all life insurance contracts 
that are either--
    (i) Issued after December 31, 2008; or
    (ii) Issued on or after October 1, 2007 and based upon the 2001 CSO 
tables.
    (2) Contracts issued before the general effective date. Pursuant to 
section 7805(b)(7), a taxpayer may apply these regulations retroactively 
for contracts issued before October 1, 2007, provided that the taxpayer 
does not later determine qualification of those contracts in a manner 
that is inconsistent with these regulations.

[T.D. 9287, 71 FR 53970, Sept. 13, 2006]



Sec. 1.7702B-1  Consumer protection provisions.

    (a) In general. Under sections 7702B(b)(1)(F), 7702B(g), and 4980C, 
qualified long-term care insurance contracts and issuers of those 
contracts are required to satisfy certain provisions of the Long-Term 
Care Insurance Model Act (Model Act) and Long-Term Care Insurance Model 
Regulation (Model Regulation) promulgated by the National Association of 
Insurance Commissioners (NAIC), as adopted as of January 1993. The 
requirements for qualified long-term care insurance contracts under 
section 7702B(b)(1)(F) and (g) relate to guaranteed renewal or 
noncancellability, prohibitions on limitations and exclusions, extension 
of benefits, continuation or conversion of coverage, discontinuance and 
replacement of policies, unintentional lapse, disclosure, prohibitions 
against post-claims underwriting, minimum standards, inflation 
protection, prohibitions against pre-existing conditions exclusions and 
probationary periods, and prior hospitalization. The requirements for 
qualified long-term care insurance contracts under section 4980C relate 
to application forms and replacement coverage, reporting requirements, 
filing requirements for marketing, standards for marketing, 
appropriateness of recommended purchase, standard format outline of 
coverage, delivery of a shopper's guide, right to return, outline of 
coverage, certificates under group plans, policy summary, monthly 
reports on accelerated death benefits, and incontestability period.
    (b) Coordination with State requirements--(1) Contracts issued in a 
State that imposes more stringent requirements. If a State imposes a 
requirement that is more stringent than the analogous requirement 
imposed by section 7702B(g) or 4980C, then, under section 4980C(f), 
compliance with the more stringent requirement of State law is 
considered compliance with the parallel requirement of section 7702B(g) 
or 4980C. The principles of paragraph (b)(3) of this section apply to 
any case in which a State imposes a requirement that is more stringent 
than the analogous requirement imposed by section 7702B(g) or 4980C (as 
described in this paragraph (b)(1)), but in which there has been a 
failure to comply with that State requirement.
    (2) Contracts issued in a State that has adopted the model 
provisions. If a State imposes a requirement that is the same as the 
parallel requirement imposed by section 7702B(g) or 4980C, compliance 
with that requirement of State law is considered compliance with the 
parallel requirement of section 7702B(g) or 4980C, and failure to comply 
with that requirement of State law is considered failure to comply with 
the parallel requirement of section 7702B(g) or 4980C.
    (3) Contracts issued in a State that has not adopted the model 
provisions or more stringent requirements. If a State has not adopted 
the Model Act, the Model Regulation, or a requirement that is the same 
as or more stringent than the analogous requirement imposed by section 
7702B(g) or 4980C, then the language, caption, format, and content 
requirements imposed by sections 7702B(g) and 4980C with respect to 
contracts, applications, outlines of coverage, policy summaries, and 
notices will be considered satisfied for a contract subject to the law 
of that State if the language, caption, format, and content are 
substantially similar to those required under the parallel provision of 
the Model Act or Model Regulation. Only nonsubstantive deviations are 
permitted in order for language, caption, format, and content to be 
considered substantially similar to the requirements of the Model Act or 
Model Regulation.

[[Page 713]]

    (c) Effective date. This section applies with respect to contracts 
issued after December 10, 1999.

[T.D. 8792, 63 FR 68186, Dec. 10, 1998]



Sec. 1.7702B-2  Special rules for pre-1997 long-term care insurance
contracts.

    (a) Scope. The definitions and special provisions of this section 
apply solely for purposes of determining whether an insurance contract 
(other than a qualified long-term care insurance contract described in 
section 7702B(b) and any regulations issued thereunder) is treated as a 
qualified long-term care insurance contract for purposes of the Internal 
Revenue Code under section 321(f)(2) of the Health Insurance Portability 
and Accountability Act of 1996 (Public Law 104-191).
    (b) Pre-1997 long-term care insurance contracts--(1) In general. A 
pre-1997 long-term care insurance contract is treated as a qualified 
long-term care insurance contract, regardless of whether the contract 
satisfies section 7702B(b) and any regulations issued thereunder.
    (2) Pre-1997 long-term care insurance contract defined. A pre-1997 
long-term care insurance contract is any insurance contract with an 
issue date before January 1, 1997, that met the long-term care insurance 
requirements of the State in which the contract was sitused on the issue 
date. For this purpose, the long-term care insurance requirements of the 
State are the State laws (including statutory and administrative law) 
that are intended to regulate insurance coverage that constitutes 
``long-term care insurance'' (as defined in section 4 of the National 
Association of Insurance Commissioners (NAIC) Long-Term Care Insurance 
Model Act, as in effect on August 21, 1996), regardless of the 
terminology used by the State in describing the insurance coverage.
    (3) Issue date of a contract--(i) In general. Except as otherwise 
provided in this paragraph (b)(3), the issue date of a contract is the 
issue date assigned to the contract by the insurance company. In no 
event is the issue date earlier than the date the policyholder submitted 
a signed application for coverage to the insurance company. If the 
period between the date the signed application is submitted to the 
insurance company and the date coverage under which the contract 
actually becomes effective is substantially longer than under the 
insurance company's usual business practice, then the issue date is the 
later of the date coverage under which the contract becomes effective or 
the issue date assigned to the contract by the insurance company. A 
policyholder's right to return a contract within a free-look period 
following delivery for a full refund of any premiums paid is not taken 
into account in determining the contract's issue date.
    (ii) Special rule for group contracts. The issue date of a group 
contract (including any certificate issued thereunder) is the date on 
which coverage under the group contract becomes effective.
    (iii) Exchange of contract or certain changes in a contract treated 
as a new issuance. For purposes of this paragraph (b)(3)--
    (A) A contract issued in exchange for an existing contract after 
December 31, 1996, is considered a contract issued after that date;
    (B) Any change described in paragraph (b)(4) of this section is 
treated as the issuance of a new contract with an issue date no earlier 
than the date the change goes into effect; and
    (C) If a change described in paragraph (b)(4) of this section occurs 
with regard to one or more, but fewer than all, of the certificates 
evidencing coverage under a group contract, then the insurance coverage 
under the changed certificates is treated as coverage under a newly 
issued group contract (and the insurance coverage provided by any 
unchanged certificate continues to be treated as coverage under the 
original group contract).
    (4) Changes treated as the issuance of a new contract--(i) In 
general. For purposes of paragraph (b)(3) of this section, except as 
provided in paragraph (b)(4)(ii) of this section, the following changes 
are treated as the issuance of a new contract--
    (A) A change in the terms of a contract that alters the amount or 
timing of an item payable by either the policyholder (or certificate 
holder), the insured, or the insurance company;

[[Page 714]]

    (B) A substitution of the insured under an individual contract; or
    (C) A change (other than an immaterial change) in the contractual 
terms, or in the plan under which the contract was issued, relating to 
eligibility for membership in the group covered under a group contract.
    (ii) Exceptions. For purposes of this paragraph (b)(4), the 
following changes are not treated as the issuance of a new contract--
    (A) A policyholder's exercise of any right provided under the terms 
of the contract as in effect on December 31, 1996, or a right required 
by applicable State law to be provided to the policyholder;
    (B) A change in the mode of premium payment (for example, a change 
from monthly to quarterly premiums);
    (C) In the case of a policy that is guaranteed renewable or 
noncancellable, a classwide increase or decrease in premiums;
    (D) A reduction in premiums due to the purchase of a long-term care 
insurance contract by a family member of the policyholder;
    (E) A reduction in coverage (with a corresponding reduction in 
premiums) made at the request of a policyholder;
    (F) A reduction in premiums as a result of extending to an 
individual policyholder a discount applicable to similar categories of 
individuals pursuant to a premium rate structure that was in effect on 
December 31, 1996, for the issuer's pre-1997 long-term care insurance 
contracts of the same type;
    (G) The addition, without an increase in premiums, of alternative 
forms of benefits that may be selected by the policyholder;
    (H) The addition of a rider (including any similarly identifiable 
amendment) to a pre-1997 long-term care insurance contract in any case 
in which the rider, if issued as a separate contract of insurance, would 
itself be a qualified long-term care insurance contract under section 
7702B and any regulations issued thereunder (including the consumer 
protection provisions in section 7702B(g) to the extent applicable to 
the addition of a rider);
    (I) The deletion of a rider or provision of a contract that 
prohibited coordination of benefits with Medicare (often referred to as 
an HHS (Health and Human Services) rider);
    (J) The effectuation of a continuation or conversion of coverage 
right that is provided under a pre-1997 group contract and that, in 
accordance with the terms of the contract as in effect on December 31, 
1996, provides for coverage under an individual contract following an 
individual's ineligibility for continued coverage under the group 
contract; and
    (K) The substitution of one insurer for another insurer in an 
assumption reinsurance transaction.
    (5) Examples. The following examples illustrate the principles of 
this paragraph (b):

    Example 1. (i) On December 3, 1996, A, an individual, submits a 
signed application to an insurance company to purchase a nursing home 
contract that meets the long-term care insurance requirements of the 
State in which the contract is sitused. The insurance company decides on 
December 20, 1996, that it will issue the contract, and assigns December 
20, 1996, as the issue date for the contract. Under the terms of the 
contract, A's insurance coverage becomes effective on January 1, 1997. 
The company delivers the contract to A on January 3, 1997. A has the 
right to return the contract within 15 days following delivery for a 
refund of all premiums paid.
    (ii) Under paragraph (b)(3)(i) of this section, the issue date of 
the contract is December 20, 1996. Thus, the contract is a pre-1997 
long-term care insurance contract that is treated as a qualified long-
term care insurance contract.
    Example 2. (i) The facts are the same as in Example 1, except that 
the insurance coverage under the contract does not become effective 
until March 1, 1997. Under the insurance company's usual business 
practice, the period between the date of the application and the date 
the contract becomes effective is 30 days or less.
    (ii) Under paragraph (b)(3)(i) of this section, the issue date of 
the contract is March 1, 1997. Thus, the contract is not a pre-1997 
long-term care insurance contract, and, accordingly, the contract must 
meet the requirements of section 7702B(b) and any regulations issued 
thereunder to be a qualified long-term care insurance contract.
    Example 3. (i) B, an individual, is the policyholder under a long-
term care insurance contract purchased in 1995. On June 15, 2000, the 
insurance coverage and premiums under the contract are increased by 
agreement between B and the insurance company.
    (ii) Under paragraph (b)(4)(i)(A) of this section, a change in the 
terms of a contract

[[Page 715]]

that alters the amount or timing of an item payable by the policyholder 
or the insurance company is treated as the issuance of a new contract. 
Thus, B's coverage is treated as coverage under a contract issued on 
June 15, 2000, and, accordingly, the contract must meet the requirements 
of section 7702B(b) and any regulations issued thereunder in order to be 
a qualified long-term care insurance contract.
    Example 4. (i) C, an individual, is the policyholder under a long-
term care insurance contract purchased in 1994. At that time and through 
December 31, 1996, the contract met the long-term care insurance 
requirements of the State in which the contract was sitused. In 1996, 
the policy was amended to add a provision requiring the policyholder to 
be offered the right to increase dollar limits for inflation every three 
years (without the policyholder being required to pass a physical or 
satisfy any other underwriting requirements). During 2002, C elects to 
increase the amount of insurance coverage (with a resulting premium 
increase) pursuant to the inflation provision.
    (ii) Under paragraph (b)(4)(ii)(A) of this section, an increase in 
the amount of insurance coverage at the election of the policyholder 
(without the insurance company's consent and without underwriting or 
other limitations on the policyholder's rights) pursuant to a pre-1997 
inflation provision is not treated as the issuance of a new contract. 
Thus, C's contract continues to be a pre-1997 long-term care insurance 
contract that is treated as a qualified long-term care insurance 
contract.

    (c) Effective date. This section is applicable January 1, 1999.

[T.D. 8792, 63 FR 68187, Dec. 10, 1998]



Sec. 1.7703-1  Determination of marital status.

    (a) General rule. The determination of whether an individual is 
married shall be made as of the close of his taxable year unless his 
spouse dies during his taxable year, in which case such determination 
shall be made as of the time of such death; and, except as provided in 
paragraph (b) of this section, an individual shall be considered as 
married even though living apart from his spouse unless legally 
separated under a decree of divorce or separate maintenance. The 
provisions of this paragraph may be illustrated by the following 
examples:

    Example 1. Taxpayer A and his wife B both make their returns on a 
calendar year basis. In July 1954, they enter into a separation 
agreement and thereafter live apart, but no decree of divorce or 
separate maintenance is issued until March 1955. If A itemizes and 
claims his actual deductions on his return for the calendar year 1954, B 
may not elect the standard deduction on her return since B is considered 
as married to A (although permanently separated by agreement) on the 
last day of 1954.
    Example 2. Taxpayer A makes his returns on the basis of a fiscal 
year ending June 30. His wife B makes her returns on the calendar year 
basis. A died in October 1954. In such case, since A and B were married 
as of the date of death, B may not elect the standard deduction for the 
calendar year 1954 if the income of A for the short taxable year ending 
with the date of his death is determined without regard to the standard 
deduction.

    (b) Certain married individuals living apart. (1) For purposes of 
Part IV of Subchapter B of Chapter 1 of the Code, an individual is not 
considered as married for taxable years beginning after December 31, 
1969, if (i) such individual is married (within the meaning of paragraph 
(a) of this section) but files a separate return; (ii) such individual 
maintains as his home a household which constitutes for more than one-
half of the taxable year the principal place of abode of a dependent (a) 
who (within the meaning of section 152 and the regulations thereunder) 
is a son, stepson, daughter, or stepdaughter of the individual, and (b) 
with respect to whom such individual is entitled to a deduction for the 
taxable year under section 151; (iii) such individual furnishes over 
half of the cost of maintaining such household during the taxable year; 
and (iv) during the entire taxable year such individual's spouse is not 
a member of such household.
    (2) For purposes of subparagraph (1)(ii)(a) of this paragraph, a 
legally adopted son or daughter of an individual, a child (described in 
paragraph (c)(2) of Sec. 1.152-2) who is a member of an individual's 
household if placed with such individual by an authorized placement 
agency (as defined in paragraph (c)(2) of Sec. 1.152-2) for legal 
adoption by such individual, or a foster child (described in paragraph 
(c)(4) of Sec. 1.152-2) of an individual if such child satisfies the 
requirements of section 152(a)(9) of the Code and paragraph (b) of Sec. 
1.152-1 with respect to such individual, shall be treated as a son or 
daughter of such individual by blood.

[[Page 716]]

    (3) For purposes of subparagraph (1)(ii) of this paragraph, the 
household must actually constitute the home of the individual for his 
taxable year. However, a physical change in the location of such home 
will not prevent an individual from qualifying for the treatment 
provided in subparagraph (1) of this paragraph. It is not sufficient 
that the individual maintain the household without being its occupant. 
The individual and the dependent described in subparagraph (1)(ii)(a) of 
this paragraph must occupy the household for more than one-half of the 
taxable year of the individual. However, the fact that such dependent is 
born or dies within the taxable year will not prevent an individual from 
qualifying for such treatment if the household constitutes the principal 
place of abode of such dependent for the remaining or preceding part of 
such taxable year. The individual and such dependent will be considered 
as occupying the household during temporary absences from the household 
due to special circumstances. A nonpermanent failure to occupy the 
common abode by reason of illness, education, business, vacation, 
military service, or a custody agreement under which a child or 
stepchild is absent for less than 6 months in the taxable year of the 
taxpayer, shall be considered a temporary absence due to special 
circumstances. Such absence will not prevent an individual from 
qualifying for the treatment provided in subparagraph (1) of this 
paragraph if (i) it is reasonable to assume that such individual or the 
dependent will return to the household and (ii) such individual 
continues to maintain such household or a substantially equivalent 
household in anticipation of such return.
    (4) An individual shall be considered as maintaining a household 
only if he pays more than one-half of the cost thereof for his taxable 
year. The cost of maintaining a household shall be the expenses incurred 
for the mutual benefit of the occupants thereof by reason of its 
operation as the principal place of abode of such occupants for such 
taxable year. The cost of maintaining a household shall not include 
expenses otherwise incurred. The expenses of maintaining a household 
include property taxes, mortgage interest, rent, utility charges, upkeep 
and repairs, property insurance, and food consumed on the premises. Such 
expenses do not include the cost of clothing, education, medical 
treatment, vacations, life insurance, and transportation. In addition, 
the cost of maintaining a household shall not include any amount which 
represents the value of services rendered in the household by the 
taxpayer or by a dependent described in subparagraph (1)(ii)(a) of this 
paragraph.
    (5) For purposes of subparagraph (1)(iv) of this paragraph, an 
individual's spouse is not a member of the household during a taxable 
year if such household does not constitute such spouse's place of abode 
at any time during such year. An individual's spouse will be considered 
to be a member of the household during temporary absences from the 
household due to special circumstances. A nonpermanent failure to occupy 
such household as his abode by reason of illness, education, business, 
vacation, or military service shall be considered a mere temporary 
absence due to special circumstances.
    (6) The provisions of this paragraph may be illustrated by the 
following example:

    Example. Taxpayer A, married to B at the close of the calendar year 
1971, his taxable year, is living apart from B, but A is not legally 
separated from B under a decree of divorce or separate maintenance. A 
maintains a household as his home which is for 7 months of 1971 the 
principal place of abode of C, his son, with respect to whom A is 
entitled to a deduction under section 151. A pays for more than one-half 
the cost of maintaining that household. At no time during 1971 was B a 
member of the household occupied by A and C. A files a separate return 
for 1971. Under these circumstances, A is considered as not married 
under section 143(b) for purposes of the standard deduction. Even though 
A is married and files a separate return A may claim for 1971 as his 
standard deduction the larger of the low income allowance up to a 
maximum of $1,050 consisting of both the basic allowance and additional 
allowance (rather than the basic allowance only subject to the $500 
limitation applicable to a separate return of a married individual) or 
the percentage standard deduction subject to the $1,500 limitation 
(rather than the $750 limitation applicable to a separate return of

[[Page 717]]

a married individual). See Sec. 1.141-1. For purposes of the provisions 
of part IV of subchapter B of chapter 1 of the Code and the regulations 
thereunder, A is treated as unmarried.

[T.D. 7123, 36 FR 11086, June 9, 1971. Redesignated by T.D. 8712, 62 FR 
2283, Jan. 16, 1997]



Sec. 1.7704-1  Publicly traded partnerships.

    (a) In general--(1) Publicly traded partnership. A domestic or 
foreign partnership is a publicly traded partnership for purposes of 
section 7704(b) and this section if--
    (i) Interests in the partnership are traded on an established 
securities market; or
    (ii) Interests in the partnership are readily tradable on a 
secondary market or the substantial equivalent thereof.
    (2) Partnership interest--(i) In general. For purposes of section 
7704(b) and this section, an interest in a partnership includes--
    (A) Any interest in the capital or profits of the partnership 
(including the right to partnership distributions); and
    (B) Any financial instrument or contract the value of which is 
determined in whole or in part by reference to the partnership 
(including the amount of partnership distributions, the value of 
partnership assets, or the results of partnership operations).
    (ii) Exception for non-convertible debt. For purposes of section 
7704(b) and this section, an interest in a partnership does not include 
any financial instrument or contract that--
    (A) Is treated as debt for federal tax purposes; and
    (B) Is not convertible into or exchangeable for an interest in the 
capital or profits of the partnership and does not provide for a payment 
of equivalent value.
    (iii) Exception for tiered entities. For purposes of section 7704(b) 
and this section, an interest in a partnership or a corporation 
(including a regulated investment company as defined in section 851 or a 
real estate investment trust as defined in section 856) that holds an 
interest in a partnership (lower-tier partnership) is not considered an 
interest in the lower-tier partnership.
    (3) Definition of transfer. For purposes of section 7704(b) and this 
section, a transfer of an interest in a partnership means a transfer in 
any form, including a redemption by the partnership or the entering into 
of a financial instrument or contract described in paragraph 
(a)(2)(i)(B) of this section.
    (b) Established securities market. For purposes of section 7704(b) 
and this section, an established securities market includes--
    (1) A national securities exchange registered under section 6 of the 
Securities Exchange Act of 1934 (15 U.S.C. 78f);
    (2) A national securities exchange exempt from registration under 
section 6 of the Securities Exchange Act of 1934 (15 U.S.C. 78f) because 
of the limited volume of transactions;
    (3) A foreign securities exchange that, under the law of the 
jurisdiction where it is organized, satisfies regulatory requirements 
that are analogous to the regulatory requirements under the Securities 
Exchange Act of 1934 described in paragraph (b) (1) or (2) of this 
section (such as the London International Financial Futures Exchange; 
the Marche a Terme International de France; the International Stock 
Exchange of the United Kingdom and the Republic of Ireland, Limited; the 
Frankfurt Stock Exchange; and the Tokyo Stock Exchange);
    (4) A regional or local exchange; and
    (5) An interdealer quotation system that regularly disseminates firm 
buy or sell quotations by identified brokers or dealers by electronic 
means or otherwise.
    (c) Readily tradable on a secondary market or the substantial 
equivalent thereof--(1) In general. For purposes of section 7704(b) and 
this section, interests in a partnership that are not traded on an 
established securities market (within the meaning of section 7704(b) and 
paragraph (b) of this section) are readily tradable on a secondary 
market or the substantial equivalent thereof if, taking into account all 
of the facts and circumstances, the partners are readily able to buy, 
sell, or exchange their partnership interests in a manner that is 
comparable, economically, to trading on an established securities 
market.

[[Page 718]]

    (2) Secondary market or the substantial equivalent thereof. For 
purposes of paragraph (c)(1) of this section, interests in a partnership 
are readily tradable on a secondary market or the substantial equivalent 
thereof if--
    (i) Interests in the partnership are regularly quoted by any person, 
such as a broker or dealer, making a market in the interests;
    (ii) Any person regularly makes available to the public (including 
customers or subscribers) bid or offer quotes with respect to interests 
in the partnership and stands ready to effect buy or sell transactions 
at the quoted prices for itself or on behalf of others;
    (iii) The holder of an interest in the partnership has a readily 
available, regular, and ongoing opportunity to sell or exchange the 
interest through a public means of obtaining or providing information of 
offers to buy, sell, or exchange interests in the partnership; or
    (iv) Prospective buyers and sellers otherwise have the opportunity 
to buy, sell, or exchange interests in the partnership in a time frame 
and with the regularity and continuity that is comparable to that 
described in the other provisions of this paragraph (c)(2).
    (3) Secondary market safe harbors. The fact that a transfer of a 
partnership interest is not within one or more of the safe harbors 
described in paragraph (e), (f), (g), (h), or (j) of this section is 
disregarded in determining whether interests in the partnership are 
readily tradable on a secondary market or the substantial equivalent 
thereof.
    (d) Involvement of the partnership required. For purposes of section 
7704(b) and this section, interests in a partnership are not traded on 
an established securities market within the meaning of paragraph (b)(5) 
of this section and are not readily tradable on a secondary market or 
the substantial equivalent thereof within the meaning of paragraph (c) 
of this section (even if interests in the partnership are traded or 
readily tradable in a manner described in paragraph (b)(5) or (c) of 
this section) unless--
    (1) The partnership participates in the establishment of the market 
or the inclusion of its interests thereon; or
    (2) The partnership recognizes any transfers made on the market by--
    (i) Redeeming the transferor partner (in the case of a redemption or 
repurchase by the partnership); or
    (ii) Admitting the transferee as a partner or otherwise recognizing 
any rights of the transferee, such as a right of the transferee to 
receive partnership distributions (directly or indirectly) or to acquire 
an interest in the capital or profits of the partnership.
    (e) Transfers not involving trading--(1) In general. For purposes of 
section 7704(b) and this section, the following transfers (private 
transfers) are disregarded in determining whether interests in a 
partnership are readily tradable on a secondary market or the 
substantial equivalent thereof--
    (i) Transfers in which the basis of the partnership interest in the 
hands of the transferee is determined, in whole or in part, by reference 
to its basis in the hands of the transferor or is determined under 
section 732;
    (ii) Transfers at death, including transfers from an estate or 
testamentary trust;
    (iii) Transfers between members of a family (as defined in section 
267(c)(4));
    (iv) Transfers involving the issuance of interests by (or on behalf 
of) the partnership in exchange for cash, property, or services;
    (v) Transfers involving distributions from a retirement plan 
qualified under section 401(a) or an individual retirement account;
    (vi) Block transfers (as defined in paragraph (e)(2) of this 
section);
    (vii) Transfers pursuant to a right under a redemption or repurchase 
agreement (as defined in paragraph (e)(3) of this section) that is 
exercisable only--
    (A) Upon the death, disability, or mental incompetence of the 
partner; or
    (B) Upon the retirement or termination of the performance of 
services of an individual who actively participated in the management 
of, or performed services on a full-time basis for, the partnership;
    (viii) Transfers pursuant to a closed end redemption plan (as 
defined in paragraph (e)(4) of this section);
    (ix) Transfers by one or more partners of interests representing in 
the aggregate 50 percent or more of the total interests in partnership 
capital and

[[Page 719]]

profits in one transaction or a series of related transactions; and
    (x) Transfers not recognized by the partnership (within the meaning 
of paragraph (d)(2) of this section).
    (2) Block transfers. For purposes of paragraph (e)(1)(vi) of this 
section, a block transfer means the transfer by a partner and any 
related persons (within the meaning of section 267(b) or 707(b)(1)) in 
one or more transactions during any 30 calendar day period of 
partnership interests representing in the aggregate more than 2 percent 
of the total interests in partnership capital or profits.
    (3) Redemption or repurchase agreement. For purposes of section 
7704(b) and this section, a redemption or repurchase agreement means a 
plan of redemption or repurchase maintained by a partnership whereby the 
partners may tender their partnership interests for purchase by the 
partnership, another partner, or a person related to another partner 
(within the meaning of section 267(b) or 707(b)(1)).
    (4) Closed end redemption plan. For purposes of paragraph 
(e)(1)(viii) of this section, a redemption or repurchase agreement (as 
defined in paragraph (e)(3) of this section) is a closed end redemption 
plan only if--
    (i) The partnership does not issue any interest after the initial 
offering (other than the issuance of additional interests prior to 
August 5, 1988); and
    (ii) No partner or person related to any partner (within the meaning 
of section 267(b) or 707(b)(1)) provides contemporaneous opportunities 
to acquire interests in similar or related partnerships which represent 
substantially identical investments.
    (f) Redemption and repurchase agreements. For purposes of section 
7704(b) and this section, the transfer of an interest in a partnership 
pursuant to a redemption or repurchase agreement (as defined in 
paragraph (e)(3) of this section) that is not described in paragraph 
(e)(1) (vii) or (viii) of this section is disregarded in determining 
whether interests in the partnership are readily tradable on a secondary 
market or the substantial equivalent thereof only if--
    (1) The redemption or repurchase agreement provides that the 
redemption or repurchase cannot occur until at least 60 calendar days 
after the partner notifies the partnership in writing of the partner's 
intention to exercise the redemption or repurchase right;
    (2) Either--
    (i) The redemption or repurchase agreement requires that the 
redemption or repurchase price not be established until at least 60 
calendar days after receipt of such notification by the partnership or 
the partner; or
    (ii) The redemption or repurchase price is established not more than 
four times during the partnership's taxable year; and
    (3) The sum of the percentage interests in partnership capital or 
profits transferred during the taxable year of the partnership (other 
than in private transfers described in paragraph (e) of this section) 
does not exceed 10 percent of the total interests in partnership capital 
or profits.
    (g) Qualified matching services--(1) In general. For purposes of 
section 7704(b) and this section, the transfer of an interest in a 
partnership through a qualified matching service is disregarded in 
determining whether interests in the partnership are readily tradable on 
a secondary market or the substantial equivalent thereof.
    (2) Requirements. A matching service is a qualified matching service 
only if--
    (i) The matching service consists of a computerized or printed 
listing system that lists customers' bid and/or ask quotes in order to 
match partners who want to sell their interests in a partnership (the 
selling partner) with persons who want to buy those interests;
    (ii) Matching occurs either by matching the list of interested 
buyers with the list of interested sellers or through a bid and ask 
process that allows interested buyers to bid on the listed interest;
    (iii) The selling partner cannot enter into a binding agreement to 
sell the interest until the 15th calendar day after the date information 
regarding the offering of the interest for sale is made available to 
potential buyers and such time period is evidenced by contemporaneous 
records ordinarily maintained by the operator at a central location;

[[Page 720]]

    (iv) The closing of the sale effected by virtue of the matching 
service does not occur prior to the 45th calendar day after the date 
information regarding the offering of the interest for sale is made 
available to potential buyers and such time period is evidenced by 
contemporaneous records ordinarily maintained by the operator at a 
central location;
    (v) The matching service displays only quotes that do not commit any 
person to buy or sell a partnership interest at the quoted price 
(nonfirm price quotes) or quotes that express interest in a partnership 
interest without an accompanying price (nonbinding indications of 
interest) and does not display quotes at which any person is committed 
to buy or sell a partnership interest at the quoted price (firm quotes);
    (vi) The selling partner's information is removed from the matching 
service within 120 calendar days after the date information regarding 
the offering of the interest for sale is made available to potential 
buyers and, following any removal (other than removal by reason of a 
sale of any part of such interest) of the selling partner's information 
from the matching service, no offer to sell an interest in the 
partnership is entered into the matching service by the selling partner 
for at least 60 calendar days; and
    (vii) The sum of the percentage interests in partnership capital or 
profits transferred during the taxable year of the partnership (other 
than in private transfers described in paragraph (e) of this section) 
does not exceed 10 percent of the total interests in partnership capital 
or profits.
    (3) Closing. For purposes of paragraph (g)(2)(iv) of this section, 
the closing of a sale occurs no later than the earlier of--
    (i) The passage of title to the partnership interest;
    (ii) The payment of the purchase price (which does not include the 
delivery of funds to the operator of the matching service or other 
closing agent to hold on behalf of the seller pending closing); or
    (iii) The date, if any, that the operator of the matching service 
(or any person related to the operator within the meaning of section 
267(b) or 707(b)(1)) loans, advances, or otherwise arranges for funds to 
be available to the seller in anticipation of the payment of the 
purchase price.
    (4) Optional features. A qualified matching service may be sponsored 
or operated by a partner of the partnership (either formally or 
informally), the underwriter that handled the issuance of the 
partnership interests, or an unrelated third party. In addition, a 
qualified matching service may offer the following features--
    (i) The matching service may provide prior pricing information, 
including information regarding resales of interests and actual prices 
paid for interests; a description of the business of the partnership; 
financial and reporting information from the partnership's financial 
statements and reports; and information regarding material events 
involving the partnership, including special distributions, capital 
distributions, and refinancings or sales of significant portions of 
partnership assets;
    (ii) The operator may assist with the transfer documentation 
necessary to transfer the partnership interest;
    (iii) The operator may receive and deliver funds for completed 
transactions; and
    (iv) The operator's fee may consist of a flat fee for use of the 
service, a fee or commission based on completed transactions, or any 
combination thereof.
    (h) Private placements--(1) In general. For purposes of section 
7704(b) and this section, except as otherwise provided in paragraph 
(h)(2) of this section, interests in a partnership are not readily 
tradable on a secondary market or the substantial equivalent thereof 
if--
    (i) All interests in the partnership were issued in a transaction 
(or transactions) that was not required to be registered under the 
Securities Act of 1933 (15 U.S.C. 77a et seq.); and
    (ii) The partnership does not have more than 100 partners at any 
time during the taxable year of the partnership.
    (2) Exception for certain offerings outside of the United States. 
Paragraph (h)(1) of this section does not apply to the offering and sale 
of interests in a partnership that was not required to be registered 
under the Securities Act of

[[Page 721]]

1933 by reason of Regulation S (17 CFR 230.901 through 230.904) unless 
the offering and sale of the interests would not have been required to 
be registered under the Securities Act of 1933 if the interests had been 
offered and sold within the United States.
    (3) Anti-avoidance rule. For purposes of determining the number of 
partners in the partnership under paragraph (h)(1)(ii) of this section, 
a person (beneficial owner) owning an interest in a partnership, grantor 
trust, or S corporation (flow-through entity), that owns, directly or 
through other flow-through entities, an interest in the partnership, is 
treated as a partner in the partnership only if--
    (i) Substantially all of the value of the beneficial owner's 
interest in the flow-through entity is attributable to the flow-through 
entity's interest (direct or indirect) in the partnership; and
    (ii) A principal purpose of the use of the tiered arrangement is to 
permit the partnership to satisfy the 100-partner limitation in 
paragraph (h)(1)(ii) of this section.
    (i) [Reserved]
    (j) Lack of actual trading--(1) General rule. For purposes of 
section 7704(b) and this section, interests in a partnership are not 
readily tradable on a secondary market or the substantial equivalent 
thereof if the sum of the percentage interests in partnership capital or 
profits transferred during the taxable year of the partnership (other 
than in transfers described in paragraph (e), (f), or (g) of this 
section) does not exceed 2 percent of the total interests in partnership 
capital or profits.
    (2) Examples. The following examples illustrate the rules of this 
paragraph (j):

    Example 1. Calculation of percentage interest transferred. (i) ABC, 
a calendar year limited partnership formed in 1996, has 9,000 units of 
limited partnership interests outstanding at all times during 1997, 
representing in the aggregate 95 percent of the total interests in 
capital and profits of ABC. The remaining 5 percent is held by the 
general partner.
    (ii) During 1997, the following transactions occur with respect to 
the units of ABC's limited partnership interests--
    (A) 800 units are sold through the use of a qualified matching 
service that meets the requirements of paragraph (g) of this section;
    (B) 50 units are sold through the use of a matching service that 
does not meet the requirements of paragraph (g) of this section; and
    (C) 500 units are transferred as a result of private transfers 
described in paragraph (e) of this section.
    (iii) The private transfers of 500 units and the sale of 800 units 
through a qualified matching service are disregarded under paragraph 
(j)(1) of this section for purposes of applying the 2 percent rule. As a 
result, the total percentage interests in partnership capital and 
profits transferred for purposes of the 2 percent rule is .528 percent, 
determined by--
    (A) Dividing the number of units sold through a matching service 
that did not meet the requirements of paragraph (g) of this section (50) 
by the total number of outstanding limited partnership units (9,000); 
and
    (B) Multiplying the result by the percentage of total interests 
represented by limited partnership units (95 percent)


([50 / 9,000] x .95 = .528 percent).
    Example 2. Application of the 2 percent rule. (i) ABC operates a 
service consisting of computerized video display screens on which 
subscribers view and publish nonfirm price quotes that do not commit any 
person to buy or sell a partnership interest and unpriced indications of 
interest in a partnership interest without an accompanying price. The 
ABC service does not provide firm quotes at which any person (including 
the operator of the service) is committed to buy or sell a partnership 
interest. The service may provide prior pricing information, including 
information regarding resales of interests and actual prices paid for 
interests; transactional volume information; and information on special 
or capital distributions by a partnership. The operator's fee may 
consist of a flat fee for use of the service; a fee based on completed 
transactions, including, for example, the number of nonfirm quotes or 
unpriced indications of interest entered by users of the service; or any 
combination thereof.
    (ii) The ABC service is not an established securities market for 
purposes of section 7704(b) and this section. The service is not an 
interdealer quotation system as defined in paragraph (b)(5) of this 
section because it does not disseminate firm buy or sell quotations. 
Therefore, partnerships whose interests are listed and transferred on 
the ABC service are not publicly traded for purposes of section 7704(b) 
and this section as a result of such listing or transfers if the sum of 
the percentage interests in partnership capital or profits transferred 
during the taxable year of the partnership (other than in transfers 
described in paragraph (e), (f), or (g) of this section) does not exceed 
2 percent of the total interests in partnership capital or profits. In 
addition, assuming the ABC

[[Page 722]]

service complies with the necessary requirements, the service may 
qualify as a matching service described in paragraph (g) of this 
section.

    (k) Percentage interests in partnership capital or profits--(1) 
Interests considered--(i) General rule. Except as otherwise provided in 
this paragraph (k), for purposes of this section, the total interests in 
partnership capital or profits are determined by reference to all 
outstanding interests in the partnership.
    (ii) Exceptions--(A) General partner with greater than 10 percent 
interest. If the general partners and any person related to the general 
partners (within the meaning of section 267(b) or 707(b)(1)) own, in the 
aggregate, more than 10 percent of the outstanding interests in 
partnership capital or profits at any one time during the taxable year 
of the partnership, the total interests in partnership capital or 
profits are determined without reference to the interests owned by such 
persons.
    (B) Derivative interests. Any partnership interests described in 
paragraph (a)(2)(i)(B) of this section are taken into account for 
purposes of determining the total interests in partnership capital or 
profits only if and to the extent that the partnership satisfies 
paragraph (d) (1) or (2) of this section.
    (2) Monthly determination. For purposes of this section, except in 
the case of block transfers (as defined in paragraph (e)(2) of this 
section), the percentage interests in partnership capital or profits 
represented by partnership interests that are transferred during a 
taxable year of the partnership is equal to the sum of the percentage 
interests transferred for each calendar month during the taxable year of 
the partnership in which a transfer of a partnership interest occurs 
(other than a private transfer as described in paragraph (e) of this 
section). The percentage interests in capital or profits of interests 
transferred during a calendar month is determined by reference to the 
partnership interests outstanding during that month.
    (3) Monthly conventions. For purposes of paragraph (k)(2) of this 
section, a partnership may use any reasonable convention in determining 
the interests outstanding for a month, provided the convention is 
consistently used by the partnership from month to month during a 
taxable year and from year to year. Reasonable conventions include, but 
are not limited to, a determination by reference to the interests 
outstanding at the beginning of the month, on the 15th day of the month, 
or at the end of the month.
    (4) Block transfers. For purposes of paragraph (e)(2) of this 
section (defining block transfers), the partnership must determine the 
percentage interests in capital or profits for each transfer of an 
interest during the 30 calendar day period by reference to the 
partnership interests outstanding immediately prior to such transfer.
    (5) Example. The following example illustrates the rules of this 
paragraph (k):

    Example. Conventions. (i) ABC limited partnership, a calendar year 
partnership formed in 1996, has 1,000 units of limited partnership 
interests outstanding on January 1, 1997, representing in the aggregate 
95 percent of the total interests in capital and profits of ABC. The 
remaining 5 percent is held by the general partner.
    (ii) The following transfers take place during 1997--
    (A) On January 15, 10 units of limited partnership interests are 
sold in a transaction that is not a private transfer;
    (B) On July 10, 1,000 additional units of limited partnership 
interests are issued by the partnership (the general partner's 
percentage interest is unchanged); and
    (C) On July 20, 15 units of limited partnership interests are sold 
in a transaction that is not a private transfer.
    (iii) For purposes of determining the sum of the percentage 
interests in partnership capital or profits transferred, ABC chooses to 
use the end of the month convention. The percentage interests in 
partnership capital and profits transferred during January is .95 
percent, determined by dividing the number of transferred units (10) by 
the total number of limited partnership units (1,000) and multiplying 
the result by the percentage of total interests represented by limited 
partnership units ([10/1,000] x .95). The percentage interests in 
partnership capital and profits transferred during July is .7125 percent 
([15/2,000] x .95). ABC is not required to make determinations for the 
other months during the year because no transfers of partnership 
interests occurred during such months. ABC may qualify for the 2 percent 
rule for its 1997 taxable year because less than 2 percent (.95 percent 
+ .7125 percent = 1.6625 percent) of its total interests in partnership 
capital and profits was transferred during that year.

[[Page 723]]

    (iv) If ABC had chosen to use the beginning of the month convention, 
the interests in capital or profits sold during July would have been 
1.425 percent ([15/1,000] x .95) and ABC would not have satisfied the 2 
percent rule for its 1997 taxable year because 2.375 percent (.95 + 
1.425) of ABC's interests in partnership capital and profits was 
transferred during that year.

    (l) Effective date--(1) In general. Except as provided in paragraph 
(l)(2) of this section, this section applies to taxable years of a 
partnership beginning after December 31, 1995.
    (2) Transition period. For partnerships that were actively engaged 
in an activity before December 4, 1995, this section applies to taxable 
years beginning after December 31, 2005, unless the partnership adds a 
substantial new line of business after December 4, 1995, in which case 
this section applies to taxable years beginning on or after the addition 
of the new line of business. Partnerships that qualify for this 
transition period may continue to rely on the provisions of Notice 88-75 
(1988-2 C.B. 386) (see Sec. 601.601(d)(2) of this chapter) for guidance 
regarding the definition of readily tradable on a secondary market or 
the substantial equivalent thereof for purposes of section 7704(b).
    (3) Substantial new line of business. For purposes of paragraph 
(l)(2) of this section--
    (i) Substantial is defined in Sec. 1.7704-2(c); and
    (ii) A new line of business is defined in Sec. 1.7704-2(d), except 
that the applicable date is ``December 4, 1995'' instead of ``December 
17, 1987''.
    (4) Termination under section 708(b)(1)(B). The termination of a 
partnership under section 708(b)(1)(B) due to the sale or exchange of 50 
percent or more of the total interests in partnership capital and 
profits is disregarded in determining whether a partnership qualifies 
for the transition period provided in paragraph (l)(2) of this section.

[T.D. 8629, 60 FR 62029, Dec. 4, 1995]



Sec. 1.7704-2  Transition provisions.

    (a) Transition rule--(1) Statutory dates. Section 7704 generally 
applies to taxable years beginning after December 31, 1987. In the case 
of an existing partnership, however, section 7704 and the regulations 
thereunder apply to taxable years beginning after December 31, 1997.
    (2) Effective date of regulations. These regulations are effective 
for taxable years beginning after December 31, 1991.
    (b) Existing partnership--(1) In general. For purposes of Sec. 
1.7704-2, the term ``existing partnership'' means any partnership if--
    (i) The partnership was a publicly traded partnership (within the 
meaning of section 7704(b)) on December 17, 1987;
    (ii) A registration statement indicating that the partnership was to 
be a publicly traded partnership was filed with the Securities and 
Exchange Commission (SEC) with respect to the partnership on or before 
December 17, 1987; or
    (iii) With respect to the partnership, an application was filed with 
a state regulatory commission on or before December 17, 1987, seeking 
permission to restructure a portion of a corporation as a publicly 
traded partnership.
    (2) Changed status of an existing partnership. A partnership will 
not qualify as an existing partnership after a new line of business is 
substantial.
    (c) Substantial--(1) In general. A new line of business is 
substantial as of the earlier of--
    (i) The taxable year in which the partnership derives more than 15 
percent of its gross income from that line of business; or
    (ii) The taxable year in which the partnership directly uses in that 
line of business more than 15 percent (by value) of its total assets.
    (2) Timing rule. If a substantial new line of business is added 
during the taxable year (e.g., by acquisition), the line of business is 
treated as substantial as of the date it is added; otherwise a 
substantial new line of business is treated as substantial as of the 
first day of the taxable year in which it becomes substantial.
    (d) New line of business--(1) In general. A new line of business is 
any business activity of the partnership not closely related to a pre-
existing business of the partnership to the extent that the activity 
generates income other than ``qualifying income'' within the meaning of 
section 7704 and the regulations thereunder.

[[Page 724]]

    (2) Pre-existing business. A business activity is a pre-existing 
business of the partnership if--
    (i) The partnership was actively engaged in the activity on or 
before December 17, 1987; or
    (ii) The partnership is actively engaged in the business activity 
that was specifically described as a proposed business activity of the 
partnership in a registration statement or amendment thereto filed on 
behalf of the partnership with the SEC on or before December 17, 1987. 
For this purpose, a specific description does not include a general 
grant of authority to conduct any business.
    (3) Closely related. All of the facts and circumstances will 
determine whether a new business activity is closely related to a pre-
existing business of the partnership. The following factors, among 
others, will help to establish that a new business activity is closely 
related to a pre-existing business of the partnership and therefore is 
not a new line of business:
    (i) The activity provides products or services very similar to the 
products or services provided by the pre-existing business.
    (ii) The activity markets products and services to the same class of 
customers as that of the pre-existing business.
    (iii) The activity is of a type that is normally conducted in the 
same business location as the pre-existing business.
    (iv) The activity requires the use of similar operating assets as 
those used in the pre-existing business.
    (v) The activity's economic success depends on the success of the 
pre-existing business.
    (vi) The activity is of a type that would normally be treated as a 
unit with the pre-existing business in the business' accounting records.
    (vii) If the activity and the pre-existing business are regulated or 
licensed, they are regulated or licensed by the same or similar 
governmental authority.
    (viii) The United States Bureau of the Census assigns the activity 
the same four-digit Industry Number Standard Identification Code 
(Industry SIC Code) as the pre-existing business. Such codes are set 
forth in the Executive Office of the President, Office of Management and 
Budget, Standard Industrial Classification Manual, prepared, and from 
time to time revised, by the Statistical Policy Division of the United 
States Office of Management and Budget. For example, if a partnership's 
pre-existing business is manufacturing steam turbines and then the 
partnership begins an activity manufacturing hydraulic turbines, both 
activities would be assigned the same Industry SIC Code, 3511--Steam, 
Gas, and Hydraulic Turbines, and Turbine Generator Set Units. In the 
case of a pre-existing business or activity that is listed under the 
Industry SIC Code, 9999--Nonclassifiable Establishments--or under a 
miscellaneous category (e.g., most Industry SIC Codes ending in a ``9'' 
are miscellaneous categories), the similarity of the SIC Codes is 
ignored as a factor in determining whether the activity is closely 
related to the pre-existing business. The dissimilarity of the SIC Codes 
is considered in determining whether the business activity is closely 
related to the pre-existing line of business.
    (e) Activities conducted through controlled corporations--(1) In 
general. An activity conducted by a corporation controlled by an 
existing partnership may be treated as an activity of the existing 
partnership if the effect of the arrangement is to permit the 
partnership to engage in an activity the income from which is not 
subject to a corporate-level tax and which would be a new line of 
business if conducted directly by the partnership. This determination is 
based upon all facts and circumstances.
    (2) Safe harbor--(i) In general. This paragraph (e)(2) provides a 
safe harbor for activities of a corporation controlled by an existing 
partnership. An activity conducted by a corporation controlled by an 
existing partnership is not deemed to be an activity of the partnership 
for purposes of determining whether an existing partnership has added a 
new line of business if no more than 10% of the gross income that the 
partnership derives from the corporation during the taxable year is 
section 7704(d) qualifying income that

[[Page 725]]

is recharacterized as nonqualifying income under paragraphs (e)(2) (ii) 
and (iii) of this section. The Internal Revenue Service will not presume 
that an activity conducted through a corporation controlled by an 
existing partnership is an activity of the partnership solely because 
the partnership fails to satisfy the requirements of this paragraph 
(e)(2)(i).
    (ii) Recharacterization of qualifying income. Gross income received 
by a partnership from a controlled corporation that would be qualifying 
income under section 7704(d) is subject to recharacterization as 
nonqualifying income if the amount is deductible in computing the income 
of the controlled corporation.
    (iii) Extent of recharacterization. The amount of income described 
in paragraph (e)(2)(ii) of this section that is recharacterized as 
nonqualifying income is--
    (A) The amount described in paragraph (e)(2)(ii) of this section; 
multiplied by
    (B) The controlled corporation's taxable income (determined without 
regard to deductions for amounts paid to the partnership) that would not 
be qualifying income within the meaning of section 7704(d) if earned 
directly by the partnership; divided by
    (C) The controlled corporation's taxable income (determined without 
regard to deductions for amounts paid to the partnership).
    (3) Control. For purposes of paragraphs (e) (1) and (2) of this 
section, control of a corporation is determined generally under the 
rules of section 304(c). However, the application of section 304(c) is 
modified to apply only to partners who own five percent or more by value 
(directly or indirectly) of the existing partnership unless a principal 
purpose of the arrangement is to avoid tax at the corporate level.
    (4) Example. The following example illustrates the application of 
the this paragraph (e):

    Example. (i) PTP, an existing partnership, acquired all the stock of 
X corporation on January 1, 1993. During PTP's 1993 taxable year it 
received $185,000 of dividends and $15,000 of interest from X. 
Determined without regard to interest paid to PTP, X's taxable income 
during that period was $500,000 none of which was ``qualifying income'' 
within the meaning of section 7704 and the regulations thereunder. In 
computing the income of X, the $15,000 of interest paid to PTP is 
deductible.
    (ii) Under paragraph (e)(2)(ii) of section, all $15,000 of PTP's 
interest income was nonqualifying income ($15,000 x 500,000/500,000). 
Under paragraph (e)(2) of this section, however, the activities of X 
will not be considered to be activities of PTP for the 1993 taxable year 
because no more than 10 percent of the gross income that PTP derived 
from X would be treated as other than qualifying income (15,000 / 
200,000 = 7.5%).

    (f) Activities conducted through tiered partnerships. An activity 
conducted by a partnership in which an existing partnership holds an 
interest (directly or through another partnership) will be considered an 
activity of the existing partnership.
    (g) Exceptions--(1) Coordination with gross income requirements of 
section 7704(c)(2). A partnership that is either an existing partnership 
as of December 31, 1997, or an existing partnership that ceases to 
qualify as an existing partnership is subject to section 7704 and the 
regulations thereunder. Section 7704(a) does not apply to these 
partnerships, however, if these partnerships meet the gross income 
requirements of paragraphs (c) (1) and (2) of section 7704. For purposes 
of applying section 7704(c) (1) and (2) to these partnerships, the only 
taxable years that must be tested are those beginning on and after the 
earlier of--
    (i) January 1, 1998; or
    (ii) The day on which the partnership ceases to qualify as an 
existing partnership because of the addition of a new line of business; 
or
    (iii) The first day of the first taxable year in which a new line of 
business becomes substantial (if the new line of business becomes 
substantial after the year in which it is added).
    (2) Specific exceptions. In determining whether a partnership is an 
existing partnership for purposes of section 7704, the following events 
do not in themselves terminate the status of existing partnerships--
    (i) Termination of the partnership under section 708(b)(1)(B) due to 
the sale or exchange of 50 percent or more of the total interests in 
partnership capital and profits;

[[Page 726]]

    (ii) Issuance of additional partnership units; and
    (iii) Dropping a line of business. This event, however, could affect 
an existing partnership's status indirectly. For example, dropping one 
line of business could change the composition of the partnership's gross 
income. The change in composition could make a new line of business 
``substantial,'' under paragraph (c) of this section, and terminate the 
partnership's status. See paragraph (b)(2) of this section.
    (h) Examples. The following examples illustrate the application of 
this section:

    Example 1. (i) On December 17, 1987, PTP, a calendar-year publicly 
traded partnership, owned and operated citrus groves. On March 1, 1993, 
PTP purchased a processing business involving frozen citrus products. In 
the partnership's 1993 taxable year, the partnership directly used in 
the processing business more than 15 percent (by value) of its total 
assets.
    (ii) The citrus grove activities provide different products from the 
processing activities, are marketed to customers different from the 
customers of the processing activities, require different types of 
operating assets, are not commonly conducted at the same location, are 
not commonly treated as a unit in accounting records, do not depend upon 
one another for economic success, and do not have the same Industry SIC 
Code. Under the facts and circumstances, the processing business is not 
closely related to the citrus grove operation and is a new line of 
business under paragraph (d)(1) of this section.
    (iii) The assets of the partnership used in the new line of business 
are substantial under paragraph (c)(2) of this section. Because PTP 
added a substantial new line of business after December 17, 1987, 
paragraph (b)(2) of this section terminates PTP's status as an existing 
partnership on March 1, 1993.
    Example 2. (i) On December 17, 1987, PTP, a calendar-year publicly 
traded partnership, owned and operated retirement centers that serve the 
elderly. Each center contains three sections--
    (A) A residential section, which includes suites of rooms, dining 
facilities, lounges, and gamerooms;
    (B) An assisted-living section, which provides laundry and 
housekeeping services, health monitoring, and emergency care; and
    (C) A nursing section, which provides private and semiprivate rooms, 
dining facilities, examination and treatment rooms, drugs, medical 
equipment, and physical, speech, and occupational therapy.
    (ii) The business activities of each section constitute pre-existing 
businesses of PTP under paragraph (d)(2) of this section, because PTP 
was actively engaged in the activities on or before December 17, 1987.
    (iii) The nursing sections primarily furnish health care. They 
employ nurses and therapists, are subject to federal, state, and local 
licensing requirements, and may change certain costs to government 
programs like Medicare and Medicaid.
    (iv) In 1993, PTP acquired new nursing homes that treat inpatient 
adults of all ages. The nursing homes provide private and semiprivate 
rooms, dining facilities, examination and treatment rooms, drugs, 
medical equipment, and physical, speech, and occupational therapy. The 
nursing homes primarily furnish health care. They employ nurses and 
therapists, are subject to federal, state, and local licensing 
requirements, and may charge certain costs to government programs like 
Medicare and Medicaid.
    (v) PTP's new nursing homes and old nursing sections provide very 
similar services, market to very similar customers, use similar types of 
property and personnel, and are licensed by the same regulatory 
agencies. The nursing homes and old nursing sections have the same 
Industry SIC Code. Under these facts and circumstances, the new nursing 
homes are closely related to a pre-existing business of the partnership. 
Accordingly, under paragraph (d)(1) of this section, the acquisition of 
the new nursing homes is not the addition of a new line of business.
    (vi) PTP was a publicly traded partnership on December 17, 1987, and 
was an existing partnership under paragraph (b)(1)(i) of this section. 
Because PTP has added no substantial new line of business after December 
17, 1987, paragraph (b)(2) of this section does not terminate PTP's 
status as an existing partnership.
    Example 3. (i) On December 17, 1987, PTP, a calendar-year publicly 
traded partnership, owned and operated cable television systems in the 
northeastern United States. PTP's registration statement described as 
its proposed business activities the ownership and operation of cable 
television systems, any ancillary operations, and any business permitted 
by the laws of the state in which PTP was formed.
    (ii) PTP's cable systems include cables strung along telephone 
lines, converter boxes in subscribers' homes, other types of cable 
equipment, satellite dishes that receive programs broadcast by various 
television networks, and channels that carry public service 
announcements of local interest. Subscribers pay the systems a fee for 
the right to receive both the local announcements and the network 
signals relayed through the cables. Those fees constitute PTP's primary 
revenue. The systems operate under franchise agreements negotiated with 
each municipality in which they do business.

[[Page 727]]

    (iii) On September 1, 1993, PTP purchased a television station in 
the northwestern United States. The station owns broadcasting 
facilities, satellite dishes that receive programs broadcast by the 
station's network, and a studio that produces programs of interest to 
the area that receives the station's broadcasts. Fees from advertisers 
constitute the station's primary revenue. The station operates under a 
license from the Federal Communications Commission.
    (iv) In the partnership's 1993 taxable year, the station generated 
less than 15 percent of PTP's gross income and constituted less than 15 
percent of its total assets (by value). In PTP's 1994 taxable year, the 
station generated more than 15 percent of PTP's gross income.
    (v) The cable systems relay signals through cables to subscribers 
and earn revenue from subscriber fees; the station broadcasts signals to 
the general public and earns revenue by selling air time for 
commercials. Despite certain similarities, the two types of activities 
generally require different operating assets and earn income from 
different sources. They are regulated by different agencies. They are 
not commonly conducted at the same location and do not generally depend 
upon one another for their economic success. They have different 
Industry SIC Codes. Under the facts and circumstances, the television 
station activities are not closely related to PTP's pre-existing 
business, the cable system activities.
    (vi) As of December 17, 1987, PTP did not own and operate any 
television station. PTP's registration statement specifically described 
as its proposed business activities only the ownership and operation of 
cable television systems and any ancillary operations. For purposes of 
paragraph (d)(2) of this section, a specific description does not 
include PTP's general authority to carry on any business permitted by 
the state of its formation. Therefore, the television station line of 
business was not specifically described as a proposed business activity 
of PTP in its registration statement. PTP's acquisition of the 
television station business activity constitutes a new line of business 
under paragraph (d)(1) of this section.
    (vii) PTP was a publicly traded partnership on December 17, 1987, 
and was an existing partnership under paragraph (b)(1)(i) of this 
section. PTP added a new line of business in 1993, but that line of 
business was not substantial under paragraph (c) of this section, and 
thus PTP remained an existing partnership for its 1993 taxable year. In 
1994, the new line of business became substantial because it generated 
more than 15 percent of PTP's gross income. Paragraph (b)(2) of this 
section therefore terminates PTP's existing partnership status as of 
January 1, 1994, the first day of the first taxable year beginning after 
December 31, 1987, in which PTP's new line of business became 
substantial.

[T.D. 8450, 57 FR 58708, Dec. 11, 1992]



Sec. 1.7704-3  Qualifying income.

    (a) Certain investment income--(1) In general. For purposes of 
section 7704(d)(1), qualifying income includes capital gain from the 
sale of stock, income from holding annuities, income from notional 
principal contracts (as defined in Sec. 1.446-3), and other 
substantially similar income from ordinary and routine investments to 
the extent determined by the Commissioner. Income from a notional 
principal contract is included in qualifying income only if the 
property, income, or cash flow that measures the amounts to which the 
partnership is entitled under the contract would give rise to qualifying 
income if held or received directly by the partnership.
    (2) Limitations. Qualifying income described in paragraph (a)(1) of 
this section does not include income derived in the ordinary course of a 
trade or business. For purposes of the preceding sentence, income 
derived from an asset with respect to which the partnership is a broker, 
market maker, or dealer is income derived in the ordinary course of a 
trade or business; income derived from an asset with respect to which 
the taxpayer is a trader or investor is not income derived in the 
ordinary course of a trade or business.
    (b) Calculation of gross income and qualifying income--(1) Treatment 
of losses. Except as otherwise provided in this section, in computing 
the gross income and qualifying income of a partnership for purposes of 
section 7704(c)(2) and this section, losses do not enter into the 
computation.
    (2) Certain positions that are marked to market. Gain recognized 
with respect to a position that is marked to market (for example, under 
section 475(f), 1256, 1259, or 1296) shall not fail to be qualifying 
income solely because there is no sale or disposition of the position.
    (3) Certain items of ordinary income. Gain recognized with respect 
to a capital asset shall not fail to be qualifying income solely because 
it is characterized as ordinary income under section 475(f), 988, 1258, 
or 1296.

[[Page 728]]

    (4) Straddles. In computing the gross income and qualifying income 
of a partnership for purposes of section 7704(c)(2) and this section, a 
straddle (as defined in section 1092(c)) shall be treated as set forth 
in this paragraph (b)(4). For purposes of the preceding sentence, two or 
more straddles that are part of a larger straddle shall be treated as a 
single straddle. The amount of the gain from any straddle to be taken 
into account shall be computed as follows:
    (i) Straddles other than mixed straddle accounts. With respect to 
each straddle (whether or not a straddle during the taxable year) other 
than a mixed straddle account, the amount of gain taken into account 
shall be the excess, if any, of gain recognized during the taxable year 
with respect to property that was at any time a position in that 
straddle over any loss recognized during the taxable year with respect 
to property that was at any time a position in that straddle (including 
loss realized in an earlier taxable year).
    (ii) Mixed straddle accounts. With respect to each mixed straddle 
account (as defined in Sec. 1.1092(b)-4T(b)), the amount of gain taken 
into account shall be the annual account gain for that mixed straddle 
account, computed pursuant to Sec. 1.1092(b)-4T(c)(2).
    (5) Certain transactions similar to straddles. In computing the 
gross income and qualifying income of a partnership for purposes of 
section 7704(c)(2) and this section, related interests in property 
(whether or not personal property as defined in section 1092(d)(1)) that 
produce a substantial diminution of the partnership's risk of loss 
similar to that of a straddle (as defined in section 1092(c)) shall be 
combined so that the amount of gain taken into account by the 
partnership in computing its gross income shall be the excess, if any, 
of gain recognized during the taxable year with respect to such 
interests over any loss recognized during the taxable year with respect 
to such interests.
    (6) Wash sale rule--(i) Gain not taken into account. Solely for 
purposes of section 7704(c)(2) and this section, if a partnership 
recognizes gain in a section 7704 wash sale transaction with respect to 
one or more positions in either a straddle (as defined in section 
1092(c)) or an arrangement described in paragraph (b)(5) of this 
section, then the gain shall not be taken into account to the extent of 
the amount of unrecognized loss (as of the close of the taxable year) in 
one or more offsetting positions of the straddle or arrangement 
described in paragraph (b)(5) of this section.
    (ii) Section 7704 wash sale transaction. For purposes of this 
paragraph (b)(6), a section 7704 wash sale transaction is a transaction 
in which--
    (A) A partnership disposes of one or more positions of a straddle 
(as defined in section 1092(c)) or one or more related positions 
described in paragraph (b)(5) of this section; and
    (B) The partnership acquires a substantially similar position or 
positions within a period beginning 30 days before the date of the 
disposition and ending 30 days after such date.
    (c) Effective date. This section applies to taxable years of a 
partnership beginning on or after December 17, 1998. However, a 
partnership may apply this section in its entirety for all of the 
partnership's open taxable years beginning after any earlier date 
selected by the partnership.

[T.D. 8799, 63 FR 69553, Dec. 17, 1998]



Sec. 1.7704-4  Qualifying income--mineral and natural resources.

    (a) In general. For purposes of section 7704(d)(1)(E), qualifying 
income is income and gains from qualifying activities with respect to 
minerals or natural resources as defined in paragraph (b) of this 
section. Qualifying activities are section 7704(d)(1)(E) activities (as 
described in paragraph (c) of this section) and intrinsic activities (as 
described in paragraph (d) of this section).
    (b) Mineral or natural resource. The term mineral or natural 
resource (including fertilizer, geothermal energy, and timber) means any 
product of a character with respect to which a deduction for depletion 
is allowable under section 611, except that such term does not include 
any product described in section 613(b)(7)(A) or (B) (soil, sod, dirt, 
turf, water, mosses, or minerals from sea water, the air, or other 
similar inexhaustible sources). For purposes of this section, the term 
mineral or natural resource does not

[[Page 729]]

include industrial source carbon dioxide, fuels described in section 
6426(b) through (e), any alcohol fuel defined in section 6426(b)(4)(A), 
or any biodiesel fuel as defined in section 40A(d)(1).
    (c) Section 7704(d)(1)(E) activities--(1) Definition. Section 
7704(d)(1)(E) activities include the exploration, development, mining or 
production, processing, refining, transportation, or marketing of any 
mineral or natural resource. Solely for purposes of section 7704(d), 
such terms are defined as provided in this paragraph (c).
    (2) Exploration. An activity constitutes exploration if it is 
performed to ascertain the existence, location, extent, or quality of 
any deposit of mineral or natural resource before the beginning of the 
development stage of the natural deposit including by--
    (i) Drilling an exploratory or stratigraphic type test well;
    (ii) Conducting drill stem and production flow tests to verify 
commerciality of the deposit;
    (iii) Conducting geological or geophysical surveys;
    (iv) Interpreting data obtained from geological or geophysical 
surveys; or
    (v) For minerals, testpitting, trenching, drilling, driving of 
exploration tunnels and adits, and similar types of activities described 
in Rev. Rul. 70-287 (1970-1 CB 146), (see Sec. 601.601(d)(2)(ii)(b) of 
this chapter) if conducted prior to development activities with respect 
to the minerals.
    (3) Development. An activity constitutes development if it is 
performed to make accessible minerals or natural resources, including 
by--
    (i) Drilling wells to access deposits of minerals or natural 
resources;
    (ii) Constructing and installing drilling, production, or dual 
purpose platforms in marine locations, or any similar supporting 
structures necessary for extraordinary non-marine terrain (such as 
swamps or tundra);
    (iii) Completing wells, including by installing lease and well 
equipment, such as pumps, flow lines, separators, and storage tanks, so 
that wells are capable of producing oil and gas, and the production can 
be removed from the premises;
    (iv) Performing a development technique such as, for minerals other 
than oil and natural gas, stripping, benching and terracing, dredging by 
dragline, stoping, and caving or room-and-pillar excavation, and for oil 
and natural gas, fracturing; or
    (v) Constructing and installing gathering systems and custody 
transfer stations.
    (4) Mining or production. An activity constitutes mining or 
production if it is performed to extract minerals or natural resources 
from the ground including by operating equipment to extract minerals or 
natural resources from mines and wells, or to extract minerals or 
natural resources from the waste or residue of prior mining or 
production allowable under this section. The recycling of scrap or 
salvaged metals or minerals from previously manufactured products or 
manufacturing processes is not considered to be the extraction of ores 
or minerals from waste or residue.
    (5) Processing. An activity constitutes processing if it is 
performed to convert raw mined or harvested products or raw well 
effluent to substances that can be readily transported or stored, as 
described in this paragraph (c)(5).
    (i) Natural gas. An activity constitutes processing of natural gas 
if it is performed to--
    (A) Purify natural gas, including by removal of oil or condensate, 
water, or non-hydrocarbon gases (such as carbon dioxide, hydrogen 
sulfide, nitrogen, and helium); and
    (B) Separate natural gas into its constituents which are normally 
recovered in a gaseous phase (methane and ethane) and those which are 
normally recovered in a liquid phase (propane, butane, pentane, and 
heavier streams).
    (ii) Crude oil. An activity constitutes processing of crude oil if 
it is performed to separate produced fluids by passing crude oil through 
mechanical separators to remove gas, placing crude oil in settling tanks 
to recover basic sediment and water, dehydrating crude oil, and 
operating heater-treaters that separate raw oil well effluent into crude 
oil, natural gas, and salt water.
    (iii) Ores and minerals other than natural gas or crude oil. An 
activity constitutes processing of ores and minerals other than natural 
gas or crude oil if it meets the definition of mining

[[Page 730]]

processes under Sec. 1.613-4(f)(1)(ii), without regard to Sec. 1.613-
4(f)(2)(iv).
    (iv) Timber. An activity constitutes processing of timber if it is 
performed to modify the physical form of timber, including by the 
application of heat or pressure to timber, without adding any foreign 
substances. Processing of timber does not include activities that add 
chemicals or other foreign substances to timber to manipulate its 
physical or chemical properties, such as using a digester to produce 
pulp. Products that result from timber processing include wood chips, 
sawdust, rough lumber, kiln-dried lumber, veneers, wood pellets, wood 
bark, and rough poles. Products that are not the result of timber 
processing include pulp, paper, paper products, treated lumber, oriented 
strand board/plywood, and treated poles.
    (6) Refining. An activity constitutes refining if the activity is 
set forth in this paragraph (c)(6).
    (i) Natural gas and crude oil. (A) The refining of natural gas and 
crude oil includes the further physical or chemical conversion or 
separation processes of products resulting from activities listed in 
paragraph (c)(5)(i) and (ii) of this section, and the blending of 
petroleum hydrocarbons, to the extent they give rise to a product listed 
in paragraph (c)(5)(i) or (ii) of this section or to the products of a 
type produced in a petroleum refinery or natural gas processing plant 
listed in this paragraph (c)(6)(i)(A). Refining of natural gas and crude 
oil also includes the further physical or chemical conversion or 
separation processes and blending of the products listed in this 
paragraph (c)(6)(i)(A), to the extent that the resulting product is also 
listed in this paragraph (c)(6)(i)(A). The following products are of a 
type produced in a petroleum refinery or natural gas processing plant:
    (1) Ethane.
    (2) Ethylene.
    (3) Propane.
    (4) Propylene.
    (5) Normal butane.
    (6) Butylene.
    (7) Isobutane.
    (8) Isobutene.
    (9) Isobutylene.
    (10) Pentanes plus.
    (11) Unfinished naphtha.
    (12) Unfinished kerosene and light gas oils.
    (13) Unfinished heavy gas oils.
    (14) Unfinished residuum.
    (15) Reformulated gasoline with fuel ethanol.
    (16) Reformulated other motor gasoline.
    (17) Conventional gasoline with fuel ethanol--Ed55 and lower 
gasoline.
    (18) Conventional gasoline with fuel ethanol--greater than Ed55 
gasoline.
    (19) Conventional gasoline with fuel ethanol--other conventional 
finished gasoline.
    (20) Reformulated blendstock for oxygenate (RBOB).
    (21) Conventional blendstock for oxygenate (CBOB).
    (22) Gasoline treated as blendstock (GTAB).
    (23) Other motor gasoline blending components defined as gasoline 
blendstocks as provided in Sec. 48.4081-1(c)(3) of this chapter.
    (24) Finished aviation gasoline and blending components.
    (25) Special naphthas (solvents).
    (26) Kerosene-type jet fuel.
    (27) Kerosene.
    (28) Distillate fuel oil (heating oils, diesel fuel, and ultra-low 
sulfur diesel fuel).
    (29) Residual fuel oil.
    (30) Lubricants (lubricating base oils).
    (31) Asphalt and road oil (atmospheric or vacuum tower bottom).
    (32) Waxes.
    (33) Petroleum coke.
    (34) Still gas.
    (35) Naphtha less than 401 [deg]F end-point.
    (36) Other products of a refinery that the Commissioner may identify 
through published guidance.
    (B) For purposes of this section, the products listed in this 
paragraph (c)(6)(i)(B) are not products of refining:
    (1) Heat, steam, or electricity produced by processing or refining.
    (2) Products that are obtained from third parties or produced onsite 
for use in the refinery, such as hydrogen, if excess amounts are sold.

[[Page 731]]

    (3) Any product that results from further chemical change of a 
product listed in paragraph (c)(6)(i)(A) of this section that does not 
result in the same or another product listed in paragraph (c)(6)(i)(A) 
of this section (for example, production of petroleum coke from heavy 
(refinery) residuum qualifies, but any upgrading of petroleum coke (such 
as to calcined coke) does not qualify because it is further chemically 
changed and does not result in the same or another product listed in 
paragraph (c)(6)(i)(A) of this section).
    (4) Plastics or similar petroleum derivatives.
    (ii) Ores and minerals other than natural gas or crude oil. (A) An 
activity constitutes refining of ores and minerals other than natural 
gas or crude oil if it is one of the various processes performed 
subsequent to mining processes (as defined in paragraph (c)(5)(iii) of 
this section) to eliminate impurities or foreign matter and which are 
necessary steps in achieving a high degree of purity from metallic ores 
and minerals which are not customarily sold in the form of the crude 
mineral product, as specified in paragraph (c)(6)(ii)(B) of this 
section. Refining processes include: fine pulverization, electrowinning, 
electrolytic deposition, roasting, thermal or electric smelting, or 
substantially equivalent processes or combinations of processes used to 
separate or extract the specified metals listed in paragraph 
(c)(6)(ii)(B) of this section from the ore for the primary purpose of 
producing a purer form of the metal, as for example the smelting of 
concentrates to produce Dor[eacute] bars or refining of blister copper.
    (B) For purposes of this section, the specified metallic ores or 
minerals which are not customarily sold in the form of the crude mineral 
product are--
    (1) Lead;
    (2) Zinc;
    (3) Copper;
    (4) Gold;
    (5) Silver; and
    (6) Any other ores or minerals that the Commissioner may identify 
through published guidance.
    (C) Refining does not include the introduction of additives that 
remain in the metal, for example, in the manufacture of alloys of gold. 
Also, the application of nonmining processes as defined in Sec. 1.613-
4(g) in order to produce a specified metal that is considered a waste or 
by-product of production from a non-specified mineral deposit is not 
considered refining for purposes of this section.
    (7) Transportation--(i) General rule. An activity constitutes 
transportation if it is performed to move minerals or natural resources, 
and products under paragraph (c)(4), (5), or (6) of this section, 
including by pipeline, marine vessel, rail, or truck. Except as provided 
in paragraph (c)(7)(ii) of this section, transportation does not include 
the movement of minerals or natural resources, and products produced 
under paragraph (c)(4), (5), or (6) of this section, directly to retail 
customers or to a place that sells or dispenses to retail customers. 
Retail customers do not include a person who acquires oil or gas for 
refining or processing, or a utility. Transportation includes the 
following activities:
    (A) Providing storage services.
    (B) Providing terminalling services, including the following: 
Receiving products from pipelines, marine vessels, railcars, or trucks; 
storing products; loading products to pipelines, marine vessels, 
railcars, or trucks for distribution; testing and treating, as well as 
blending and additization, if income from such activities would be 
qualifying income pursuant to paragraph (c)(10)(iv) and (v) of this 
section; and separating and selling excess renewable identification 
numbers acquired as part of additization services to comply with 
environmental regulations.
    (C) Moving or carrying (whether by owner or operator) products via 
pipelines, gathering systems, and custody transfer stations.
    (D) Operating marine vessels (including time charters), railcars, or 
trucks.
    (E) Providing compression services to a pipeline.
    (F) Liquefying or regasifying natural gas.
    (ii) Transportation to retail customers or to a place that sells to 
retail customers. Transportation includes the movement of minerals or 
natural resources, and products under paragraph (c)(4), (5), or (6) of 
this section, via pipeline to a

[[Page 732]]

place that sells to retail customers. Transportation also includes the 
movement of liquefied petroleum gas via trucks, rail cars, or pipeline 
to a place that sells to retail customers or directly to retail 
customers.
    (8) Marketing--(i) General rule. An activity constitutes marketing 
if it is the bulk sale of minerals or natural resources, and products 
under paragraph (c)(4), (5), or (6) of this section. Except as provided 
in paragraph (c)(8)(ii) of this section, marketing does not include 
retail sales (sales made in small quantities directly to end users), 
which includes the operation of gasoline service stations, home heating 
oil delivery services, and local natural gas delivery services.
    (ii) Retail sales of liquefied petroleum gas. Retail sales of 
liquefied petroleum gas are included in marketing.
    (iii) Certain activities that facilitate sale. Marketing also 
includes certain activities that facilitate sales that constitute 
marketing under paragraphs (c)(8)(i) and (ii) of this section, including 
packaging, as well as blending and additization, if income from blending 
and additization would be qualifying income pursuant to paragraph 
(c)(10)(iv) and (v) of this section.
    (9) Fertilizer. [Reserved]
    (10) Additional activities. The following types of income as 
described in paragraph (c)(10)(i) through (v) of this section will be 
considered derived from a section 7704(d)(1)(E) activity.
    (i) Cost reimbursements. If the partnership is in the trade or 
business of performing a section 7704(d)(1)(E) activity, qualifying 
income includes income received to reimburse the partnership for its 
costs in performing that section 7704(d)(1)(E) activity, whether 
imbedded in the rate the partnership charges or separately itemized. 
Reimbursable costs may include the cost of designing, constructing, 
installing, inspecting, maintaining, metering, monitoring, or relocating 
an asset used in that section 7704(d)(1)(E) activity, or providing 
office functions necessary to the operation of that section 
7704(d)(1)(E) activity (such as staffing, purchasing supplies, billing, 
accounting, and financial reporting). For example, a pipeline operator 
that charges a customer for its cost to build, repair, or schedule flow 
on the pipelines that it operates will have qualifying income from such 
activity whether or not it itemizes those costs when it bills the 
customer.
    (ii) Hedging. [Reserved]
    (iii) Passive Interests. Qualifying income includes income and gains 
from a passive interest or non-operating interest, including production 
royalties, minimum annual royalties, net profits interests, delay 
rentals, and lease-bonus payments, if the interest is in a mineral or 
natural resource as defined in paragraph (b) of this section. Payments 
received on a production payment will not be qualifying income if they 
are properly treated as loan payments under section 636.
    (iv) Blending. Qualifying income includes income and gains from 
performing blending activities or services with respect to products 
under paragraph (c)(4), (5), or (6) of this section, so long as the 
products being blended are component parts of the same mineral or 
natural resource. For purposes of this paragraph (c)(10)(iv), products 
of oil and natural gas will be considered as from the same natural 
resource. Blending does not include combining different minerals or 
natural resources or products thereof together. However, see paragraph 
(c)(10)(v) of this section for rules concerning additization.
    (v) Additization. Qualifying income includes income and gains from 
providing additization services with respect to products under paragraph 
(c)(4), (5), or (6) of this section to the extent specifically permitted 
in this paragraph (c)(10)(v). The addition of additives described in 
paragraph (c)(10)(v)(A) through (C) of this section is permissible if 
the additives aid in the transportation of a product, enhance or protect 
the intrinsic properties of a product, or are necessary as required by 
federal, state, or local law (for example, to meet environmental 
standards), but only if such additives do not create a new product.
    (A) The addition of additives to products of natural gas and crude 
oil is permissible, provided that such additives constitute less than 5 
percent (except that ethanol or biodiesel may be up to 20 percent) of 
the total volume for products of natural gas and crude oil

[[Page 733]]

and are added into the product by the terminal operator or upstream of 
the terminal operator.
    (B) In the case of ores and minerals other than natural gas or crude 
oil, the addition of incidental amounts of material such as paper dots 
to identify shipments, anti-freeze to aid in shipping, or compounds to 
allay dust as required by law or reduce losses during shipping is 
permissible.
    (C) In the case of timber, additization of incidental amounts to 
comply with government regulations is permissible, to the extent such 
additization does not create a new product. For example, the pressure 
treatment of wood is impermissible because it creates a new product.
    (d) Intrinsic activities--(1) General requirements. An activity is 
an intrinsic activity only if the activity is specialized to support a 
section 7704(d)(1)(E) activity, is essential to the completion of the 
section 7704(d)(1)(E) activity, and requires the provision of 
significant services to support the section 7704(d)(1)(E) activity. 
Whether an activity is an intrinsic activity is determined on an 
activity-by-activity basis.
    (2) Specialization. An activity is a specialized activity if--
    (i) The partnership provides personnel (including employees of the 
partnership, an affiliate, subcontractor, or independent contractor 
performing work on behalf of the partnership) to support a section 
7704(d)(1)(E) activity and those personnel have received training in 
order to support the section 7704(d)(1)(E) activity that is unique to 
the mineral or natural resource industry and of limited utility other 
than to perform or support a section 7704(d)(1)(E) activity; and
    (ii) To the extent that the activity involves the sale, provision, 
or use of specific property, either--
    (A) The property is primarily tangible property that is dedicated 
to, and has limited utility outside of, section 7704(d)(1)(E) activities 
and is not easily converted (as determined based on all the facts and 
circumstances, including the cost to convert the property) to another 
use other than supporting or performing the section 7704(d)(1)(E) 
activities (except that the use of non-specialized property typically 
used incidentally in operating a business will not cause a partnership 
to fail this paragraph (d)(2)(ii)(A)); or
    (B) If the property is used as an injectant to perform a section 
7704(d)(1)(E) activity that is also commonly used outside of section 
7704(d)(1)(E) activities (such as water and lubricants), the partnership 
provides the injectants exclusively to those engaged in section 
7704(d)(1)(E) activities; the partnership is also in the trade or 
business of collecting, cleaning, recycling, or otherwise disposing of 
injectants after use in accordance with Federal, state, or local 
regulations concerning waste products from mining or production 
activities; and the partnership operates its injectant delivery and 
disposal services within the same geographic area.
    (3) Essential. (i) An activity is essential to the section 
7704(d)(1)(E) activity if it is required to--
    (A) Physically complete a section 7704(d)(1)(E) activity (including 
in a cost-effective manner, such as by making the activity economically 
viable), or
    (B) Comply with Federal, state, or local law regulating the section 
7704(d)(1)(E) activity.
    (ii) Legal, financial, consulting, accounting, insurance, and other 
similar services do not qualify as essential to a section 7704(d)(1)(E) 
activity.
    (4) Significant services. (i) An activity requires significant 
services to support the section 7704(d)(1)(E) activity if those services 
must be conducted on an ongoing or frequent basis by the partnership's 
personnel at the site or sites of the section 7704(d)(1)(E) activities. 
Alternatively, those services may be conducted offsite if the services 
are performed on an ongoing or frequent basis and are offered to those 
engaged in one or more section 7704(d)(1)(E) activities. If the services 
are monitoring, those services must be offered exclusively to those 
engaged in one or more section 7704(d)(1)(E) activities. Whether 
services are conducted on an ongoing or frequent basis is determined 
based on all the facts and circumstances, including recognized best 
practices in the relevant industry.

[[Page 734]]

    (ii) Personnel perform significant services only if those services 
are necessary for the partnership to perform an activity that is 
essential to the section 7704(d)(1)(E) activity, or to support the 
section 7704(d)(1)(E) activity. Personnel include employees of the 
partnership, an affiliate, subcontractor, or independent contractor 
performing work on behalf of the partnership.
    (iii) Services are not significant services with respect to a 
section 7704(d)(1)(E) activity if the services principally involve the 
design, construction, manufacturing, repair, maintenance, lease, rent, 
or temporary provision of property.
    (e) Interpretations of section 611 and section 613. This section and 
interpretations of this section have no effect on interpretations of 
sections 611 and 613, or other sections of the Code, or the regulations 
thereunder; however, this section incorporates some of the 
interpretations under section 611 and 613 and the regulations thereunder 
as provided in this section.
    (f) Examples. The following examples illustrate the provisions of 
this section:

    Example 1. Petrochemical products sourced from an oil and gas well. 
(i) Z, a publicly traded partnership, chemically converts a mixture of 
ethane and propane (obtained from physical separation of natural gas) 
into ethylene and propylene through use of a steam cracker. Z sells the 
ethylene and propylene in bulk to a third party.
    (ii) Ethylene and propylene are products of refining as provided in 
paragraph (c)(6)(i) of this section; therefore, Z is engaged in a 
section 7704(d)(1)(E) activity. The income Z receives from the sale of 
ethylene and propylene is qualifying income for purposes of section 
7704(d)(1)(E).
    Example 2. Petroleum streams chemically converted into refinery 
grade olefins byproducts. (i) Y, a publicly traded partnership, owns a 
petroleum refinery. The refinery physically separates crude oil, 
obtaining heavy gas oil. The refinery then uses a catalytic cracking 
unit to chemically convert the heavy gas oil into a liquid stream 
suitable for gasoline blending and a gas stream containing ethane, 
ethylene, and other gases. The refinery also further physically 
separates the gas stream, resulting in refinery-grade ethylene. Y sells 
the ethylene in bulk to a third party.
    (ii) Y's activities give rise to products of refining as provided in 
paragraph (c)(6)(i) of this section; therefore, Y is engaged in a 
section 7704(d)(1)(E) activity. The income Y receives from the sales of 
ethylene is qualifying income for purposes of section 7704(d)(1)(E).
    Example 3. Converting methane gas into synthetic fuels through 
chemical change. (i) Y, a publicly traded partnership, chemically 
converts methane into methanol and synthesis gas, and further chemically 
converts those products into gasoline and diesel fuel. Y receives income 
from bulk sales of gasoline and diesel created during the conversion 
processes, as well as from sales of methanol.
    (ii) With respect to the production of gasoline or diesel from 
methane, gasoline and diesel are products of refining as provided in 
paragraph (c)(6)(i) of this section; therefore, Y is engaged in a 
section 7704(d)(1)(E) activity. Y's income from the sale of gasoline and 
diesel is qualifying income for purposes of section 7704(d)(1)(E).
    (iii) The income from the sale of methanol, an intermediate product 
in the conversion process, is not qualifying income for purposes of 
section 7704(d)(1)(E) because methanol is not a product of processing or 
refining as defined in paragraph (c)(5) and (6) of this section.
    Example 4. Converting methanol into gasoline and diesel. (i) Assume 
the same facts as in Example 3 of this paragraph (f), except Y purchases 
methanol and synthesis gas and chemically converts the methanol and 
synthesis gas into gasoline and diesel.
    (ii) The chemical conversion of methanol and synthesis gas into 
gasoline and diesel is not refining as provided in paragraph (c)(6)(i) 
of this section because it is not the physical or chemical conversion or 
the separation or blending of products listed in paragraph (c)(6)(i)(A) 
of this section. Accordingly, the income from the sales of the gasoline 
and diesel is not qualifying income for purposes of section 
7704(d)(1)(E).
    Example 5. Delivery of refined products. (i) X, a publicly traded 
partnership, sells diesel to a government entity at wholesale prices and 
delivers those goods in bulk.
    (ii) X's sale of a refined product to the government entity is a 
section 7704(d)(1)(E) activity because it is a bulk transportation and 
sale as described in paragraph (c)(7) and (8) of this section and is not 
a retail sale.
    Example 6. Constructing a pipeline. (i) X, a publicly traded 
partnership, operates interstate and intrastate natural gas pipelines. 
Y, a corporation, is a construction firm. X pays Y to build a pipeline. 
X later seeks reimbursement for its cost to build the pipeline from A, a 
refiner who contracts with X to transport gasoline.
    (ii) X, as an operator of pipelines, is engaged in transportation 
pursuant to paragraph (c)(7)(i)(C) of this section. The reimbursement X 
receives from A for X's cost to build the pipeline is qualifying income 
pursuant to paragraph (c)(10)(i) of this section because X receives the 
income to reimburse

[[Page 735]]

X for its costs in performing X's transportation activity and 
reimbursable costs may include construction costs. In contrast, Y is not 
in the trade or business of performing a 7704(d)(1)(E) activity, thus 
income Y received from X for building the pipeline is not qualifying 
income to Y.
    Example 7. Delivery of water. (i) X, a publicly traded partnership, 
owns interstate and intrastate natural gas pipelines. X built a water 
delivery pipeline along the existing right of way for its natural gas 
pipeline to deliver water to A for use in A's fracturing activity. A 
uses the delivered water in fracturing to develop A's natural gas 
reserve in a cost-efficient manner. X earns income for transporting 
natural gas in the pipelines and for delivery of water.
    (ii) X's income from transporting natural gas in its interstate and 
intrastate pipelines is qualifying income for purposes of section 
7704(c) because transportation of natural gas is a section 7704(d)(1)(E) 
activity as provided in paragraph (c)(7)(i)(C) of this section.
    (iii) The income X obtains from its water delivery services is not a 
section 7704(d)(1)(E) activity as provided in paragraph (c) of this 
section. However, because X's water delivery supports A's development of 
natural gas, a section 7704(d)(1)(E) activity, X's income from water 
delivery services may be qualifying income for purposes of section 
7704(c) if the water delivery service is an intrinsic activity as 
provided in paragraph (d) of this section. An activity is an intrinsic 
activity if the activity is specialized to support the section 
7704(d)(1)(E) activity, is essential to the completion of the section 
7704(d)(1)(E) activity, and requires the provision of significant 
services to support the section 7704(d)(1)(E) activity. Under paragraph 
(d)(2)(ii)(B) of this section, the provision of water for use as an 
injectant in a section 7704(d)(1)(E) activity is specialized to that 
activity only if the partnership (1) provides the water exclusively to 
those engaged in section 7704(d)(1)(E) activities, (2) is also in the 
trade or business of cleaning, recycling, or otherwise disposing of 
water after use in accordance with Federal, state, or local regulations 
concerning waste products from mining or production activities, and (3) 
operates these disposal services within the same geographic area as that 
in which it delivers water. Because X does not perform such disposal 
services, X's water delivery activities are not specialized to support 
the section 7704(d)(1)(E) activity. Thus, X's water delivery is not an 
intrinsic activity. Accordingly, X's income from the delivery of water 
is not qualifying income for purposes of section 7704(c).
    Example 8. Delivery of water and recovery and recycling of flowback. 
(i) Assume the same facts as in Example 7 of this paragraph (f), except 
that X also collects and treats flowback at the drilling site in 
accordance with state regulations as part of its water delivery services 
and transports the treated flowback away from the site. In connection 
with these services, X provides personnel to perform these services on 
an ongoing or frequent basis that is consistent with best industry 
practices. X has provided these personnel with specialized training 
regarding the recovery and recycling of flowback produced during the 
development of natural gas, and this training is of limited utility 
other than to perform or support the development of natural gas.
    (ii) The income X obtains from its water delivery services is not a 
section 7704(d)(1)(E) activity as provided in paragraph (c) of this 
section. However, because X's water delivery supports A's development of 
natural gas, a section 7704(d)(1)(E) activity, X's income from water 
delivery services may be qualifying income for purposes of section 
7704(c) if the water delivery service is an intrinsic activity as 
provided in paragraph (d) of this section.
    (iii) An activity is an intrinsic activity if the activity is 
specialized to support the section 7704(d)(1)(E) activity, is essential 
to the completion of the section 7704(d)(1)(E) activity, and requires 
the provision of significant services to support the section 
7704(d)(1)(E) activity. Under paragraph (d)(2)(ii)(B) of this section, 
the provision of water for use as an injectant in a section 
7704(d)(1)(E) activity is specialized to that activity only if the 
partnership (1) provides the water exclusively to those engaged in 
section 7704(d)(1)(E) activities, (2) is also in the trade or business 
of cleaning, recycling, or otherwise disposing of water after use in 
accordance with Federal, state, or local regulations concerning waste 
products from mining or production activities, and (3) operates these 
disposal services within the same geographical area as where it delivers 
water. X's provision of personnel is specialized because those personnel 
received training regarding the recovery and recycling of flowback 
produced during the development of natural gas, and this training is of 
limited utility other than to perform or support the development of 
natural gas. The provision of water is also specialized because water is 
an injectant used to perform a section 7704(d)(1)(E) activity, and X 
also collects and treats flowback in accordance with state regulations 
as part of its water delivery services. Therefore, X meets the 
specialization requirement. The delivery of water is essential to 
support A's development activity because the water is needed for use in 
fracturing to develop A's natural gas reserve in a cost-efficient 
manner. Finally, the water delivery and recovery and recycling 
activities require significant services to support the development 
activity because X's personnel provide services necessary for the 
partnership to perform the support activity at the development site on

[[Page 736]]

an ongoing or frequent basis that is consistent with best industry 
practices. Because X's delivery of water and X's collection, transport, 
and treatment of flowback is a specialized activity, is essential to the 
completion of a section 7704(d)(1)(E) activity, and requires significant 
services, the delivery of water and the transport and treatment of 
flowback is an intrinsic activity. X's income from the delivery of water 
and the collection, treatment, and transport of flowback is qualifying 
income for purposes of section 7704(c).

    (g) Effective/applicability date and transition rule. (1) In 
general. Except as provided in paragraph (g)(2) of this section, this 
section applies to income earned by a partnership in a taxable year 
beginning on or after January 19, 2017. Paragraph (g)(2) of this section 
applies during the period that ends on the last day of the partnership's 
taxable year that includes January 19, 2027 (Transition Period).
    (2) Income during Transition Period. A partnership may treat income 
from an activity as qualifying income during the Transition Period if--
    (i) The partnership received a private letter ruling from the IRS 
holding that the income from that activity is qualifying income;
    (ii) Prior to May 6, 2015, the partnership was publicly traded, 
engaged in the activity, and treated the activity as giving rise to 
qualifying income under section 7704(d)(1)(E), and that income was 
qualifying income under the statute as reasonably interpreted prior to 
May 6, 2015;
    (iii) Prior to May 6, 2015, the partnership was publicly traded and 
had entered into a binding agreement for construction of assets to be 
used in such activity that would give rise to income that was qualifying 
income under the statute as reasonably interpreted prior to May 6, 2015; 
or
    (iv) The partnership is publicly traded and engages in the activity 
after May 6, 2015 but before January 19, 2017, and the income from that 
activity is qualifying income under the proposed regulations (REG-
132634-14) contained in the Internal Revenue Bulletin (IRB) 2015-21 (see 
https://www.irs.gov/pub/irs-irbs/irb15-21.pdf).
    (3) Relief from technical termination. In the event of a technical 
termination under section 708(b)(1)(B) of a partnership that satisfies 
the requirements of paragraph (g)(2) of this section without regard to 
the technical termination, the resulting partnership will be treated as 
the partnership that satisfies the requirements of paragraph (g)(2) of 
this section for purposes of applying the Transition Period.

[T.D. 9817, 82 FR 8338, Jan. 24, 2017]



Sec. Sec. 1.7872-1--1.7872-4  [Reserved]



Sec. 1.7872-5  Exempted loans.

    (a) In general--(1) General rule. Except as provided in paragraph 
(a)(2) of this section, notwithstanding any other provision of section 
7872 and the regulations under that section, section 7872 does not apply 
to the loans listed in paragraph (b) of this section because the 
interest arrangements do not have a significant effect on the Federal 
tax liability of the borrower or the lender.
    (2) No exemption for tax avoidance loans. If a taxpayer structures a 
transaction to be a loan described in paragraph (b) of this section and 
one of the principal purposes of so structuring the transaction is the 
avoidance of Federal tax, then the transaction will be recharacterized 
as a tax avoidance loan as defined in section 7872(c)(1)(D).
    (b) List of exemptions. Except as provided in paragraph (a) of this 
section, the following transactions are exempt from section 7872:
    (1) through (15) [Reserved] For further guidance, see Sec. 1.7872-
5T(b)(1) through (15).
    (16) An exchange facilitator loan (within the meaning of Sec. 
1.468B-6(c)(1)) if the amount of the exchange funds (as defined in Sec. 
1.468B-6(b)(2)) treated as loaned does not exceed $2,000,000 and the 
duration of the loan is 6 months or less. The Commissioner may increase 
this $2,000,000 loan exemption amount in published guidance of general 
applicability, see Sec. 601.601(d)(2) of this chapter.
    (c) [Reserved] For further guidance, see Sec. 1.7872-5T(c).
    (d) Effective/applicability date. This section applies to exchange 
facilitator loans issued on or after October 8, 2008.

[T.D. 9413, 73 FR 39622, July 10, 2008]

[[Page 737]]



Sec. 1.7872-5T  Exempted loans (temporary).

    (a) In general--(1) General rule. Except as provided in paragraph 
(a)(2) of this section, notwithstanding any other provision of section 
7872 and the regulations thereunder, section 7872 does not apply to the 
loans listed in paragraph (b) of this section because the interest 
arrangements do not have a significant effect on the Federal tax 
liability of the borrower or the lender.
    (2) No exemption for tax avoidance loans. If a taxpayer structures a 
transaction to be a loan described in paragraph (b) of this section and 
one of the principal purposes of so structuring the transaction is the 
avoidance of Federal tax, then the transaction will be recharacterized 
as a tax avoidance loan as defined in section 7872 (c)(1)(D).
    (b) List of exemptions. Except as provided in paragraph (a) of this 
section, the following transactions are exempt from section 7872:
    (1) Loans which are made available by the lender to the general 
public on the same terms and conditions and which are consistent with 
the lender's customary business practice;
    (2) Accounts or withdrawable shares with a bank (as defined in 
section 581), or an institution to which section 591 applies, or a 
credit union, made in the ordinary course of its business;
    (3) Acquisitions of publicly traded debt obligations for an amount 
equal to the public trading price at the time of acquisition;
    (4) Loans made by a life insurance company (as defined in section 
816 (a)), in the ordinary course of its business, to an insured, under a 
loan right contained in a life insurance policy and in which the cash 
surrender values are used as collateral for the loans;
    (5) Loans subsidized by the Federal, State (including the District 
of Columbia), or Municipal government (or any agency or instrumentality 
thereof), and which are made available under a program of general 
application to the public;
    (6) Employee-relocation loans that meet the requirements of 
paragraph (c)(1) of this section;
    (7) Obligations the interest on which is excluded from gross income 
under section 103;
    (8) Obligations of the United States government;
    (9) Gift loans to a charitable organization (described in section 
170(c)), but only if at no time during the taxable year will the 
aggregate outstanding amount of gift loans by the lender to that 
organization exceed $250,000. Charitable organizations which are 
effectively controlled, within the meaning of Sec. 1.482-1(a)(1), by 
the same person or persons shall be considered one charitable 
organization for purposes of this limitation.
    (10) Loans made to or from a foreign person that meet the 
requirements of paragraph (c)(2) of this section;
    (11) Loans made by a private foundation or other organization 
described in section 170(c), the primary purpose of which is to 
accomplish one or more of the purposes described in section 
170(c)(2)(B);
    (12) Indebtedness subject to section 482, but such indebtedness is 
exempt from the application of section 7872 only during the interest-
free period, if any, determined under Sec. 1.482-2(a)(1)(iii) with 
respect to intercompany trade receivables described in Sec. 1.482-
2(a)(1)(ii)(A)(ii). See also Sec. 1.482-2(a)(3);
    (13) All money, securities, and property--
    (i) Received by a futures commission merchant or registered broker/
dealer or by a clearing organization (A) to margin, guarantee or secure 
contracts for future delivery on or subject to the rules of a qualified 
board or exchange (as defined in section 1256(g)(7)), or (B) to 
purchase, margin, guarantee or secure options contracts traded on or 
subject to the rules of a qualified board or exchange, so long as the 
amounts so received to purchase, margin, guarantee or secure such 
contracts for future delivery or such options contracts are reasonably 
necessary for such purposes and so long as any commissions received by 
the futures commission merchant, registered broker-dealer, or clearing 
organization are not reduced for those making deposits of money, and all 
money accruing to account holders as the result of such futures and 
options contacts or

[[Page 738]]

    (ii) Received by a clearing organization from a member thereof as a 
required deposit to a clearing fund, guaranty fund, or similar fund 
maintained by the clearing organization to protect it against defaults 
by members.
    (14) Loans the interest arrangements of which the taxpayer is able 
to show have no significant effect on any Federal tax liability of the 
lender or the borrower, as described in paragraph (c)(3) of this 
section; and
    (15) Loans, described in revenue rulings or revenue procedures 
issued under section 7872(g)(1)(C), if the Commissioner finds that the 
factors justifying an exemption for such loans are sufficiently similar 
to the factors justifying the exemptions contained in this section.
    (c) Special rules--(1) Employee-relocation loans--(i) Mortgage 
loans. In the case of a compensation-related loan to an employee, where 
such loan is secured by a mortgage on the new principal residence 
(within the meaning of section 217 and the regulations thereunder) of 
the employee, acquired in connection with the transfer of that employee 
to a new principal place of work (which meets the requirements in 
section 217(c) and the regulations thereunder), the loan will be exempt 
from section 7872 if the following conditions are satisfied:
    (A) The loan is a demand loan or is a term loan the benefits of the 
interest arrangements of which are not transferable by the employee and 
are conditioned on the future performance of substantial services by the 
employee;
    (B) The employee certifies to the employer that the employee 
reasonably expects to be entitled to and will itemize deductions for 
each year the loan is outstanding; and
    (C) The loan agreement requires that the loan proceeds be used only 
to purchase the new principal residence of the employee.
    (ii) Bridge loans. In the case of a compensation-related loan to an 
employee which is not described in paragraph (c)(1)(i) of this section, 
and which is used to purchase a new principal residence (within the 
meaning of section 217 and the regulations thereunder) of the employee 
acquired in connection with the transfer of that employee to a new 
principal place of work (which meets the requirements in section 217(c) 
and the regulations thereunder), the loan will be exempt from section 
7872 if the following conditions are satisfied:
    (A) The conditions contained in paragraphs (c)(1)(i) (A), (B), and 
(C) of this section;
    (B) The loan agreement provides that the loan is payable in full 
within 15 days after the date of the sale of the employee's immediately 
former principal residence;
    (C) The aggregate principal amount of all outstanding loans 
described in this paragraph (c)(1)(ii) to an employee is no greater than 
the employer's reasonable estimate of the amount of the equity of the 
employee and the employee's spouse in the employee's immediately former 
principal residence, and
    (D) The employee's immediately former principal residence is not 
converted to business or investment use.
    (2) Below-market loans involving foreign persons. (i) Section 7872 
shall not apply to a below-market loan (other than a compensation-
related loan or a corporation-shareholder loan where the borrower is a 
shareholder that is not a C corporation as defined in section 
1361(a)(2)) if the lender is a foreign person and the borrower is a U.S. 
person unless the interest income imputed to the foreign lender (without 
regard to this paragraph) would be effectively connected with the 
conduct of a U.S. trade or business within the meaning of section 864(c) 
and the regulations thereunder and not exempt from U.S. income taxation 
under an applicable income tax treaty.
    (ii) Section 7872 shall not apply to a below-market loan where both 
the lender and the borrower are foreign persons unless the interest 
income imputed to the lender (without regard to this paragraph) would be 
effectively connected with the conduct of a U.S. trade or business 
within the meaning of section 864(c) and the regulations thereunder and 
not exempt from U.S. income taxation under an applicable income tax 
treaty.
    (iii) For purposes of this section, the term ``foreign person'' 
means any person that is not a U.S. person.

[[Page 739]]

    (3) Loans without significant tax effect. Whether a loan will be 
considered to be a loan the interest arrangements of which have a 
significant effect on any Federal tax liability of the lender or the 
borrower will be determined according to all of the facts and 
circumstances. Among the factors to be considered are--
    (i) Whether items of income and deduction generated by the loan 
offset each other;
    (ii) The amount of such items;
    (iii) The cost to the taxpayer of complying with the provisions of 
section 7872 if such section were applied; and
    (iv) Any non-tax reasons for deciding to structure the transaction 
as a below-market loan rather than a loan with interest at a rate equal 
to or greater than the applicable Federal rate and a payment by the 
lender to the borrower.

(26 U.S.C. 7872)

[T.D. 8045, 50 FR 33520, Aug. 20, 1985, as amended by T.D. 8093, 51 FR 
25033, July 10, 1986; 51 FR 28553, Aug. 8, 1986; T.D. 8204, 53 FR 18282, 
May 23, 1988]



Sec. 1.7872-15  Split-dollar loans.

    (a) General rules--(1) Introduction. This section applies to split-
dollar loans as defined in paragraph (b)(1) of this section. If a split-
dollar loan is not a below-market loan, then, except as provided in this 
section, the loan is governed by the general rules for debt instruments 
(including the rules for original issue discount (OID) under sections 
1271 through 1275 and the regulations thereunder). If a split-dollar 
loan is a below-market loan, then, except as provided in this section, 
the loan is governed by section 7872. The timing, amount, and 
characterization of the imputed transfers between the lender and 
borrower of a below-market split-dollar loan depend upon the 
relationship between the parties and upon whether the loan is a demand 
loan or a term loan. For additional rules relating to the treatment of 
split-dollar life insurance arrangements, see Sec. 1.61-22.
    (2) Loan treatment--(i) General rule. A payment made pursuant to a 
split-dollar life insurance arrangement is treated as a loan for Federal 
tax purposes, and the owner and non-owner are treated, respectively, as 
the borrower and the lender, if--
    (A) The payment is made either directly or indirectly by the non-
owner to the owner (including a premium payment made by the non-owner 
directly or indirectly to the insurance company with respect to the 
policy held by the owner);
    (B) The payment is a loan under general principles of Federal tax 
law or, if it is not a loan under general principles of Federal tax law 
(for example, because of the nonrecourse nature of the obligation or 
otherwise), a reasonable person nevertheless would expect the payment to 
be repaid in full to the non-owner (whether with or without interest); 
and
    (C) The repayment is to be made from, or is secured by, the policy's 
death benefit proceeds, the policy's cash surrender value, or both.
    (ii) Payments that are only partially repayable. For purposes of 
Sec. 1.61-22 and this section, if a non-owner makes a payment pursuant 
to a split-dollar life insurance arrangement and the non-owner is 
entitled to repayment of some but not all of the payment, the payment is 
treated as two payments: One that is repayable and one that is not. 
Thus, paragraph (a)(2)(i) of this section refers to the repayable 
payment.
    (iii) Treatment of payments that are not split-dollar loans. See 
Sec. 1.61-22(b)(5) for the treatment of payments by a non-owner that 
are not split-dollar loans.
    (iv) Examples. The provisions of this paragraph (a)(2) are 
illustrated by the following examples:

    Example 1. Assume an employee owns a life insurance policy under a 
split-dollar life insurance arrangement, the employer makes premium 
payments on this policy, there is a reasonable expectation that the 
payments will be repaid, and the repayments are secured by the policy. 
Under paragraph (a)(2)(i) of this section, each premium payment is a 
loan for Federal tax purposes.
    Example 2. (i) Assume an employee owns a life insurance policy under 
a split-dollar life insurance arrangement and the employer makes premium 
payments on this policy. The employer is entitled to be repaid 80 
percent of each premium payment, and the repayments are secured by the 
policy. Under paragraph (a)(2)(ii) of this section, the taxation of 20 
percent of each premium payment is governed by Sec. 1.61-22(b)(5). If 
there is a reasonable expectation that the remaining 80

[[Page 740]]

percent of a payment will be repaid in full, then, under paragraph 
(a)(2)(i) of this section, the 80 percent is a loan for Federal tax 
purposes.
    (ii) If less than 80 percent of a premium payment is reasonably 
expected to be repaid, then this paragraph (a)(2) does not cause any of 
the payment to be a loan for Federal tax purposes. If the payment is not 
a loan under general principles of Federal tax law, the taxation of the 
entire premium payment is governed by Sec. 1.61-22(b)(5).

    (3) No de minimis exceptions. For purposes of this section, section 
7872 is applied to a split-dollar loan without regard to the de minimis 
exceptions in section 7872(c)(2) and (3).
    (4) Certain interest provisions disregarded--(i) In general. If a 
split-dollar loan provides for the payment of interest and all or a 
portion of the interest is to be paid directly or indirectly by the 
lender (or a person related to the lender), then the requirement to pay 
the interest (or portion thereof) is disregarded for purposes of this 
section. All of the facts and circumstances determine whether a payment 
to be made by the lender (or a person related to the lender) is 
sufficiently independent from the split-dollar loan for the payment to 
not be an indirect payment of the interest (or a portion thereof) by the 
lender (or a person related to the lender).
    (ii) Examples. The provisions of this paragraph (a)(4) are 
illustrated by the following examples:

    Example 1. (i) On January 1, 2009, Employee B issues a split-dollar 
term loan to Employer Y. The split-dollar term loan provides for five 
percent interest, compounded annually. Interest and principal on the 
split-dollar term loan are due at maturity. On January 1, 2009, B and Y 
also enter into a fully vested non-qualified deferred compensation 
arrangement that will provide a payment to B in an amount equal to the 
accrued but unpaid interest due at the maturity of the split-dollar term 
loan.
    (ii) Under paragraph (a)(4)(i) of this section, B's requirement to 
pay interest on the split-dollar term loan is disregarded for purposes 
of this section, and the split-dollar term loan is treated as a loan 
that does not provide for interest for purposes of this section.
    Example 2. (i) On January 1, 2004, Employee B and Employer Y enter 
into a fully vested non-qualified deferred compensation arrangement that 
will provide a payment to B equal to B's salary in the three years 
preceding the retirement of B. On January 1, 2009, B and Y enter into a 
split-dollar life insurance arrangement and, under the arrangement, B 
issues a split-dollar term loan to Y on that date. The split-dollar term 
loan provides for five percent interest, compounded annually. Interest 
and principal on the split-dollar term loan are due at maturity. Over 
the period in which the non-qualified deferred compensation arrangement 
is effective, the terms and conditions of B's non-qualified deferred 
compensation arrangement do not change in a way that indicates that the 
payment of the non-qualified deferred compensation is related to B's 
requirement to pay interest on the split-dollar term loan. No other 
facts and circumstances exist to indicate that the payment of the non-
qualified deferred compensation is related to B's requirement to pay 
interest on the split-dollar term loan.
    (ii) The facts and circumstances indicate that the payment by Y of 
non-qualified deferred compensation is independent from B's requirement 
to pay interest under the split-dollar term loan. Under paragraph 
(a)(4)(i) of this section, the fully vested non-qualified deferred 
compensation does not cause B's requirement to pay interest on the 
split-dollar term loan to be disregarded for purposes of this section. 
For purposes of this section, the split-dollar term loan is treated as a 
loan that provides for stated interest of five percent, compounded 
annually.

    (b) Definitions. For purposes of this section, the terms split-
dollar life insurance arrangement, owner, and non-owner have the same 
meanings as provided in Sec. 1.61-22(b) and (c). In addition, the 
following definitions apply for purposes of this section:
    (1) A split-dollar loan is a loan described in paragraph (a)(2)(i) 
of this section.
    (2) A split-dollar demand loan is any split-dollar loan that is 
payable in full at any time on the demand of the lender (or within a 
reasonable time after the lender's demand).
    (3) A split-dollar term loan is any split-dollar loan other than a 
split-dollar demand loan. See paragraph (e)(5) of this section for 
special rules regarding certain split-dollar term loans payable on the 
death of an individual, certain split-dollar term loans conditioned on 
the future performance of substantial services by an individual, and 
gift split-dollar term loans.
    (c) Interest deductions for split-dollar loans. The borrower may not 
deduct any qualified stated interest, OID, or imputed interest on a 
split-dollar loan.

[[Page 741]]

See sections 163(h) and 264(a). In certain circumstances, an indirect 
participant may be allowed to deduct qualified stated interest, OID, or 
imputed interest on a deemed loan. See paragraph (e)(2)(iii) of this 
section (relating to indirect loans).
    (d) Treatment of split-dollar loans providing for nonrecourse 
payments--(1) In general. Except as provided in paragraph (d)(2) of this 
section, if a payment on a split-dollar loan is nonrecourse to the 
borrower, the payment is a contingent payment for purposes of this 
section. See paragraph (j) of this section for the treatment of a split-
dollar loan that provides for one or more contingent payments.
    (2) Exception for certain loans with respect to which the parties to 
the split-dollar life insurance arrangement make a representation--(i) 
Requirement. An otherwise noncontingent payment on a split-dollar loan 
that is nonrecourse to the borrower is not a contingent payment under 
this section if the parties to the split-dollar life insurance 
arrangement represent in writing that a reasonable person would expect 
that all payments under the loan will be made.
    (ii) Time and manner for providing written representation. The 
Commissioner may prescribe the time and manner for providing the written 
representation required by paragraph (d)(2)(i) of this section. Until 
the Commissioner prescribes otherwise, the written representation that 
is required by paragraph (d)(2)(i) of this section must meet the 
requirements of this paragraph (d)(2)(ii). Both the borrower and the 
lender must sign the representation not later than the last day 
(including extensions) for filing the Federal income tax return of the 
borrower or lender, whichever is earlier, for the taxable year in which 
the lender makes the first split-dollar loan under the split-dollar life 
insurance arrangement. This representation must include the names, 
addresses, and taxpayer identification numbers of the borrower, lender, 
and any indirect participants. Unless otherwise stated therein, this 
representation applies to all subsequent split-dollar loans made 
pursuant to the split-dollar life insurance arrangement. Each party 
should retain an original of the representation as part of its books and 
records and should attach a copy of this representation to its Federal 
income tax return for any taxable year in which the lender makes a loan 
to which the representation applies.
    (e) Below-market split-dollar loans--(1) Scope--(i) In general. This 
paragraph (e) applies to below-market split-dollar loans enumerated 
under section 7872(c)(1), which include gift loans, compensation-related 
loans, and corporation-shareholder loans. The characterization of a 
split-dollar loan under section 7872(c)(1) and of the imputed transfers 
under section 7872(a)(1) and (b)(1) depends upon the relationship 
between the lender and the borrower or the lender, borrower, and any 
indirect participant. For example, if the lender is the borrower's 
employer, the split-dollar loan is generally a compensation-related 
loan, and any imputed transfer from the lender to the borrower is 
generally a payment of compensation. The loans covered by this paragraph 
(e) include indirect loans between the parties. See paragraph (e)(2) of 
this section for the treatment of certain indirect split-dollar loans. 
See paragraph (f) of this section for the treatment of any stated 
interest or OID on split-dollar loans. See paragraph (j) of this section 
for additional rules that apply to a split-dollar loan that provides for 
one or more contingent payments.
    (ii) Significant-effect split-dollar loans. If a direct or indirect 
below-market split-dollar loan is not enumerated in section 
7872(c)(1)(A), (B), or (C), the loan is a significant-effect loan under 
section 7872(c)(1)(E).
    (2) Indirect split-dollar loans--(i) In general. If, based on all 
the facts and circumstances, including the relationship between the 
borrower or lender and some third person (the indirect participant), the 
effect of a below-market split-dollar loan is to transfer value from the 
lender to the indirect participant and from the indirect participant to 
the borrower, then the below-market split-dollar loan is restructured as 
two or more successive below-market loans (the deemed loans) as provided 
in this paragraph (e)(2). The transfers of value described in the 
preceding sentence include (but are not

[[Page 742]]

limited to) a gift, compensation, a capital contribution, and a 
distribution under section 301 (or, in the case of an S corporation, 
under section 1368). The deemed loans are--
    (A) A deemed below-market split-dollar loan made by the lender to 
the indirect participant; and
    (B) A deemed below-market split-dollar loan made by the indirect 
participant to the borrower.
    (ii) Application. Each deemed loan is treated as having the same 
provisions as the original loan between the lender and borrower, and 
section 7872 is applied to each deemed loan. Thus, for example, if, 
under a split-dollar life insurance arrangement, an employer (lender) 
makes an interest-free split-dollar loan to an employee's child 
(borrower), the loan is restructured as a deemed compensation-related 
below-market split-dollar loan from the lender to the employee (the 
indirect participant) and a second deemed gift below-market split-dollar 
loan from the employee to the employee's child. In appropriate 
circumstances, section 7872(d)(1) may limit the interest that accrues on 
a deemed loan for Federal income tax purposes. For loan arrangements 
between husband and wife, see section 7872(f)(7).
    (iii) Limitations on investment interest for purposes of section 
163(d). For purposes of section 163(d), the imputed interest from the 
indirect participant to the lender that is taken into account by the 
indirect participant under this paragraph (e)(2) is not investment 
interest to the extent of the excess, if any, of--
    (A) The imputed interest from the indirect participant to the lender 
that is taken into account by the indirect participant; over
    (B) The imputed interest to the indirect participant from the 
borrower that is recognized by the indirect participant.
    (iv) Examples. The provisions of this paragraph (e)(2) are 
illustrated by the following examples:

    Example 1. (i) On January 1, 2009, Employer X and Individual A enter 
into a split-dollar life insurance arrangement under which A is named as 
the policy owner. A is the child of B, an employee of X. On January 1, 
2009, X makes a $30,000 premium payment, repayable upon demand without 
interest. Repayment of the premium payment is fully recourse to A. The 
payment is a below-market split-dollar demand loan. A's net investment 
income for 2009 is $1,100, and there are no other outstanding loans 
between A and B. Assume that the blended annual rate for 2009 is 5 
percent, compounded annually.
    (ii) Based on the relationships among the parties, the effect of the 
below-market split-dollar loan from X to A is to transfer value from X 
to B and then to transfer value from B to A. Under paragraph (e)(2) of 
this section, the below-market split-dollar loan from X to A is 
restructured as two deemed below-market split-dollar demand loans: a 
compensation-related below-market split-dollar loan between X and B and 
a gift below-market split-dollar loan between B and A. Each of the 
deemed loans has the same terms and conditions as the original loan.
    (iii) Under paragraph (e)(3) of this section, the amount of forgone 
interest deemed paid to B by A in 2009 is $1,500 ([$30,000 x 0.05]--0). 
Under section 7872(d)(1), however, the amount of forgone interest deemed 
paid to B by A is limited to $1,100 (A's net investment income for the 
year). Under paragraph (e)(2)(iii) of this section, B's deduction under 
section 163(d) in 2009 for interest deemed paid on B's deemed loan from 
X is limited to $1,100 (the interest deemed received from A).

    Example 2. (i) The facts are the same as the facts in Example 1, 
except that T, an irrevocable life insurance trust established for the 
benefit of A (B's child), is named as the policy owner. T is not a 
grantor trust.
    (ii) Based on the relationships among the parties, the effect of the 
below-market split-dollar loan from X to T is to transfer value from X 
to B and then to transfer value from B to T. Under paragraph (e)(2) of 
this section, the below-market split-dollar loan from X to T is 
restructured as two deemed below-market split-dollar demand loans: a 
compensation-related below-market split-dollar loan between X and B and 
a gift below-market split-dollar loan between B and T. Each of the 
deemed loans has the same terms and conditions as the original loan.
    (iii) Under paragraph (e)(3) of this section, the amount of forgone 
interest deemed paid to B by T in 2009 is $1,500 ([$30,000 x 0.05]--0). 
Section 7872(d)(1) does not apply because T is not an individual. The 
amount of forgone interest deemed paid to B by T is $1,500. Under 
paragraph (e)(2)(iii) of this section, B's deduction under section 
163(d) in 2009 for interest deemed paid on B's deemed loan from X is 
$1,500 (the interest deemed received from T).

    (3) Split-dollar demand loans--(i) In general. This paragraph (e)(3) 
provides rules for testing split-dollar demand loans for sufficient 
interest, and, if the

[[Page 743]]

loans do not provide for sufficient interest, rules for the calculation 
and treatment of forgone interest on these loans. See paragraph (g) of 
this section for additional rules that apply to a split-dollar loan 
providing for certain variable rates of interest.
    (ii) Testing for sufficient interest. Each calendar year that a 
split-dollar demand loan is outstanding, the loan is tested to determine 
if the loan provides for sufficient interest. A split-dollar demand loan 
provides for sufficient interest for the calendar year if the rate 
(based on annual compounding) at which interest accrues on the loan's 
adjusted issue price during the year is no lower than the blended annual 
rate for the year. (The Internal Revenue Service publishes the blended 
annual rate in the Internal Revenue Bulletin in July of each year (see 
Sec. 601.601(d)(2)(ii) of this chapter).) If the loan does not provide 
for sufficient interest, the loan is a below-market split-dollar demand 
loan for that calendar year. See paragraph (e)(3)(iii) of this section 
to determine the amount and treatment of forgone interest for each 
calendar year the loan is below-market.
    (iii) Imputations--(A) Amount of forgone interest. For each calendar 
year, the amount of forgone interest on a split-dollar demand loan is 
treated as transferred by the lender to the borrower and as 
retransferred as interest by the borrower to the lender. This amount is 
the excess of--
    (1) The amount of interest that would have been payable on the loan 
for the calendar year if interest accrued on the loan's adjusted issue 
price at the blended annual rate (determined in paragraph (e)(3)(ii) of 
this section) and were payable annually on the day referred to in 
paragraph (e)(3)(iii)(B) of this section; over
    (2) Any interest that accrues on the loan during the year.
    (B) Timing of transfers of forgone interest--(1) In general. Except 
as provided in paragraphs (e)(3)(iii)(B)(2) and (3) of this section, the 
forgone interest (as determined under paragraph (e)(3)(iii)(A) of this 
section) that is attributable to a calendar year is treated as 
transferred by the lender to the borrower (and retransferred as interest 
by the borrower to the lender) on the last day of the calendar year and 
is accounted for by each party to the split-dollar loan in a manner 
consistent with that party's method of accounting.
    (2) Exception for death, liquidation, or termination of the 
borrower. In the taxable year in which the borrower dies (in the case of 
a borrower who is a natural person) or is liquidated or otherwise 
terminated (in the case of a borrower other than a natural person), any 
forgone interest is treated, for both the lender and the borrower, as 
transferred and retransferred on the last day of the borrower's final 
taxable year.
    (3) Exception for repayment of below-market split-dollar loan. Any 
forgone interest is treated, for both the lender and the borrower, as 
transferred and retransferred on the day the split-dollar loan is repaid 
in full.
    (4) Split-dollar term loans--(i) In general. Except as provided in 
paragraph (e)(5) of this section, this paragraph (e)(4) provides rules 
for testing split-dollar term loans for sufficient interest and, if the 
loans do not provide for sufficient interest, rules for imputing 
payments on these loans. See paragraph (g) of this section for 
additional rules that apply to a split-dollar loan providing for certain 
variable rates of interest.
    (ii) Testing a split-dollar term loan for sufficient interest. A 
split-dollar term loan is tested on the day the loan is made to 
determine if the loan provides for sufficient interest. A split-dollar 
term loan provides for sufficient interest if the imputed loan amount 
equals or exceeds the amount loaned. The imputed loan amount is the 
present value of all payments due under the loan, determined as of the 
date the loan is made, using a discount rate equal to the AFR in effect 
on that date. The AFR used for purposes of the preceding sentence must 
be appropriate for the loan's term (short-term, mid-term, or long-term) 
and for the compounding period used in computing the present value. See 
section 1274(d)(1). If the split-dollar loan does not provide for 
sufficient interest, the loan is a below-market split-dollar term loan 
subject to paragraph (e)(4)(iv) of this section.
    (iii) Determining loan term. This paragraph (e)(4)(iii) provides 
rules to determine the term of a split-dollar term

[[Page 744]]

loan for purposes of paragraph (e)(4)(ii) of this section. The term of 
the loan determined under this paragraph (e)(4)(iii) (other than 
paragraph (e)(4)(iii)(C) of this section) applies to determine the 
split-dollar loan's term, payment schedule, and yield for all purposes 
of this section.
    (A) In general. Except as provided in paragraph (e)(4)(iii)(B), (C), 
(D) or (E) of this section, the term of a split-dollar term loan is 
based on the period from the date the loan is made until the loan's 
stated maturity date.
    (B) Special rules for certain options--(1) Payment schedule that 
minimizes yield. If a split-dollar term loan is subject to one or more 
unconditional options that are exercisable at one or more times during 
the term of the loan and that, if exercised, require payments to be made 
on the split-dollar loan on an alternative payment schedule (for 
example, an option to extend or an option to call a split-dollar loan), 
then the rules of this paragraph (e)(4)(iii)(B)(1) determine the term of 
the loan. However, this paragraph (e)(4)(iii)(B)(1) applies only if the 
timing and amounts of the payments that comprise each payment schedule 
are known as of the issue date. For purposes of determining a split-
dollar loan's term, the borrower is projected to exercise or not 
exercise an option or combination of options in a manner that minimizes 
the loan's overall yield. Similarly, the lender is projected to exercise 
or not exercise an option or combination of options in a manner that 
minimizes the loan's overall yield. If different projected patterns of 
exercise or non-exercise produce the same minimum yield, the parties are 
projected to exercise or not exercise an option or combination of 
options in a manner that produces the longest term.
    (2) Change in circumstances. If the borrower (or lender) does or 
does not exercise the option as projected under paragraph 
(e)(4)(iii)(B)(1) of this section, the split-dollar loan is treated for 
purposes of this section as retired and reissued on the date the option 
is or is not exercised for an amount of cash equal to the loan's 
adjusted issue price on that date. The reissued loan must be retested 
using the appropriate AFR in effect on the date of reissuance to 
determine whether it is a below-market loan.
    (3) Examples. The following examples illustrate the rules of this 
paragraph (e)(4)(iii)(B):

    Example 1. Employee B issues a 10-year split-dollar term loan to 
Employer Y. B has the right to prepay the loan at the end of year 5. 
Interest is payable on the split-dollar loan at 1 percent for the first 
5 years and at 10 percent for the remaining 5 years. Under paragraph 
(e)(4)(iii)(B)(1) of this section, this arrangement is treated as a 5-
year split-dollar term loan from Y to B, with interest payable at 1 
percent.
    Example 2. The facts are the same as the facts in Example 1, except 
that B does not in fact prepay the split-dollar loan at the end of year 
5. Under paragraph (e)(4)(iii)(B)(2) of this section, the first loan is 
treated as retired at the end of year 5 and a new 5-year split-dollar 
term loan is issued at that time, with interest payable at 10 percent.
    Example 3. Employee A issues a 10-year split-dollar term loan on 
which the lender, Employer X, has the right to demand payment at the end 
of year 2. Interest is payable on the split-dollar loan at 7 percent 
each year that the loan is outstanding. Under paragraph 
(e)(4)(iii)(B)(1) of this section, this arrangement is treated as a 10-
year split-dollar term loan because the exercise of X's put option would 
not reduce the yield of the loan (the yield of the loan is 7 percent, 
compounded annually, whether or not X demands payment).

    (C) Split-dollar term loans providing for certain variable rates of 
interest. If a split-dollar term loan is subject to paragraph (g) of 
this section (a split-dollar loan that provides for certain variable 
rates of interest), the term of the loan for purposes of paragraph 
(e)(4)(ii) of this section is determined under paragraph (g)(3)(ii) of 
this section.
    (D) Split-dollar loans payable upon the death of an individual. If a 
split-dollar term loan is described in paragraph (e)(5)(ii)(A) or (v)(A) 
of this section, the term of the loan for purposes of paragraph 
(e)(4)(ii) of this section is determined under paragraph (e)(5)(ii)(C) 
or (v)(B)(2) of this section, whichever is applicable.
    (E) Split-dollar loans conditioned on the future performance of 
substantial services by an individual. If a split-dollar term loan is 
described in paragraph (e)(5)(iii)(A)(1) or (v)(A) of this section, the 
term of the loan for purposes of

[[Page 745]]

paragraph (e)(4)(ii) of this section is determined under paragraph 
(e)(5)(iii)(C) or (v)(B)(2) of this section, whichever is applicable.
    (iv) Timing and amount of imputed transfer in connection with below-
market split-dollar term loans. If a split-dollar term loan is a below-
market loan, then the rules applicable to below-market term loans under 
section 7872 apply. In general, the loan is recharacterized as 
consisting of two portions: an imputed loan amount (as defined in 
paragraph (e)(4)(ii) of this section) and an imputed transfer from the 
lender to the borrower. The imputed transfer occurs at the time the loan 
is made (for example, when the lender makes a premium payment on a life 
insurance policy) and is equal to the excess of the amount loaned over 
the imputed loan amount.
    (v) Amount treated as OID. In the case of any below-market split-
dollar term loan described in this paragraph (e)(4), for purposes of 
applying sections 1271 through 1275 and the regulations thereunder, the 
issue price of the loan is the amount determined under Sec. 1.1273-2, 
reduced by the amount of the imputed transfer described in paragraph 
(e)(4)(iv) of this section. Thus, the loan is generally treated as 
having OID in an amount equal to the amount of the imputed transfer 
described in paragraph (e)(4)(iv) of this section, in addition to any 
other OID on the loan (determined without regard to section 
7872(b)(2)(A) or this paragraph (e)(4)).
    (vi) Example. The provisions of this paragraph (e)(4) are 
illustrated by the following example:

    Example. (i) On July 1, 2009, Corporation Z and Shareholder A enter 
into a split-dollar life insurance arrangement under which A is named as 
the policy owner. On July 1, 2009, Z makes a $100,000 premium payment, 
repayable without interest in 15 years. Repayment of the premium payment 
is fully recourse to A. The premium payment is a split-dollar term loan. 
Assume the long-term AFR (based on annual compounding) at the time the 
loan is made is 7 percent.
    (ii) Based on a 15-year term and a discount rate of 7 percent, 
compounded annually (the long-term AFR), the present value of the 
payments under the loan is $36,244.60, determined as follows: $100,000/
[1 + (0.07/1)] \15\. This loan is a below-market split-dollar term loan 
because the imputed loan amount of $36,244.60 (the present value of the 
amount required to be repaid to Z) is less than the amount loaned 
($100,000).
    (iii) In accordance with section 7872(b)(1) and paragraph (e)(4)(iv) 
of this section, on the date that the loan is made, Z is treated as 
transferring to A $63,755.40 (the excess of $100,000 (amount loaned) 
over $36,244.60 (imputed loan amount)). Under section 7872 and paragraph 
(e)(1)(i) of this section, Z is treated as making a section 301 
distribution to A on July 1, 2009, of $63,755.40. Z must take into 
account as OID an amount equal to the imputed transfer. See Sec. 
1.1272-1 for the treatment of OID.

    (5) Special rules for certain split-dollar term loans--(i) In 
general. This paragraph (e)(5) provides rules for split-dollar loans 
payable on the death of an individual, split-dollar loans conditioned on 
the future performance of substantial services by an individual, and 
gift term loans. These split-dollar loans are split-dollar term loans 
for purposes of determining whether the loan provides for sufficient 
interest. If, however, the loan is a below-market split-dollar loan, 
then, except as provided in paragraph (e)(5)(v) of this section, forgone 
interest is determined annually, similar to a demand loan, but using an 
AFR that is appropriate for the loan's term and that is determined when 
the loan is issued.
    (ii) Split-dollar loans payable not later than the death of an 
individual--(A) Applicability. This paragraph (e)(5)(ii) applies to a 
split-dollar term loan payable not later than the death of an 
individual.
    (B) Treatment of loan. A split-dollar loan described in paragraph 
(e)(5)(ii)(A) of this section is tested under paragraph (e)(4)(ii) of 
this section to determine if the loan provides for sufficient interest. 
If the loan provides for sufficient interest, then section 7872 does not 
apply to the loan, and the interest on the loan is taken into account 
under paragraph (f) of this section. If the loan does not provide for 
sufficient interest, then section 7872 applies to the loan, and the loan 
is treated as a below-market demand loan subject to paragraph 
(e)(3)(iii) of this section. For each year that the loan is outstanding, 
however, the rate used in the determination of forgone interest under 
paragraph (e)(3)(iii) of this section is not the blended annual rate but 
rather is the AFR (based on annual compounding)

[[Page 746]]

appropriate for the loan's term as of the month in which the loan is 
made. See paragraph (e)(5)(ii)(C) of this section to determine the 
loan's term.
    (C) Term of loan. For purposes of paragraph (e)(5)(ii)(B) of this 
section, the term of a split-dollar loan payable on the death of an 
individual (including the death of the last survivor of a group of 
individuals) is the individual's life expectancy as determined under the 
appropriate table in Sec. 1.72-9 on the day the loan is made. If a 
split-dollar loan is payable on the earlier of the individual's death or 
another term determined under paragraph (e)(4)(iii) of this section, the 
term of the loan is whichever term is shorter.
    (D) Retirement and reissuance of loan. If a split-dollar loan 
described in paragraph (e)(5)(ii)(A) of this section remains outstanding 
longer than the term determined under paragraph (e)(5)(ii)(C) of this 
section because the individual outlived his or her life expectancy, the 
split-dollar loan is treated for purposes of this section as retired and 
reissued as a split-dollar demand loan at that time for an amount of 
cash equal to the loan's adjusted issue price on that date. However, the 
loan is not retested at that time to determine whether the loan provides 
for sufficient interest. For purposes of determining forgone interest 
under paragraph (e)(5)(ii)(B) of this section, the appropriate AFR for 
the reissued loan is the AFR determined under paragraph (e)(5)(ii)(B) of 
this section on the day the loan was originally made.
    (iii) Split-dollar loans conditioned on the future performance of 
substantial services by an individual--(A) Applicability--(1) In 
general. This paragraph (e)(5)(iii) applies to a split-dollar term loan 
if the benefits of the interest arrangements of the loan are not 
transferable and are conditioned on the future performance of 
substantial services (within the meaning of section 83) by an 
individual.
    (2) Exception. Notwithstanding paragraph (e)(5)(iii)(A)(1) of this 
section, this paragraph (e)(5)(iii) does not apply to a split-dollar 
loan described in paragraph (e)(5)(v)(A) of this section (regarding a 
split-dollar loan that is payable on the later of a term certain and the 
date on which the condition to perform substantial future services by an 
individual ends).
    (B) Treatment of loan. A split-dollar loan described in paragraph 
(e)(5)(iii)(A)(1) of this section is tested under paragraph (e)(4)(ii) 
of this section to determine if the loan provides for sufficient 
interest. Except as provided in paragraph (e)(5)(iii)(D) of this 
section, if the loan provides for sufficient interest, then section 7872 
does not apply to the loan and the interest on the loan is taken into 
account under paragraph (f) of this section. If the loan does not 
provide for sufficient interest, then section 7872 applies to the loan 
and the loan is treated as a below-market demand loan subject to 
paragraph (e)(3)(iii) of this section. For each year that the loan is 
outstanding, however, the rate used in the determination of forgone 
interest under paragraph (e)(3)(iii) of this section is not the blended 
annual rate but rather is the AFR (based on annual compounding) 
appropriate for the loan's term as of the month in which the loan is 
made. See paragraph (e)(5)(iii)(C) of this section to determine the 
loan's term.
    (C) Term of loan. The term of a split-dollar loan described in 
paragraph (e)(5)(iii)(A)(1) of this section is based on the period from 
the date the loan is made until the loan's stated maturity date. 
However, if a split-dollar loan described in paragraph (e)(5)(iii)(A)(1) 
of this section does not have a stated maturity date, the term of the 
loan is presumed to be seven years.
    (D) Retirement and reissuance of loan. If a split-dollar loan 
described in paragraph (e)(5)(iii)(A)(1) of this section remains 
outstanding longer than the term determined under paragraph 
(e)(5)(iii)(C) of this section because of the continued performance of 
substantial services, the split-dollar loan is treated for purposes of 
this section as retired and reissued as a split-dollar demand loan at 
that time for an amount of cash equal to the loan's adjusted issue price 
on that date. The loan is retested at that time to determine whether the 
loan provides for sufficient interest.
    (iv) Gift split-dollar term loans--(A) Applicability. This paragraph 
(e)(5)(iv) applies to gift split-dollar term loans.

[[Page 747]]

    (B) Treatment of loan. A split-dollar loan described in paragraph 
(e)(5)(iv)(A) of this section is tested under paragraph (e)(4)(ii) of 
this section to determine if the loan provides for sufficient interest. 
If the loan provides for sufficient interest, then section 7872 does not 
apply to the loan and the interest on the loan is taken into account 
under paragraph (f) of this section. If the loan does not provide for 
sufficient interest, then section 7872 applies to the loan and the loan 
is treated as a below-market demand loan subject to paragraph 
(e)(3)(iii) of this section. For each year that the loan is outstanding, 
however, the rate used in the determination of forgone interest under 
paragraph (e)(3)(iii) of this section is not the blended annual rate but 
rather is the AFR (based on annual compounding) appropriate for the 
loan's term as of the month in which the loan is made. See paragraph 
(e)(5)(iv)(C) of this section to determine the loan's term.
    (C) Term of loan. For purposes of paragraph (e)(5)(iv)(B) of this 
section, the term of a gift split-dollar term loan is the term 
determined under paragraph (e)(4)(iii) of this section.
    (D) Limited application for gift split-dollar term loans. The rules 
of paragraph (e)(5)(iv)(B) of this section apply to a gift split-dollar 
term loan only for Federal income tax purposes. For purposes of Chapter 
12 of the Internal Revenue Code (relating to the gift tax), gift below-
market split-dollar term loans are treated as term loans under section 
7872(b) and paragraph (e)(4) of this section. See section 7872(d)(2).
    (v) Split-dollar loans payable on the later of a term certain and 
another specified date--(A) Applicability. This paragraph (e)(5)(v) 
applies to any split-dollar term loan payable upon the later of a term 
certain or--
    (1) The death of an individual; or
    (2) For a loan described in paragraph (e)(5)(iii)(A)(1) of this 
section, the date on which the condition to perform substantial future 
services by an individual ends.
    (B) Treatment of loan--(1) In general. A split-dollar loan described 
in paragraph (e)(5)(v)(A) of this section is a split-dollar term loan, 
subject to paragraph (e)(4) of this section.
    (2) Term of the loan. The term of a split-dollar loan described in 
paragraph (e)(5)(v)(A) of this section is the term certain.
    (3) Appropriate AFR. The appropriate AFR for a split-dollar loan 
described in paragraph (e)(5)(v)(A) of this section is based on a term 
of the longer of the term certain or the loan's expected term as 
determined under either paragraph (e)(5) (ii) or (iii) of this section, 
whichever is applicable.
    (C) Retirement and reissuance. If a split-dollar loan described in 
paragraph (e)(5)(v)(A) of this section remains outstanding longer than 
the term certain, the split-dollar loan is treated for purposes of this 
section as retired and reissued at the end of the term certain for an 
amount of cash equal to the loan's adjusted issue price on that date. 
The reissued loan is subject to paragraph (e)(5) (ii) or (iii) of this 
section, whichever is applicable. However, the loan is not retested at 
that time to determine whether the loan provides for sufficient 
interest. For purposes of paragraph (e)(3)(iii) of this section, the 
appropriate AFR for the reissued loan is the AFR determined under 
paragraph (e)(5)(v)(B)(3) of this section on the day the loan was 
originally made.
    (vi) Example. The provisions of this paragraph (e)(5) are 
illustrated by the following example:

    Example. (i) On January 1, 2009, Corporation Y and Shareholder B, a 
65 year-old male, enter into a split-dollar life insurance arrangement 
under which B is named as the policy owner. On January 1, 2009, Y makes 
a $100,000 premium payment, repayable, without interest, from the death 
benefits of the underlying contract upon B's death. The premium payment 
is a split-dollar term loan. Repayment of the premium payment is fully 
recourse to B. Assume the long-term AFR (based on annual compounding) at 
the time of the loan is 7 percent. Both Y and B use the calendar year as 
their taxable years.
    (ii) Based on Table 1 in Sec. 1.72-9, the expected term of the loan 
is 15 years. Under paragraph (e)(5)(ii)(C) of this section, the long-
term AFR (based on annual compounding) is the appropriate test rate. 
Based on a 15-year term and a discount rate of 7 percent, compounded 
annually (the long-term AFR), the present value of the payments under 
the loan is $36,244.60, determined as follows: $100,000/[1 + (0.07/
1)]\15\. Under paragraph (e)(5)(ii)(B) of this section, this loan is a 
below-market split-dollar term loan because the imputed loan amount of

[[Page 748]]

$36,244.60 (the present value of the amount required to be repaid to Y) 
is less than the amount loaned ($100,000).
    (iii) Under paragraph (e)(5)(ii)(B) of this section, the amount of 
forgone interest for 2009 (and each subsequent full calendar year that 
the loan remains outstanding) is $7,000, which is the amount of interest 
that would have been payable on the loan for the calendar year if 
interest accrued on the loan's adjusted issue price ($100,000) at the 
long-term AFR (7 percent, compounded annually). Under section 7872 and 
paragraph (e)(1)(i) of this section, on December 31, 2009, Y is treated 
as making a section 301 distribution to B of $7,000. In addition, Y has 
$7,000 of imputed interest income for 2009.

    (f) Treatment of stated interest and OID for split-dollar loans--(1) 
In general. If a split-dollar loan provides for stated interest or OID, 
the loan is subject to this paragraph (f), regardless of whether the 
split-dollar loan has sufficient interest. Except as otherwise provided 
in this section, split-dollar loans are subject to the same Internal 
Revenue Code and regulatory provisions for stated interest and OID as 
other loans. For example, the lender of a split-dollar loan that 
provides for stated interest must account for any qualified stated 
interest (as defined in Sec. 1.1273-1(c)) under its regular method of 
accounting (for example, an accrual method or the cash receipts and 
disbursements method). See Sec. 1.446-2 to determine the amount of 
qualified stated interest that accrues during an accrual period. In 
addition, the lender must account under Sec. 1.1272-1 for any OID on a 
split-dollar loan. However, Sec. 1.1272-1(c) does not apply to any 
split-dollar loan. See paragraph (h) of this section for a subsequent 
waiver, cancellation, or forgiveness of stated interest on a split-
dollar loan.
    (2) Term, payment schedule, and yield. The term of a split-dollar 
term loan determined under paragraph (e)(4)(iii) of this section (other 
than paragraph (e)(4)(iii)(C) of this section) applies to determine the 
split-dollar loan's term, payment schedule, and yield for all purposes 
of this section.
    (g) Certain variable rates of interest--(1) In general. This 
paragraph (g) provides rules for a split-dollar loan that provides for 
certain variable rates of interest. If this paragraph (g) does not apply 
to a variable rate split-dollar loan, the loan is subject to the rules 
in paragraph (j) of this section for split-dollar loans that provide for 
one or more contingent payments.
    (2) Applicability--(i) In general. Except as provided in paragraph 
(g)(2)(ii) of this section, this paragraph (g) applies to a split-dollar 
loan that is a variable rate debt instrument (within the meaning of 
Sec. 1.1275-5) and that provides for stated interest at a qualified 
floating rate (or rates).
    (ii) Interest rate restrictions. This paragraph (g) does not apply 
to a split-dollar loan if, as a result of interest rate restrictions 
(such as an interest rate cap), the expected yield of the loan taking 
the restrictions into account is significantly less than the expected 
yield of the loan without regard to the restrictions. Conversely, if 
reasonably symmetric interest rate caps and floors or reasonably 
symmetric governors are fixed throughout the term of the loan, these 
restrictions generally do not prevent this paragraph (g) from applying 
to the loan.
    (3) Testing for sufficient interest--(i) Demand loan. For purposes 
of paragraph (e)(3)(ii) of this section (regarding testing a split-
dollar demand loan for sufficient interest), a split-dollar demand loan 
is treated as if it provided for a fixed rate of interest for each 
accrual period to which a qualified floating rate applies. The projected 
fixed rate for each accrual period is the value of the qualified 
floating rate as of the beginning of the calendar year that contains the 
last day of the accrual period.
    (ii) Term loan. For purposes of paragraph (e)(4)(ii) of this section 
(regarding testing a split-dollar term loan for sufficient interest), a 
split-dollar term loan subject to this paragraph (g) is treated as if it 
provided for a fixed rate of interest for each accrual period to which a 
qualified floating rate applies. The projected fixed rate for each 
accrual period is the value of the qualified floating rate on the date 
the split-dollar term loan is made. The term of a split-dollar loan that 
is subject to this paragraph (g)(3)(ii) is determined using the rules in 
Sec. 1.1274-4(c)(2). For example, if the loan provides for interest at 
a qualified floating rate that adjusts at varying intervals, the term of 
the loan is determined by reference to

[[Page 749]]

the longest interval between interest adjustment dates. See paragraph 
(e)(5) of this section for special rules relating to certain split-
dollar term loans, such as a split-dollar term loan payable not later 
than the death of an individual.
    (4) Interest accruals and imputed transfers. For purposes of 
paragraphs (e) and (f) of this section, the projected fixed rate or 
rates determined under paragraph (g)(3) of this section are used for 
purposes of determining the accrual of interest each period and the 
amount of any imputed transfers. Appropriate adjustments are made to the 
interest accruals and any imputed transfers to take into account any 
difference between the projected fixed rate and the actual rate.
    (5) Example. The provisions of this paragraph (g) are illustrated by 
the following example:

    Example. (i) On January 1, 2010, Employer V and Employee F enter 
into a split-dollar life insurance arrangement under which F is named as 
the policy owner. On January 1, 2010, V makes a $100,000 premium 
payment, repayable in 15 years. The premium payment is a split-dollar 
term loan. Under the arrangement between the parties, interest is 
payable on the split-dollar loan each year on January 1, starting 
January 1, 2011, at a rate equal to the value of 1-year LIBOR as of the 
payment date. The short-term AFR (based on annual compounding) at the 
time of the loan is 7 percent. Repayment of both the premium payment and 
the interest due thereon is nonrecourse to F. However, the parties made 
a representation under paragraph (d)(2) of this section. Assume that the 
value of 1-year LIBOR on January 1, 2010, is 8 percent, compounded 
annually.
    (ii) The loan is subject to this paragraph (g) because the loan is a 
variable rate debt instrument that bears interest at a qualified 
floating rate. Because the interest rate is reset each year, under 
paragraph (g)(3)(ii) of this section, the short-term AFR (based on 
annual compounding) is the appropriate test rate used to determine 
whether the loan provides for sufficient interest. Moreover, under 
paragraph (g)(3)(ii) of this section, to determine whether the loan 
provides for sufficient interest, the loan is treated as if it provided 
for a fixed rate of interest equal to 8 percent, compounded annually. 
Based on a discount rate of 7 percent, compounded annually (the short-
term AFR), the present value of the payments under the loan is 
$109,107.91. The loan provides for sufficient interest because the 
loan's imputed loan amount of $109,107.91 (the present value of the 
payments) is more than the amount loaned of $100,000. Therefore, the 
loan is not a below-market split-dollar term loan, and interest on the 
loan is taken into account under paragraph (f) of this section.

    (h) Adjustments for interest paid at less than the stated rate--(1) 
Application--(i) In general. To the extent required by this paragraph 
(h), if accrued but unpaid interest on a split-dollar loan is 
subsequently waived, cancelled, or forgiven by the lender, then the 
waiver, cancellation, or forgiveness is treated as if, on that date, the 
interest had in fact been paid to the lender and retransferred by the 
lender to the borrower. The amount deemed transferred and retransferred 
is determined under paragraph (h) (2) or (3) of this section. Except as 
provided in paragraph (h)(1)(iv) of this section, the amount treated as 
retransferred by the lender to the borrower under paragraph (h) (2) or 
(3) of this section is increased by the deferral charge determined under 
paragraph (h)(4) of this section. To determine the character of any 
retransferred amount, see paragraph (e)(1)(i) of this section. See Sec. 
1.61-22(b)(6) for the treatment of amounts other than interest on a 
split-dollar loan that are waived, cancelled, or forgiven by the lender.
    (ii) Certain split-dollar term loans. For purposes of this paragraph 
(h), a split-dollar term loan described in paragraph (e)(5) of this 
section (for example, a split-dollar term loan payable not later than 
the death of an individual) is subject to the rules of paragraph (h)(3) 
of this section.
    (iii) Payments treated as a waiver, cancellation, or forgiveness. 
For purposes of this paragraph (h), if a payment by the lender (or a 
person related to the lender) to the borrower is, in substance, a 
waiver, cancellation, or forgiveness of accrued but unpaid interest, the 
payment by the lender (or person related to the lender) is treated as an 
amount retransferred to the borrower by the lender under this paragraph 
(h) and is subject to the deferral charge in paragraph (h)(4) of this 
section to the extent that the payment is, in substance, a waiver, 
cancellation, or forgiveness of accrued but unpaid interest.
    (iv) Treatment of certain nonrecourse split-dollar loans. For 
purposes of this paragraph (h), if the parties to a split-

[[Page 750]]

dollar life insurance arrangement make the representation described in 
paragraph (d)(2) of this section and the interest actually paid on the 
split-dollar loan is less than the interest required to be accrued on 
the split-dollar loan, the excess of the interest required to be accrued 
over the interest actually paid is treated as waived, cancelled, or 
forgiven by the lender under this paragraph (h). However, the amount 
treated as retransferred under paragraph (h)(1)(i) of this section is 
not increased by the deferral charge in paragraph (h)(4) of this 
section.
    (2) Split-dollar term loans. In the case of a split-dollar term 
loan, the amount of interest deemed transferred and retransferred for 
purposes of paragraph (h)(1) of this section is determined as follows:
    (i) If the loan's stated rate is less than or equal to the 
appropriate AFR (the AFR used to test the loan for sufficient interest 
under paragraph (e) of this section), the amount of interest deemed 
transferred and retransferred pursuant to this paragraph (h) is the 
excess of the amount of interest payable at the stated rate over the 
interest actually paid.
    (ii) If the loan's stated rate is greater than the appropriate AFR 
(the AFR used to test the loan for sufficient interest under paragraph 
(e) of this section), the amount of interest deemed transferred and 
retransferred pursuant to this paragraph (h) is the excess, if any, of 
the amount of interest payable at the AFR over the interest actually 
paid.
    (3) Split-dollar demand loans. In the case of a split-dollar demand 
loan, the amount of interest deemed transferred and retransferred for 
purposes of paragraph (h)(1) of this section is equal to the aggregate 
of--
    (i) For each year that the split-dollar demand loan was outstanding 
in which the loan was a below-market split-dollar demand loan, the 
excess of the amount of interest payable at the stated rate over the 
interest actually paid allocable to that year; plus
    (ii) For each year that the split-dollar demand loan was outstanding 
in which the loan was not a below-market split-dollar demand loan, the 
excess, if any, of the amount of interest payable at the appropriate 
rate used for purposes of imputation for that year over the interest 
actually paid allocable to that year.
    (4) Deferral charge. The Commissioner may prescribe the method for 
determining the deferral charge treated as retransferred by the lender 
to the borrower under paragraph (h)(1) of this section. Until the 
Commissioner prescribes otherwise, the deferral charge is determined 
under paragraph (h)(4)(i) of this section for a split-dollar term loan 
subject to paragraph (h)(2) of this section and under paragraph 
(h)(4)(ii) of this section for a split-dollar demand loan subject to 
paragraph (h)(3) of this section.
    (i) Split-dollar term loan. The deferral charge for a split-dollar 
term loan subject to paragraph (h)(2) of this section is determined by 
multiplying the hypothetical underpayment by the applicable underpayment 
rate, compounded daily, for the period from the date the split-dollar 
loan was made to the date the interest is waived, cancelled, or 
forgiven. The hypothetical underpayment is equal to the amount 
determined under paragraph (h)(2) of this section, multiplied by the 
highest rate of income tax applicable to the borrower (for example, the 
highest rate in effect under section 1 for individuals) for the taxable 
year in which the split-dollar term loan was made. The applicable 
underpayment rate is the average of the quarterly underpayment rates in 
effect under section 6621(a)(2) for the period from the date the split-
dollar loan was made to the date the interest is waived, cancelled, or 
forgiven.
    (ii) Split-dollar demand loan. The deferral charge for a split-
dollar demand loan subject to paragraph (h)(3) of this section is the 
sum of the following amounts determined for each year the loan was 
outstanding (other than the year in which the waiver, cancellation, or 
forgiveness occurs): For each year the loan was outstanding, multiply 
the hypothetical underpayment for the year by the applicable 
underpayment rate, compounded daily, for the applicable period. The 
hypothetical underpayment is equal to the amount determined under 
paragraph (h)(3) of this section for each year, multiplied by the 
highest rate of income tax applicable

[[Page 751]]

to the borrower for that year (for example, the highest rate in effect 
under section 1 for individuals). The applicable underpayment rate is 
the average of the quarterly underpayment rates in effect under section 
6621(a)(2) for the applicable period. The applicable period for a year 
is the period of time from the last day of that year until the date the 
interest is waived, cancelled, or forgiven.
    (5) Examples. The provisions of this paragraph (h) are illustrated 
by the following examples:

    Example 1. (i) On January 1, 2009, Employer Y and Employee B entered 
into a split-dollar life insurance arrangement under which B is named as 
the policy owner. On January 1, 2009, Y made a $100,000 premium payment, 
repayable on December 31, 2011, with interest of 5 percent, compounded 
annually. The premium payment is a split-dollar term loan. Assume the 
short-term AFR (based on annual compounding) at the time the loan was 
made was 5 percent. Repayment of both the premium payment and the 
interest due thereon was fully recourse to B. On December 31, 2011, Y is 
repaid $100,000 but Y waives the remainder due on the loan ($15,762.50). 
Both Y and B use the calendar year as their taxable years.
    (ii) When the split-dollar term loan was made, the loan was not a 
below-market loan under paragraph (e)(4)(ii) of this section. Under 
paragraph (f) of this section, Y was required to accrue compound 
interest of 5 percent each year the loan remained outstanding. B, 
however, was not entitled to any deduction for this interest under 
paragraph (c) of this section.
    (iii) Under paragraph (h)(1) of this section, the waived amount is 
treated as if, on December 31, 2011, it had in fact been paid to Y and 
was then retransferred by Y to B. The amount deemed transferred to Y and 
retransferred to B equals the excess of the amount of interest payable 
at the stated rate ($15,762.50) over the interest actually paid ($0), or 
$15,762.50. In addition, the amount deemed retransferred to B is 
increased by the deferral charge determined under paragraph (h)(4) of 
this section. Because of the employment relationship between Y and B, 
the total retransferred amount is treated as compensation paid by Y to 
B.

    Example 2. (i) On January 1, 2009, Employer Y and Employee B entered 
into a split-dollar life insurance arrangement under which B is named as 
the policy owner. On January 1, 2009, Y made a $100,000 premium payment, 
repayable on the demand of Y, with interest of 7 percent, compounded 
annually. The premium payment is a split-dollar demand loan. Assume the 
blended annual rate (based on annual compounding) in 2009 was 5 percent 
and in 2010 was 6 percent. Repayment of both the premium payment and the 
interest due thereon was fully recourse to B. On December 31, 2010, Y 
demands repayment and is repaid its $100,000 premium payment in full; 
however, Y waives all interest due on the loan. Both Y and B use the 
calendar year as their taxable years.
    (ii) For each year that the split-dollar demand loan was 
outstanding, the loan was not a below-market loan under paragraph 
(e)(3)(ii) of this section. Under paragraph (f) of this section, Y was 
required to accrue compound interest of 7 percent each year the loan 
remained outstanding. B, however, was not entitled to any deduction for 
this interest under paragraph (c) of this section.
    (iii) Under paragraph (h)(1) of this section, a portion of the 
waived interest is treated as if, on December 31, 2010, it had in fact 
been paid to Y and was then retransferred by Y to B. The amount of 
interest deemed transferred to Y and retransferred to B equals the 
excess, if any, of the amount of interest payable at the blended annual 
rate for each year the loan is outstanding over the interest actually 
paid with respect to that year. For 2009, the interest payable at the 
blended annual rate is $5,000 ($100,000 x 0.05). For 2010, the interest 
payable at the blended annual rate is $6,000 ($100,000 x 0.06). 
Therefore, the amount of interest deemed transferred to Y and 
retransferred to B equals $11,000. In addition, the amount deemed 
retransferred to B is increased by the deferral charge determined under 
paragraph (h)(4) of this section. Because of the employment relationship 
between Y and B, the total retransferred amount is treated as 
compensation paid by Y to B.

    (i) [Reserved]
    (j) Split-dollar loans that provide for contingent payments--(1) In 
general. Except as provided in paragraph (j)(2) of this section, this 
paragraph (j) provides rules for a split-dollar loan that provides for 
one or more contingent payments. This paragraph (j), rather than Sec. 
1.1275-4, applies to split-dollar loans that provide for one or more 
contingent payments.
    (2) Exceptions--(i) Certain contingencies. For purposes of this 
section, a split-dollar loan does not provide for contingent payments 
merely because--
    (A) The loan provides for options described in paragraph 
(e)(4)(iii)(B) of this section (for example, certain call options, put 
options, and options to extend); or
    (B) The loan is described in paragraph (e)(5) of this section 
(relating to

[[Page 752]]

certain split-dollar term loans, such as a split-dollar term loan 
payable not later than the death of an individual).
    (ii) Insolvency and default. For purposes of this section, a payment 
is not contingent merely because of the possibility of impairment by 
insolvency, default, or similar circumstances. However, if any payment 
on a split-dollar loan is nonrecourse to the borrower, the payment is a 
contingent payment for purposes of this paragraph (j) unless the parties 
to the arrangement make the written representation provided for in 
paragraph (d)(2) of this section.
    (iii) Remote and incidental contingencies. For purposes of this 
section, a payment is not a contingent payment merely because of a 
contingency that, as of the date the split-dollar loan is made, is 
either remote or incidental (within the meaning of Sec. 1.1275-2(h)).
    (iv) Exceptions for certain split-dollar loans. This paragraph (j) 
does not apply to a split-dollar loan described in Sec. 1.1272-1(d) 
(certain debt instruments that provide for a fixed yield) or a split-
dollar loan described in paragraph (g) of this section (relating to 
split-dollar loans providing for certain variable rates of interest).
    (3) Contingent split-dollar method--(i) In general. If a split-
dollar loan provides for one or more contingent payments, then the 
parties account for the loan under the contingent split-dollar method. 
In general, except as provided in this paragraph (j), this method is the 
same as the noncontingent bond method described in Sec. 1.1275-4(b).
    (ii) Projected payment schedule--(A) Determination of schedule. No 
comparable yield is required to be determined. The projected payment 
schedule for the loan includes all noncontingent payments and a 
projected payment for each contingent payment. The projected payment for 
a contingent payment is the lowest possible value of the payment. The 
projected payment schedule, however, must produce a yield that is not 
less than zero. If the projected payment schedule produces a negative 
yield, the schedule must be reasonably adjusted to produce a yield of 
zero.
    (B) Split-dollar term loans payable upon the death of an individual. 
If a split-dollar term loan described in paragraph (e)(5)(ii)(A) or 
(v)(A)(1) of this section provides for one or more contingent payments, 
the projected payment schedule is determined based on the term of the 
loan as determined under paragraph (e)(5)(ii)(C) or (v)(B)(2) of this 
section, whichever is applicable.
    (C) Certain split-dollar term loans conditioned on the future 
performance of substantial services by an individual. If a split-dollar 
term loan described in paragraph (e)(5)(iii)(A)(1) or (v)(A)(2) of this 
section provides for one or more contingent payments, the projected 
payment schedule is determined based on the term of the loan as 
determined under paragraph (e)(5)(iii)(C) or (v)(B)(2) of this section, 
whichever is applicable.
    (D) Demand loans. If a split-dollar demand loan provides for one or 
more contingent payments, the projected payment schedule is determined 
based on a reasonable assumption as to when the lender will demand 
repayment.
    (E) Borrower/lender consistency. Contrary to Sec. 1.1275-
4(b)(4)(iv), the lender rather than the borrower is required to 
determine the projected payment schedule and to provide the schedule to 
the borrower and to any indirect participant as described in paragraph 
(e)(2) of this section. The lender's projected payment schedule is used 
by the lender, the borrower, and any indirect participant to compute 
interest accruals and adjustments.
    (iii) Negative adjustments. If the issuer of a split-dollar loan is 
not allowed to deduct interest or OID (for example, because of section 
163(h) or 264), then the issuer is not required to include in income any 
negative adjustment carryforward determined under Sec. 1.1275-
4(b)(6)(iii)(C) on the loan, except to the extent that at maturity the 
total payments made over the life of the loan are less than the issue 
price of the loan.
    (4) Application of section 7872--(i) Determination of below-market 
status. The yield based on the projected payment schedule determined 
under paragraph (j)(3) of this section is used to determine whether the 
loan is a below-market split-dollar loan under paragraph (e) of this 
section.
    (ii) Adjustment upon the resolution of a contingent payment. To the 
extent that

[[Page 753]]

interest has accrued under section 7872 on a split-dollar loan and the 
interest would not have accrued under this paragraph (j) in the absence 
of section 7872, the lender is not required to recognize income under 
Sec. 1.1275-4(b) for a positive adjustment and the borrower is not 
treated as having interest expense for a positive adjustment. To the 
same extent, there is a reversal of the tax consequences imposed under 
paragraph (e) of this section for the prior imputed transfer from the 
lender to the borrower. This reversal is taken into account in 
determining adjusted gross income.
    (5) Examples. The following examples illustrate the rules of this 
paragraph (j). For purposes of this paragraph (j)(5), assume that the 
contingent payments are neither remote nor incidental. The examples are 
as follows:

    Example 1. (i) On January 1, 2010, Employer T and Employee G enter 
into a split-dollar life insurance arrangement under which G is named as 
the policy owner. On January 1, 2010, T makes a $100,000 premium 
payment. On December 31, 2013, T will be repaid an amount equal to the 
premium payment plus an amount based on the increase, if any, in the 
price of a specified commodity for the period the loan is outstanding. 
The premium payment is a split-dollar term loan. Repayment of both the 
premium payment and the interest due thereon is recourse to G. Assume 
that the appropriate AFR for this loan, based on annual compounding, is 
7 percent. Both T and G use the calendar year as their taxable years.
    (ii) Under this paragraph (j), the split-dollar term loan between T 
and G provides for a contingent payment. Therefore, the loan is subject 
to the contingent split-dollar method. Under this method, the projected 
payment schedule for the loan provides for a noncontingent payment of 
$100,000 and a projected payment of $0 for the contingent payment 
(because it is the lowest possible value of the payment) on December 31, 
2013.
    (iii) Based on the projected payment schedule and a discount rate of 
7 percent, compounded annually (the appropriate AFR), the present value 
of the payments under the loan is $76,289.52. Under paragraphs (e)(4) 
and (j)(4)(i) of this section, the loan does not provide for sufficient 
interest because the loan's imputed loan amount of $76,289.52 (the 
present value of the payments) is less than the amount loaned of 
$100,000. Therefore, the loan is a below-market split-dollar term loan 
and the loan is recharacterized as consisting of two portions: an 
imputed loan amount of $76,289.52 and an imputed transfer of $23,710.48 
(amount loaned of $100,000 minus the imputed loan amount of $76,289.52).
    (iv) In accordance with section 7872(b)(1) and paragraph (e)(4)(iv) 
of this section, on the date the loan is made, T is treated as 
transferring to G $23,710.48 (the imputed transfer) as compensation. In 
addition, T must take into account as OID an amount equal to the imputed 
transfer. See Sec. 1.1272-1 for the treatment of OID.
    Example 2. (i) Assume, in addition to the facts in Example 1, that 
on December 31, 2013, T receives $115,000 (its premium payment of 
$100,000 plus $15,000).
    (ii) Under the contingent split-dollar method, when the loan is 
repaid, there is a $15,000 positive adjustment ($15,000 actual payment 
minus $0 projected payment). Under paragraph (j)(4) of this section, 
because T accrued imputed interest under section 7872 on this split-
dollar loan to G and this interest would not have accrued in the absence 
of section 7872, T is not required to include the positive adjustment in 
income, and G is not treated as having interest expense for the positive 
adjustment. To the same extent, T must include in income, and G is 
entitled to deduct, $15,000 to reverse their respective prior tax 
consequences imposed under paragraph (e) of this section (T's prior 
deduction for imputed compensation deemed paid to G and G's prior 
inclusion of this amount). G takes the reversal into account in 
determining adjusted gross income. That is, the $15,000 is an ``above-
the-line'' deduction, whether or not G itemizes deductions.
    Example 3. (i) Assume the same facts as in Example 2, except that on 
December 31, 2013, T receives $127,000 (its premium payment of $100,000 
plus $27,000).
    (ii) Under the contingent split-dollar method, when the loan is 
repaid, there is a $27,000 positive adjustment ($27,000 actual payment 
minus $0 projected payment). Under paragraph (j)(4) of this section, 
because T accrued imputed interest of $23,710.48 under section 7872 on 
this split-dollar loan to G and this interest would not have accrued in 
the absence of section 7872, T is not required to include $23,710.48 of 
the positive adjustment in income, and G is not treated as having 
interest expense for the positive adjustment. To the same extent, in 
2013, T must include in income, and G is entitled to deduct, $23,710.48 
to reverse their respective prior tax consequences imposed under 
paragraph (e) of this section (T's prior deduction for imputed 
compensation deemed paid to G and G's prior inclusion of this amount). G 
and T take these reversals into account in determining adjusted gross 
income. Under the contingent split-dollar method, T must include in 
income $3,289.52 upon resolution of the contingency ($27,000 positive 
adjustment minus $23,710.48).


[[Page 754]]


    (k) Payment ordering rule. For purposes of this section, a payment 
made by the borrower to or for the benefit of the lender pursuant to a 
split-dollar life insurance arrangement is applied to all direct and 
indirect split-dollar loans in the following order--
    (1) A payment of interest to the extent of accrued but unpaid 
interest (including any OID) on all outstanding split-dollar loans in 
the order the interest accrued;
    (2) A payment of principal on the outstanding split-dollar loans in 
the order in which the loans were made;
    (3) A payment of amounts previously paid by a non-owner pursuant to 
a split-dollar life insurance arrangement that were not reasonably 
expected to be repaid by the owner; and
    (4) Any other payment with respect to a split-dollar life insurance 
arrangement, other than a payment taken into account under paragraphs 
(k)(1), (2), and (3) of this section.
    (l) [Reserved]
    (m) Repayments received by a lender. Any amount received by a lender 
under a life insurance contract that is part of a split-dollar life 
insurance arrangement is treated as though the amount had been paid to 
the borrower and then paid by the borrower to the lender. Any amount 
treated as received by the borrower under this paragraph (m) is subject 
to other provisions of the Internal Revenue Code as applicable (for 
example, sections 72 and 101(a)). The lender must take the amount into 
account as a payment received with respect to a split-dollar loan, in 
accordance with paragraph (k) of this section. No amount received by a 
lender with respect to a split-dollar loan is treated as an amount 
received by reason of the death of the insured.
    (n) Effective date--(1) General rule. This section applies to any 
split-dollar life insurance arrangement entered into after September 17, 
2003. For purposes of this section, an arrangement is entered into as 
determined under Sec. 1.61-22(j)(1)(ii).
    (2) Modified arrangements treated as new arrangements. If an 
arrangement entered into on or before September 17, 2003 is materially 
modified (within the meaning of Sec. 1.61-22(j)(2)) after September 17, 
2003, the arrangement is treated as a new arrangement entered into on 
the date of the modification.

[T.D. 9092, 68 FR 54352, Sept. 17, 2003]



Sec. 1.7872-16  Loans to an exchange facilitator under Sec. 1.468B-6.

    (a) Exchange facilitator loans. This section provides rules in 
applying section 7872 to an exchange facilitator loan (within the 
meaning of Sec. 1.468B-6(c)(1)). For purposes of this section, the 
terms deferred exchange, exchange agreement, exchange facilitator, 
exchange funds, qualified intermediary, replacement property, and 
taxpayer have the same meanings as in Sec. 1.468B-6(b).
    (b) Treatment as demand loans. For purposes of section 7872, except 
as provided in paragraph (d) of this section, an exchange facilitator 
loan is a demand loan.
    (c) Treatment as compensation-related loans. If an exchange 
facilitator loan is a below-market loan, the loan is a compensation-
related loan under section 7872(c)(1)(B).
    (d) Applicable Federal rate (AFR) for exchange facilitator loans. 
For purposes of section 7872, in the case of an exchange facilitator 
loan, the applicable Federal rate is the lower of the short-term AFR in 
effect under section 1274(d)(1) (as of the day on which the loan is 
made), compounded semiannually, or the 91-day rate. For purposes of the 
preceding sentence, the 91-day rate is equal to the investment rate on a 
13-week (generally 91-day) Treasury bill with an issue date that is the 
same as the date that the exchange facilitator loan is made or, if the 
two dates are not the same, with an issue date that most closely 
precedes the date that the exchange facilitator loan is made.
    (e) Use of approximate method permitted. The taxpayer and exchange 
facilitator may use the approximate method to determine the amount of 
forgone interest on any exchange facilitator loan.
    (f) Exemption for certain below-market exchange facilitator loans. 
If an exchange facilitator loan is a below-market loan, the loan is not 
eligible for the exemptions from section 7872 listed under Sec. 1.7872-
5T. However, the loan may be eligible for the exemption from section 
7872 under Sec. 1.7872-5(b)(16) (relating to exchange facilitator loans 
in

[[Page 755]]

which the amount treated as loaned does not exceed $2,000,000).
    (g) Effective/applicability date. This section applies to exchange 
facilitator loans issued on or after October 8, 2008.
    (h) Example. The provisions of this section are illustrated by the 
following example:

    Example. (i) T enters into a deferred exchange with QI, a qualified 
intermediary. The exchange is governed by an exchange agreement. The 
exchange funds held by QI pursuant to the exchange agreement are treated 
as loaned to QI under Sec. 1.468B-6(c)(1). The loan between T and QI is 
an exchange facilitator loan. The exchange agreement between T and QI 
provides that no earnings will be paid to T. On December 1, 2008, T 
transfers property to QI, QI transfers the property to a purchaser for 
$2,100,000, and QI deposits $2,100,000 in a money market account. On 
March 1, 2009, QI uses $2,100,000 of the funds in the account to 
purchase replacement property identified by T, and transfers the 
replacement property to T. The amount loaned for purposes of section 
7872 is $2,100,000 and the loan is outstanding for three months. For 
purposes of section 7872, under paragraph (d) of this section, T uses 
the 91-day rate, which is 4 percent, compounded semi-annually. T uses 
the approximate method for purposes of section 7872.
    (ii) Under paragraphs (b) and (c) of this section, the loan from T 
to QI is a compensation-related demand loan. Because there is no 
interest payable on the loan from T to QI, the loan is a below-market 
loan under section 7872. The loan is not exempt under Sec. 1.7872-
5(b)(16) because the amount treated as loaned exceeds $2,000,000. Under 
section 7872(e)(2), the amount of forgone interest on the loan for 2008 
is $7000 ($2,100,000*.04/2*1/6). Under section 7872(e)(2), the amount of 
forgone interest for 2009 is $14,000 ($2,100,000*.04/2*2/6). The $7000 
for 2008 is deemed transferred as compensation by T to QI and 
retransferred as interest by QI to T on December 31, 2008. The $14,000 
for 2009 is deemed transferred as compensation by T to QI and 
retransferred as interest by QI to T on March 1, 2009.

[T.D. 9413, 73 FR 39622, July 10, 2008]



Sec. 1.7874-1  Disregard of affiliate-owned stock.

    (a) Scope. Section 7874(c)(2)(A) provides that stock of the foreign 
acquiring corporation held by members of the expanded affiliated group 
shall not be taken into account in determining ownership for purposes of 
section 7874(a)(2)(B)(ii). This section provides rules under section 
7874(c)(2)(A). The rules provided in this section are also subject to 
section 7874(c)(4). For definitions that apply for purposes of this 
section, see 1.7874-12.
    (b) General rule. Except as provided in paragraph (c) of this 
section, for purposes of determining the ownership percentage described 
in section 7874(a)(2)(B)(ii), stock held by one or more members of the 
EAG is not included in either the numerator or the denominator of the 
ownership fraction.
    (c) Exceptions to general rule--(1) Overview. Stock held by one or 
more members of the EAG shall be included in the denominator, but not in 
the numerator, of the ownership fraction, if the domestic entity 
acquisition qualifies as an internal group restructuring or results in a 
loss of control, as described in paragraph (c)(2) and (c)(3) of this 
section. For rules addressing the interaction of this section and other 
rules, see paragraph (d) of this section.
    (2) Internal group restructuring. For purposes of paragraph (c)(1) 
of this section, a domestic entity acquisition qualifies as an internal 
group restructuring if:
    (i) Before the domestic entity acquisition, 80 percent or more of 
the stock (by vote and value) or the capital and profits interest, as 
applicable, of the domestic entity was held directly or indirectly by 
the corporation that is the common parent of the EAG after the 
acquisition; and
    (ii) After the domestic entity acquisition, 80 percent or more of 
the stock (by vote and value) of the foreign acquiring corporation is 
held directly or indirectly by such common parent.
    (iii) Special rule. If Sec. 1.7874-6(c)(2) applies for purposes of 
applying section 7874(c)(2)(A) and this section, then, for purposes of 
paragraph (c)(2) of this section (and so much of paragraph (c)(1) of 
this section as relates to paragraph (c)(2) of this section), the 
determination of the EAG after the domestic entity acquisition, as well 
as the determination of stock held by one or more members of the EAG 
after the domestic entity acquisition, is made without regard to one or 
more transfers (other than by issuance), in a transaction (or series of 
transactions) after and related to the acquisition, of stock of the 
acquiring foreign corporation by one or

[[Page 756]]

more members of the foreign-parented group described in Sec. 1.7874-
6(c)(2)(i).
    (3) Loss of control. For purposes of paragraph (c)(1) of this 
section, the domestic entity acquisition results in a loss of control if 
after the acquisition, the former domestic entity shareholders or former 
domestic entity partners do not hold, in the aggregate, directly or 
indirectly, more than 50 percent of the stock (by vote or value) of any 
member of the EAG.
    (d) Interaction of expanded affiliated group rules with other 
rules--(1) Exclusion rules. Stock that is excluded from the denominator 
of the ownership fraction pursuant to Sec. 1.7874-4(b), 1.7874-7(b), 
1.7874-8(b), 1.7874-9(b), or section 7874(c)(4) is taken into account 
for purposes of determining whether an entity is a member of the 
expanded affiliated group for purposes of applying section 7874(c)(2)(A) 
and paragraph (b) of this section and determining whether a domestic 
entity acquisition qualifies as an internal group restructuring or 
results in a loss of control, as described in paragraphs (c)(2) and (3) 
of this section, respectively. However, such stock is excluded from the 
denominator of the ownership fraction regardless of whether it otherwise 
would be included in the denominator of the ownership fraction as a 
result of the application of paragraph (c) of this section. See Example 
8 and Example 9 of Sec. 1.7874-4(i) for illustrations of the 
application of this paragraph (d)(1).
    (2) NOCD rule. Stock of the foreign acquiring corporation treated as 
received by former domestic entity shareholders or former domestic 
entity partners, as applicable, under Sec. 1.7874-10(b) is not taken 
into account for purposes of determining whether an entity is a member 
of the expanded affiliated group for purposes of applying section 
7874(c)(2)(A) and paragraph (b) of this section and determining whether 
a domestic entity acquisition qualifies as an internal group 
restructuring or results in a loss of control, as described in 
paragraphs (c)(2) and (3) of this section, respectively. However, such 
stock is included in the numerator and denominator of the ownership 
fraction, except to the extent that it is treated as held by a member of 
the EAG and is excluded from the numerator or both the numerator and the 
denominator, as applicable, under section 7874(c)(2)(A) or paragraphs 
(b) or (c) of this section.
    (e) Treatment of certain hook stock. This paragraph applies to stock 
of a corporation that is held by an entity in which at least 50 percent 
of the stock (by vote or value) or at least 50 percent of the capital or 
profits interest, as applicable, in such entity, is held directly or 
indirectly by the corporation. The stock to which this paragraph applies 
shall not be included in either the numerator or denominator of any 
fraction for the following purposes:
    (1) For applying paragraph (c)(1) of this section; and
    (2) For determining whether the domestic entity acquisition 
qualifies as an internal group restructuring (described in paragraph 
(c)(2) of this section) or results in a loss of control (described in 
paragraph (c)(3) of this section).
    (f) Stock held by a partnership. For purposes of this section, each 
partner in a partnership shall be treated as holding its proportionate 
share of stock held by the partnership, as determined under the rules 
and principles of sections 701 through 777.
    (g) Treatment of transactions related to the acquisition. Except as 
provided in paragraph (c)(2)(iii) of this section, all transactions that 
are related to an acquisition are taken into account in applying this 
section.
    (h) Examples. The application of this section is illustrated by the 
following examples. It is assumed that all transactions in the examples 
occur after March 4, 2003. In all the examples, if an entity or other 
person is not described as either domestic or foreign, it may be either 
domestic or foreign. In addition, each entity has only a single class of 
equity outstanding. Finally, the analysis of the following examples is 
limited to a discussion of issues under section 7874, even though the 
examples may raise other issues (for example, under section 367).

    Example 1. Disregard of hook stock. (i) Facts. USS, a domestic 
corporation, has 100 shares of stock outstanding. USS's stock is held by 
a group of individuals. Pursuant to a plan, USS forms FS, a foreign 
corporation, and transfers to FS the stock of several wholly owned 
foreign corporations, in exchange for 90 shares of FS stock. FS then 
forms Merger

[[Page 757]]

Sub, a domestic corporation. Under a merger agreement and state law, 
Merger Sub merges into USS, with USS surviving the merger. In exchange 
for their USS stock, the former shareholders of USS receive, in the 
aggregate, 100 shares of newly issued FS stock. As a result of the 
merger FS holds 100 percent of the USS stock. USS continues to hold 90 
shares of FS stock.
    (ii) Analysis. FS has indirectly acquired substantially all the 
properties held directly or indirectly by USS pursuant to a plan. After 
the acquisition, the former shareholders of USS hold 100 shares of FS 
stock by reason of holding stock in USS, and USS holds 90 shares of FS 
stock. Under paragraph (b) of this section, the 90 shares of FS stock 
held by USS, a member of the EAG, are not included in either the 
numerator or the denominator of the ownership fraction. Accordingly, the 
ownership fraction is 100/100. If the condition in section 
7874(a)(2)(B)(iii) is satisfied, FS is a surrogate foreign corporation 
which is treated as a domestic corporation under section 7874(b).
    Example 2. Internal group restructuring; wholly owned corporation. 
(i) Facts. P, a corporation, owns all 100 outstanding shares of USS, a 
domestic corporation. USS forms FS, a foreign corporation, and transfers 
all its assets to FS in exchange for all 100 shares of the stock of FS, 
in a reorganization described in section 368(a)(1). P exchanges its USS 
stock for FS stock under section 354.
    (ii) Analysis. FS has directly acquired substantially all the 
properties held directly or indirectly by USS pursuant to a plan. The 
acquisition is an internal group restructuring described in paragraph 
(c)(2) of this section because P, the common parent of the EAG after the 
acquisition, held directly or indirectly 80 percent or more of the stock 
(by vote and value) of USS before the acquisition, and after the 
acquisition, P holds directly or indirectly 80 percent or more of the 
stock (by vote and value) of FS. Accordingly, under paragraph (c)(1) of 
this section, the FS stock held by P is included in the denominator, but 
not in the numerator of the ownership fraction. Therefore, the ownership 
fraction is 0/100. FS is not a surrogate foreign corporation.
    Example 3. Internal group restructuring; wholly owned corporation. 
(i) Facts. The facts are the same as in Example 2, except that USS does 
not transfer any of its assets to FS. Instead, P transfers all 100 
shares of USS stock to FS in exchange for all 100 shares of FS stock.
    (ii) Analysis. FS has indirectly acquired substantially all the 
properties held directly or indirectly by USS pursuant to a plan. The 
acquisition is an internal group restructuring described in paragraph 
(c)(2) of this section because P, the common parent of the EAG after the 
acquisition, held directly or indirectly 80 percent or more of the stock 
(by vote and value) of USS before the acquisition, and after the 
acquisition, P holds directly or indirectly 80 percent or more of the 
stock (by vote and value) of FS. Accordingly, under paragraph (c)(1) of 
this section, the FS stock held by P is included in the denominator, but 
not in the numerator of the ownership fraction. Accordingly, the 
ownership fraction is 0/100. FS is not a surrogate foreign corporation.
    Example 4. Internal group restructuring; less than wholly owned 
corporation. (i) Facts. The facts are the same as in Example 3, except 
that P holds 85 shares of USS stock. The remaining 15 shares of USS 
stock are held by A, a person unrelated to P. P and A transfer their 
shares of USS stock to FS in exchange for 85 and 15 shares of FS stock, 
respectively.
    (ii) Analysis. FS has indirectly acquired substantially all the 
properties held directly or indirectly by USS pursuant to a plan. The 
acquisition is an internal group restructuring described in paragraph 
(c)(2) of this section because P, the common parent of the EAG after the 
acquisition, held directly or indirectly 80 percent or more of the stock 
(by vote and value) of USS before the acquisition, and after the 
acquisition P holds directly or indirectly 80 percent or more of the 
stock (by vote and value) of FS. Therefore, under paragraph (c)(1) of 
this section, the FS stock held by P is included in the denominator, but 
not in the numerator of the ownership fraction. Accordingly, the 
ownership fraction is 15/100. FS is not a surrogate foreign corporation.
    Example 5. Internal group restructuring exception not applicable; 
less than 80 percent owned corporation. (i) Facts. The facts are the 
same as in Example 2, except that P owns 55 shares of USS stock, and A, 
a person unrelated to P, holds 45 shares of USS stock. P and A exchange 
their shares of USS stock for 55 shares and 45 shares of FS stock, 
respectively.
    (ii) Analysis. FS has acquired substantially all the properties held 
directly or indirectly by USS pursuant to a plan. P, the common parent 
of the EAG after the acquisition, did not hold directly or indirectly 80 
percent or more of the stock (by vote and value) of USS before the 
acquisition, and after the acquisition P does not hold directly or 
indirectly 80 percent or more of the stock (by vote and value) of FS. 
Thus, the acquisition is not an internal group restructuring described 
in paragraph (c)(1) of this section, and the general rule of paragraph 
(b) of this section applies. Under paragraph (b) of this section, the FS 
stock held by P, a member of the EAG, is not included in either the 
numerator or the denominator of the ownership fraction. Accordingly, the 
ownership fraction is 45/45. If the condition in section 
7874(a)(2)(B)(iii) is satisfied, FS is a surrogate foreign corporation 
which is treated as a domestic corporation under section 7874(b).

[[Page 758]]

    Example 6. Internal group restructuring; hook stock. (i) Facts. USS, 
a domestic corporation, has 100 shares of stock outstanding. P, a 
corporation, holds 80 shares of USS stock. The remaining 20 shares of 
USS stock are held by A, a person unrelated to P. USS owns all 30 
outstanding shares of FS, a foreign corporation. Pursuant to a plan, FS 
forms Merger Sub, a domestic corporation. Under a merger agreement and 
state law, Merger Sub merges into USS, with USS surviving the merger as 
a subsidiary of FS. In exchange for their USS stock, P and A, the former 
shareholders of USS, respectively receive 56 and 14 shares of FS stock. 
USS continues to hold 30 shares of FS stock.
    (ii) Analysis. FS has indirectly acquired substantially all the 
properties held directly or indirectly by USS pursuant to a plan. Under 
paragraph (b) of this section, the shares of FS stock held by P and USS, 
both of which are members of the EAG, are not included in either the 
numerator or denominator of the ownership fraction, unless the 
acquisition results in an internal group restructuring or loss of 
control of USS such that the exception of paragraph (c)(1) of this 
section applies. In determining whether the acquisition of USS is an 
internal group restructuring, under paragraph (e)(2) of this section, 
the FS stock held by USS is disregarded. Because P held directly or 
indirectly 80 percent or more of the stock (by vote and value) of USS 
before the acquisition, and after the acquisition P holds directly or 
indirectly 80 percent or more of the stock (by vote and value) of FS 
(when disregarding the FS stock held by USS), the acquisition is an 
internal group restructuring and the exception of paragraph (c)(1) of 
this section applies. Accordingly, when determining whether FS is a 
surrogate foreign corporation, the FS stock held by P is included in the 
denominator, but not the numerator of the ownership fraction. However, 
under paragraph (b) of this section, the FS stock held by USS is not 
included in either the numerator or denominator of the ownership 
fraction. Accordingly, the ownership fraction is 14/70, or 20 percent, 
since only the stock held by A is included in the numerator, and the 
stock held by both P and A is included in the denominator. Accordingly, 
FS is not a surrogate foreign corporation.
    Example 7. Loss of control. (i) Facts. P, a corporation, holds all 
the outstanding stock of USS, a domestic corporation. B, a corporation 
unrelated to P, holds all 60 outstanding shares of FS, a foreign 
corporation. P transfers to FS all the outstanding stock of USS in 
exchange for 40 newly issued shares of FS.
    (ii) Analysis. FS has indirectly acquired substantially all the 
properties held directly or indirectly by USS pursuant to a plan. After 
the acquisition, B holds 60 percent of the outstanding shares of the FS 
stock. Accordingly, B, FS and USS are members of an EAG. After the 
acquisition, P does not hold directly or indirectly more than 50 percent 
of the stock (by vote or value) of any member of the EAG and, thus, the 
acquisition results in a loss of control described in paragraph (c)(3) 
of this section. Accordingly, under paragraph (c)(1) of this section, 
the FS stock owned by B is included in the denominator, but not in the 
numerator, of the ownership fraction. Therefore, the ownership fraction 
is 40/100. FS is not a surrogate foreign corporation.
    Example 8. Internal group restructuring; partnership. (i) Facts. 
LLC, a Delaware limited liability company, is engaged in the conduct of 
a trade or business. P, a corporation, holds 90 percent of the interests 
of LLC. A, a person unrelated to P, holds 10 percent of the interests of 
LLC. LLC has not elected to be treated as an association taxable as a 
corporation. P and A transfer their interests in LLC to FS, a newly 
formed foreign corporation, in exchange for 90 shares and 10 shares, 
respectively, of FS's stock, which are all of the outstanding shares of 
FS. Accordingly, LLC becomes a disregarded entity.
    (ii) Analysis. Prior to the FS's acquisition of the interests of 
LLC, LLC was a domestic partnership for Federal income tax purposes. FS 
has acquired substantially all the properties constituting a trade or 
business of LLC pursuant to a plan. After the acquisition, P holds 90 
percent of FS's stock (by vote and value) by reason of holding a capital 
and profits interest in LLC, and A holds 10 percent of FS's stock (by 
vote and value) by reason of holding a capital and profits interest in 
LLC. The internal group restructuring exception under paragraph (c)(2) 
of this section applies, because before the acquisition, P held 80 
percent or more of the capital and profits interest in LLC, and after 
the acquisition, P holds 80 percent or more of the stock (by vote and 
value) of FS. Under paragraph (c)(1) of this section, the FS stock held 
by P is included in the denominator, but not the numerator, of the 
ownership fraction. Accordingly, the ownership fraction is 10/100. FS is 
not a surrogate foreign corporation.

    (i) Applicability dates--(1) In general. Except as otherwise 
provided, this section shall apply to domestic entity acquisitions 
completed on or after May 20, 2008. This section shall not, however, 
apply to a domestic entity acquisition that was completed on or after 
May 20, 2008, provided such acquisition was entered into pursuant to a 
written agreement which was (subject to customary conditions) binding 
prior to

[[Page 759]]

May 20, 2008, and at all times thereafter (binding commitment). For 
purposes of the preceding sentence, a binding commitment shall include 
entering into options and similar interests in connection with one or 
more written agreements described in the preceding sentence. 
Notwithstanding the general application of this paragraph, taxpayers may 
elect to apply this section to domestic entity acquisitions completed 
before May 20, 2008, but must apply it consistently to all acquisitions 
within its scope. Paragraph (f) of this section shall apply to domestic 
entity acquisitions completed on or after June 7, 2012. See Sec. 
1.7874-1T(e), as contained in 26 CFR part 1 revised as of April 1, 2012, 
for completed before June 7, 2012.
    (2) Applicability date of certain provisions of this section. Except 
as provided in this paragraph (i)(2), paragraph (c)(2)(iii) of this 
section applies to domestic entity acquisitions completed on or after 
April 4, 2016. Except as provided in this paragraph (i)(2), paragraph 
(d) of this section (interaction of EAG rules with other rules) applies 
to domestic entity acquisitions completed on or after July 12, 2018. See 
Sec. Sec. 1.7874-4(h) and 1.7874-7T(e), as contained in 26 CFR part 1 
revised as of April 1, 2017, for certain coordination rules for domestic 
entity acquisitions completed before July 12, 2018. Except as provided 
in this paragraph (i)(2), paragraph (g) of this section applies to 
domestic entity acquisitions completed on or after September 22, 2014. 
For domestic entity acquisitions completed before April 4, 2016, 
however, taxpayers may elect to consistently apply paragraphs 
(c)(2)(iii) and (g) of this section, and Sec. 1.7874-6(c)(2), (d)(2), 
and (f)(2)(ii). In addition, for domestic entity acquisitions completed 
before July 12, 2018, taxpayers may elect to consistently apply 
paragraph (d) of this section.

[T.D. 9399, 73 FR 29057, May 20, 2008, as amended by T.D. 9453, 74 FR 
27926, June 12, 2009; T.D. 9591, 77 FR 34791, June 12, 2012; T.D. 9654, 
79 FR 3100, Jan. 17, 2014; T.D. 9761, 81 FR 20894, Apr. 8, 2016; T.D. 
9812, 82 FR 5401, Jan. 18, 2017; T.D. 9834, 83 FR 32543, July 12, 2018]



Sec. 1.7874-2  Surrogate foreign corporation.

    (a) Scope. This section provides rules for determining whether a 
foreign corporation is treated as a surrogate foreign corporation under 
section 7874(a)(2)(B). Paragraph (b) of this section provides 
definitions and special rules. Paragraph (c) of this section provides 
rules to determine whether a foreign corporation has acquired properties 
held by a domestic corporation (or a partnership). Paragraph (d) of this 
section provides rules that apply when two or more foreign corporations 
complete, in the aggregate, a domestic entity acquisition. Paragraph (e) 
of this section provides rules that apply when, pursuant to a plan, a 
single foreign corporation completes more than one domestic entity 
acquisition. Paragraph (f) of this section provides rules to identify 
the stock of a foreign corporation that is held by reason of holding 
stock in a domestic corporation (or an interest in a domestic 
partnership). Paragraph (g) of this section provides rules that treat 
certain publicly traded foreign partnerships as foreign corporations for 
purposes of section 7874. Paragraph (h) of this section provides rules 
concerning the treatment of certain options (or similar interests) for 
purposes of section 7874. Paragraph (i) of this section provides rules 
that treat certain interests (including debt, stock, or a partnership 
interest) as stock of a foreign corporation for purposes of section 
7874. Paragraph (j) of this section provides rules concerning the 
conversion of a foreign corporation to a domestic corporation by reason 
of section 7874(b). Paragraph (k) of this section provides examples that 
illustrate the rules of this section. Paragraph (l) of this section 
provides the applicability dates of this section. For additional 
definitions that apply for purposes of this section, see Sec. 1.7874-
12.
    (b) Definitions and special rules. In addition to the definitions in 
Sec. 1.7874-12, the following definitions and special rules apply for 
purposes of this section.
    (1) The rules of this section are subject to section 7874(c)(4).
    (2) References to properties held by a domestic corporation include 
properties held directly or indirectly by the domestic corporation.

[[Page 760]]

    (3) The rules and principles of sections 701 through 777 shall be 
applied for purposes of determining a proportionate amount (or share) of 
properties held by a partnership (such as stock).
    (4) Any reference to the acquisition of properties held by a 
domestic corporation (or a partnership) includes a direct or indirect 
acquisition of such properties.
    (5) In the case of an acquisition of stock of a domestic corporation 
or an interest in a partnership, the proportionate amount of properties 
held by the domestic corporation (or the partnership) that is treated as 
indirectly acquired shall, as applicable, be determined at the time of 
the acquisition based on the relative value of--
    (i) The stock acquired compared to all outstanding stock of the 
domestic corporation; or
    (ii) The interest acquired compared to all interests in the 
partnership.
    (6) The determination of whether a foreign corporation is a 
surrogate foreign corporation is made after the domestic entity 
acquisition. A foreign corporation that is treated as a surrogate 
foreign corporation (including a surrogate foreign corporation treated 
as a domestic corporation described in section 7874(b)) shall continue 
to be treated as a surrogate foreign corporation (or a domestic 
corporation), even if the conditions of section 7874(a)(2)(B)(ii) and 
(iii) are not satisfied at a later date.
    (7) A former initial acquiring corporation shareholder of an initial 
acquiring corporation means any person that held stock in the initial 
acquiring corporation before the subsequent acquisition, including any 
person that holds stock in the initial acquiring corporation both before 
and after the subsequent acquisition.
    (8) An initial acquisition means, with respect to a subsequent 
acquisition, a domestic entity acquisition occurring, pursuant to a plan 
that includes the subsequent acquisition (or a series of related 
transactions), before the subsequent acquisition.
    (9) An initial acquiring corporation means, with respect to an 
initial acquisition, the foreign acquiring corporation.
    (10) A subsequent acquisition means, with respect to an initial 
acquisition, a transaction occurring, pursuant to a plan that includes 
the initial acquisition (or a series of related transactions), after the 
initial acquisition in which a foreign corporation directly or 
indirectly acquires (within the meaning of paragraph (c)(4)(ii) of this 
section) substantially all of the properties held directly or indirectly 
by the initial acquiring corporation.
    (11) A subsequent acquiring corporation means, with respect to a 
subsequent acquisition, the foreign corporation that directly or 
indirectly acquires substantially all of the properties held directly or 
indirectly by the initial acquiring corporation.
    (12) Special rule regarding initial acquisitions. With respect to an 
initial acquisition, the determination of the ownership percentage 
described in section 7874(a)(2)(B)(ii) is made without regard to the 
subsequent acquisition and all related transactions occurring after the 
subsequent acquisition.
    (13) Special rule regarding subsequent acquisitions. With respect to 
a subsequent acquisition (or a similar acquisition under the principles 
of paragraph (c)(4)(i) of this section) that is an inversion 
transaction, the applicable period begins on the first date that 
properties are acquired as part of the initial acquisition.
    (c) Acquisition of properties--(1) Indirect acquisition of 
properties. For purposes of section 7874(a)(2)(B)(i), an indirect 
acquisition of properties held by a domestic corporation (or a 
partnership) includes, but is not limited to, the acquisitions described 
in paragraphs (c)(1)(i) through (iv) of this section. An acquisition of 
less than all of the stock of a domestic corporation (or interests in a 
partnership) shall constitute an indirect acquisition of a proportionate 
amount of the properties held by the domestic corporation or the 
partnership. See paragraph (b)(8) of this section for rules determining 
the proportionate amount of properties indirectly acquired.
    (i) An acquisition of stock of a domestic corporation. See Example 1 
of paragraph (k) of this section for an illustration of the rules of 
this paragraph (c)(1)(i).

[[Page 761]]

    (ii) An acquisition of an interest in a partnership. See Example 2 
of paragraph (k) of this section for an illustration of the rules of 
this paragraph (c)(1)(ii).
    (iii) An acquisition by a corporation (acquiring corporation) of 
properties held by a domestic corporation (or a partnership) in exchange 
for stock of a foreign corporation (foreign issuing corporation) that is 
part of the expanded affiliated group that includes the acquiring 
corporation after the acquisition shall be treated as an acquisition by 
the foreign issuing corporation. See Example 3 of paragraph (k) of this 
section for an illustration of the rules of this paragraph (c)(1)(iii).
    (iv) An acquisition by a partnership (acquiring partnership) of 
properties held by a domestic corporation (or a partnership) in exchange 
for stock of a foreign corporation that is part of the expanded 
affiliated group that would include the acquiring partnership after the 
acquisition (if the partnership were a corporation) shall be treated as 
an acquisition by the foreign issuing corporation.
    (2) Acquisition of stock of a foreign corporation. Except as 
provided in paragraph (c)(4) of this section, an acquisition of stock of 
a foreign corporation that owns directly or indirectly stock of a 
domestic corporation (or an interest in a partnership) shall not 
constitute an indirect acquisition of any properties held by the 
domestic corporation (or the partnership). See Example 4 of paragraph 
(k) of this section for an illustration of the rules of this paragraph 
(c)(2).
    (3) Downstream transactions. An acquisition by a corporation of its 
stock from another corporation or a partnership (for example, as a 
result of a downstream merger) is an acquisition of the other 
corporation's or partnership's properties for purposes of section 
7874(a)(2)(B)(i).
    (4) Multiple-step acquisitions--(i) Rule. A subsequent acquisition 
is treated as a domestic entity acquisition, and the subsequent 
acquiring corporation is treated as a foreign acquiring corporation. See 
Example 21 of paragraph (k) of this section for an illustration of this 
rule. See also paragraph (f)(1)(iv) of this section (treating certain 
stock of the subsequent acquiring corporation as stock of a foreign 
corporation that is held by reason of holding stock of, or a partnership 
interest in, the domestic entity).
    (ii) Acquisition of property pursuant to a subsequent acquisition. 
In determining whether a foreign corporation directly or indirectly 
acquires substantially all of the properties held directly or indirectly 
by an initial acquiring corporation, the principles of section 
7874(a)(2)(B)(i) apply, including paragraph (c) of this section other 
than paragraph (c)(2) of this section. For this purpose, the principles 
of paragraph (c)(1) of this section, including paragraph (b)(5) of this 
section, apply by substituting the term ``foreign'' for ``domestic'' 
wherever it appears.
    (iii) Additional related transactions. If, pursuant to the same plan 
(or a series of related transactions), a foreign corporation directly or 
indirectly acquires (under the principles of paragraph (c)(4)(ii) of 
this section) substantially all of the properties directly or indirectly 
held by a subsequent acquiring corporation in a transaction occurring 
after the subsequent acquisition, then the principles of paragraph 
(c)(4)(i) of this section apply to such transaction (and any subsequent 
transaction or transactions occurring pursuant to the plan (or the 
series of related transactions)).
    (d) Acquisitions by multiple foreign corporations. If, pursuant to a 
plan (or a series of related transactions), two or more foreign 
corporations complete, in the aggregate, a domestic entity acquisition, 
then each foreign corporation shall be treated as completing the 
acquisition for purposes of determining whether such foreign corporation 
is treated as a surrogate foreign corporation. See Examples 5 and 6 of 
paragraph (k) of this section for illustrations of the rules of this 
paragraph (d).
    (e) Acquisitions of multiple domestic entities. If, pursuant to a 
plan (or a series of related transactions), a foreign corporation 
completes two or more domestic entity acquisitions involving domestic 
corporations and/or domestic partnerships (domestic entities), then, for 
purposes of section 7874(a)(2)(B)(ii), the acquisitions shall be treated 
as a

[[Page 762]]

single acquisition and the domestic entities shall be treated as a 
single domestic entity. If the transaction involves one or more domestic 
corporations and one or more domestic partnerships, the stock of the 
foreign corporation held by former domestic entity shareholders and 
former domestic entity partners by reason of holding stock or a 
partnership interest in the domestic entities shall be aggregated for 
purposes of determining whether the ownership condition of section 
7874(a)(2)(B)(ii) is satisfied. See Example 7 of paragraph (k) of this 
section for an illustration of the rules of this paragraph (e).
    (f) Stock held by reason of holding stock in a domestic corporation 
or an interest in a domestic partnership-- (1) Certain transactions. For 
purposes of section 7874(a)(2)(B)(ii), stock of a foreign corporation 
that is held by reason of holding stock in a domestic corporation (or an 
interest in a domestic partnership) includes, but is not limited to, the 
stock described in paragraphs (f)(1)(i) through (iv) of this section.
    (i) Stock of a foreign corporation received in exchange for, or with 
respect to, stock of a domestic corporation.
    (ii) Stock of a foreign corporation received in exchange for, or 
with respect to, an interest in a domestic partnership.
    (iii) To the extent that paragraph (f)(1)(ii) of this section does 
not apply, stock of a foreign corporation received by a domestic 
partnership in exchange for all or part of its properties. In such a 
case, each partner in the domestic partnership shall be treated as 
holding its proportionate share of the stock of the foreign corporation 
by reason of holding an interest in the domestic partnership.
    (iv) Stock of a subsequent acquiring corporation received by a 
former initial acquiring corporation shareholder pursuant to a 
subsequent acquisition in exchange for, or with respect to, stock of an 
initial acquiring corporation that is held by reason of holding stock 
of, or a partnership interest in, a domestic entity.
    (2) Transactions involving other property--(i) Stock of a domestic 
corporation. If, pursuant to the same transaction, stock of a foreign 
corporation is received in exchange for, or with respect to, stock of a 
domestic corporation and other property, the stock of the foreign 
corporation that was received in exchange for, or with respect to, the 
stock of the domestic corporation shall be determined based on the 
relative value of the stock of the domestic corporation compared to the 
aggregate value of such stock and the other property.
    (ii) Interest in a domestic partnership. If, pursuant to the same 
transaction, stock of a foreign corporation is received in exchange for, 
or with respect to, an interest in a domestic partnership and other 
property, the stock of the foreign corporation that was received in 
exchange for, or with respect to, the interest in the domestic 
partnership shall be determined based on the relative value of the 
interest in the domestic partnership compared to the aggregate value of 
such interest and the other property.
    (3) See Examples 8 through 10 of paragraph (k) of this section for 
illustrations of the rules of this paragraph (f).
    (g) Publicly traded foreign partnerships--(1) Treatment as a foreign 
corporation. For purposes of section 7874, a publicly traded foreign 
partnership described in paragraph (g)(2) of this section shall be 
treated as a foreign corporation that is organized in the foreign 
country in which, or under the law of which, the publicly traded foreign 
partnership was created or organized, and the partnership interests in 
the publicly traded foreign partnership shall be treated as stock of the 
foreign corporation. For purposes of determining whether the foreign 
corporation shall be treated as a surrogate foreign corporation, a 
deemed acquisition of assets and liabilities by reason of Sec. 1.708-
1(b)(4) shall not constitute an acquisition described in section 
7874(a)(2)(B)(i).
    (2) Publicly traded foreign partnership. A publicly traded foreign 
partnership described in this paragraph (g)(2) is any foreign 
partnership that would, but for section 7704(c), be treated as a 
corporation under section 7704(a)--
    (i) At the time of the domestic entity acquisition; or
    (ii) At any time after the domestic entity acquisition pursuant to a 
plan

[[Page 763]]

that existed at the time of the domestic entity acquisition. For this 
purpose, a plan shall be deemed to exist at the time of the domestic 
entity acquisition if the foreign partnership would, but for section 
7704(c), be treated as a corporation under section 7704(a) at any time 
during the two-year period following the completion of the domestic 
entity acquisition.
    (3) Surrogate foreign corporation to which section 7874(b) applies. 
If paragraph (g)(1) of this section applies to a publicly traded foreign 
partnership and the foreign corporation is a surrogate foreign 
corporation to which section 7874(b) applies, the publicly traded 
foreign partnership shall be treated as a domestic corporation for 
purposes of the Internal Revenue Code (Code). See paragraph (g)(6) of 
this section for the timing and treatment of the conversion of the 
publicly traded foreign partnership to a domestic corporation. See 
Example 11 of paragraph (k) of this section for an illustration of the 
rules of this paragraph (g)(3).
    (4) Surrogate foreign corporation to which section 7874(b) does not 
apply. If paragraph (g)(1) of this section applies to a publicly traded 
foreign partnership and the foreign corporation is a surrogate foreign 
corporation to which section 7874(b) does not apply, the publicly traded 
foreign partnership shall continue to be treated as a foreign 
partnership for purposes of the Code, but section 7874(a)(1) shall apply 
to any expatriated entity (as defined in section 7874(a)(2)(A)). See 
Example 13 of paragraph (k) of this section for an illustration of the 
rules of this paragraph (g)(4).
    (5) Foreign corporation not treated as a surrogate foreign 
corporation. If paragraph (g)(1) of this section applies to a publicly 
traded foreign partnership and the foreign corporation is not treated as 
a surrogate foreign corporation, the status of the publicly traded 
foreign partnership as a foreign partnership shall not be affected by 
section 7874. See Example 12 of paragraph (k) of this section for an 
illustration of the rules of this paragraph (g)(5).
    (6) Conversion to a domestic corporation. Except for purposes of 
determining whether the publicly traded foreign partnership is a 
surrogate foreign corporation, if paragraph (g)(1) of this section 
applies to a publicly traded foreign partnership and the foreign 
corporation is a surrogate foreign corporation to which section 7874(b) 
applies, then at the later of the end of the day immediately preceding 
the first date properties are acquired as part of the domestic entity 
acquisition or immediately after the formation of the publicly traded 
foreign partnership, the publicly traded foreign partnership shall be 
treated as transferring all of its assets and liabilities to a newly 
formed domestic corporation in exchange solely for stock of the domestic 
corporation, and then distributing such stock to its partners in 
proportion to their partnership interests in liquidation of the 
partnership. The treatment of the transfer of assets and liabilities to 
the domestic corporation and the distribution of the stock of the 
domestic corporation to the partners in liquidation of the partnership 
shall be determined under all relevant provisions of the Code and 
general tax principles.
    (h) Options--(1) Value. Except to the extent otherwise provided in 
this paragraph (h), for purposes of section 7874, including for purposes 
of determining the membership of an expanded affiliated group under 
section 7874(c)(1), an option with respect to a corporation or 
partnership will be treated as stock in the corporation, or an interest 
in the partnership, as applicable, with a value equal to the holder's 
claim on the equity of the corporation or partnership. For this purpose, 
claim on the equity equals the value of the stock or partnership 
interest that may be acquired pursuant to the option, less the exercise 
price (but in no case is a claim on the equity less than zero). Also for 
this purpose, the equity of the corporation or partnership shall not 
include the amount of any property the holder of the option would be 
required to provide to the corporation or partnership under the terms of 
the option if such option were exercised. See Example 14 and Example 16 
of paragraph (k) of this section for illustrations of the rules of this 
paragraph (h)(1).
    (2) Voting power. Except to the extent otherwise provided in this 
paragraph (h), for purposes of determining the voting power of a foreign 
corporation

[[Page 764]]

under section 7874, including for purposes of determining the membership 
of an expanded affiliated group under section 7874(c)(1), an option will 
be treated as exercised only if a principal purpose of the issuance or 
transfer of the option is to avoid the foreign corporation being treated 
as a surrogate foreign corporation.
    (3) Timing. For purposes of this paragraph (h), the value of the 
holder's claim on the equity is determined--
    (i) In the case of a domestic corporation or a domestic partnership, 
immediately before the domestic entity acquisition.
    (ii) In the case of a foreign corporation or foreign partnership, 
immediately after the domestic entity acquisition.
    (4) Certain options disregarded. The rules of paragraph (h)(1) of 
this section shall not apply to an option if--
    (i) A principal purpose of the issuance or acquisition of the option 
is to avoid the foreign corporation being treated as a surrogate foreign 
corporation, or
    (ii) At the time of the domestic entity acquisition, the probability 
of the option being exercised is remote.
    (5) Options and interests similar to an option. For purposes of this 
paragraph (h), an option includes an interest similar to an option. 
Examples of options (including interests similar to options) include, 
but are not limited to, a warrant, a convertible debt instrument, an 
instrument other than debt that is convertible into stock or a 
partnership interest, a put, stock or a partnership interest subject to 
risk of forfeiture, a contract to acquire or sell stock or a partnership 
interest, and an exchangeable share or exchangeable partnership 
interest.
    (6) Multiple claims on equity. Paragraph (h)(1) of this section 
shall not apply to an option to the extent treating the option as stock 
or a partnership interest would duplicate a shareholder's or partner's 
claim on the equity of the corporation or partnership by reason of 
holding stock in the corporation or an interest in the partnership. See 
Example 15 of paragraph (k) of this section for an illustration of the 
rules of this paragraph (h)(6).
    (i) Interests treated as stock of a foreign corporation--(1) Stock 
or other interests. If the conditions of paragraphs (i)(1)(i) and (ii) 
of this section are satisfied, then, for purposes of section 7874, any 
interest (including stock or a partnership interest) that is not 
otherwise treated as stock of a foreign corporation (including under 
paragraph (h) of this section) shall be treated as stock of the foreign 
corporation. See Examples 17 and 18 of paragraph (k) of this section for 
illustrations of the rules of this paragraph (i)(1).
    (i) The interest provides the holder distribution rights that are 
substantially similar in all material respects to the distribution 
rights provided by stock in the foreign corporation. For this purpose, 
distribution rights include rights to dividends (or partnership 
distributions), distributions in redemption of the interest (in whole or 
in part), distributions in liquidation, or other similar distributions 
that represent a return on, or of, the holder's investment in the 
interest.
    (ii) Treating the interest as stock of the foreign corporation has 
the effect of treating the foreign corporation as a surrogate foreign 
corporation under section 7874(a)(2)(B).
    (2) Creditor claims--(i) Domestic corporation. For purposes of 
section 7874, if, immediately prior to the first date properties are 
acquired as part of a domestic entity acquisition, a domestic 
corporation is in a title 11 or similar case (as defined in section 
368(a)(3)), or the liabilities of the domestic corporation exceed the 
value of its assets, then each creditor of the domestic corporation 
shall be treated as a shareholder of the domestic corporation and any 
claim of the creditor against the domestic corporation shall be treated 
as stock of the domestic corporation. See Example 19 of paragraph (k) of 
this section for an illustration of the rules of this paragraph 
(i)(2)(i).
    (ii) Domestic or foreign partnership. For purposes of section 7874, 
if, immediately prior to the first date properties are acquired as part 
of a domestic entity acquisition, a partnership (foreign or domestic) is 
in a title 11 or similar case (as defined in section 368(a)(3)), or the 
liabilities of the partnership exceed the value of its assets,

[[Page 765]]

then each creditor of the partnership shall be treated as a partner in 
the partnership and any claim of the creditor against the partnership 
shall be treated as an interest in the partnership.
    (iii) Treatment of creditor as shareholder or partner. A creditor 
that is treated as a shareholder or partner under paragraph (i)(2)(i) or 
(ii) of this section shall be treated as a shareholder or partner for 
all purposes of section 7874. See, for example, Sec. 1.7874-1(c) and 
paragraph (f) of this section. See Example 19 of paragraph (k) of this 
section for an illustration of the rules of this paragraph (i)(2)(iii).
    (j) Application of section 7874(b)--(1) Conversion to a domestic 
corporation. Except for purposes of determining whether a foreign 
corporation is treated as a surrogate foreign corporation, the 
conversion of a foreign corporation to a domestic corporation by reason 
of section 7874(b) shall constitute a reorganization described in 
section 368(a)(1)(F) that occurs at the later of the end of the day 
immediately preceding the first date properties are acquired as part of 
the domestic entity acquisition or immediately after the formation of 
the foreign corporation. See, for example, Sec. Sec. 1.367(b)-2 and 
1.367(b)-3 for certain consequences of the reorganization. The treatment 
of all other aspects of the conversion shall be determined under the 
relevant provisions of the Code and general tax principles. See Example 
20 of paragraph (k) of this section for an illustration of the rules of 
this paragraph (j)(1).
    (2) Entity classification. A foreign corporation that is treated as 
a domestic corporation under section 7874(b) is not an eligible entity 
as defined in Sec. 301.7701-3(a), and therefore may not elect to be 
classified as other than an association (and thus cannot be treated as 
other than a corporation) for Federal tax purposes.
    (3) Application of section 367. If a foreign corporation is treated 
as a domestic corporation under section 7874(b), section 367 shall not 
apply to any transfer of property by a United States person to such 
foreign corporation as part of the domestic entity acquisition. However, 
section 367 shall apply to the conversion of the foreign corporation to 
a domestic corporation. See paragraph (j)(1) of this section. See 
Example 20 of paragraph (k) of this section for an illustration of the 
rules of this paragraph (j)(3).
    (k) Examples--(1) Assumed facts. Except as otherwise stated, assume 
the following for purposes of the examples included in paragraph (k)(2) 
of this section.
    (i) DC1 and DC2 are domestic corporations.
    (ii) FA, FP, F1, F2, F3, and F4 are foreign corporations organized 
in Country A.
    (iii) DPS is a domestic partnership that conducts a trade or 
business.
    (iv) FPS is a foreign partnership that is not publicly traded.
    (v) Under the terms of the partnership agreements of DPS and FPS, 
each partner's share in the partnership's items of income, gain, 
deduction, and loss is determined in accordance with the partner's 
partnership interest percentage in the partnership, as stated in the 
examples.
    (vi) A, B, and C are unrelated individuals.
    (vii) Each entity has a single class of equity outstanding and is 
unrelated to all other entities.
    (viii) All transactions are completed pursuant to a plan.
    (ix) All acquisitions of properties are completed after March 4, 
2003.
    (x) Section 7874(c)(4) does not apply, and no option is issued or 
acquired with a principal purpose to avoid a foreign corporation being 
treated as a surrogate foreign corporation.
    (2) Examples. The following examples illustrate the rules of this 
section.

    Example 1. Acquisition of stock of a domestic corporation. (i) 
Facts. FA acquires 25% of the outstanding stock of DC1.
    (ii) Analysis. Under paragraph (c)(1)(i) of this section, for 
purposes of section 7874(a)(2)(B)(i), FA is treated as acquiring 25% of 
the properties held by DC1 on the date of the stock acquisition.
    Example 2. Acquisition of a partnership interest. (i) Facts. DPS 
wholly owns DC1. FA acquires a 40% interest in DPS.
    (ii) Analysis. Under paragraph (c)(1)(ii) of this section, for 
purposes of section 7874(a)(2)(B)(i), FA is treated as acquiring 40 
percent of the DC1 stock held by DPS on the date of the acquisition of 
the partnership interest. Further, under paragraph (c)(1)(i) of this 
section, for purposes of section

[[Page 766]]

7874(a)(2)(B)(i), FA is treated as acquiring 40% of the properties held 
by DC1 on the date of the acquisition of the partnership interest.
    Example 3. Acquisition of stock by a subsidiary. (i) Facts. FP 
wholly owns FA. FA acquires all the outstanding stock of DC1 in exchange 
solely for FP stock. FP and FA are members of the same expanded 
affiliated group after the acquisition.
    (ii) Analysis. Under paragraph (c)(1)(i) of this section, for 
purposes of section 7874(a)(2)(B)(i), FA is treated as acquiring 100% of 
the properties held by DC1 on the date of the stock acquisition. 
Further, under paragraph (c)(1)(iii) of this section, for purposes of 
section 7874(a)(2)(B)(i), FP is also treated as acquiring 100% of the 
properties held by DC1 on the date of the stock acquisition. The result 
would be the same if instead FA had directly acquired all the properties 
held by DC1 in exchange for FP stock.
    Example 4. Acquisition of stock of a foreign corporation. (i) Facts. 
FP wholly owns DC1. FA acquires all of the outstanding stock of FP.
    (ii) Analysis. Under paragraph (c)(2) of this section, for purposes 
of section 7874(a)(2)(B)(i), FA is not treated as acquiring any 
properties held by DC1 on the date of the acquisition of the FP stock.
    Example 5. Acquisition of stock by multiple foreign corporations. 
(i) Facts. Pursuant to the same plan, the shareholders of DC1 transfer 
all of their DC1 stock equally to F1, F2, F3, and F4 in exchange solely 
for stock of each foreign corporation.
    (ii) Analysis. Under paragraph (c)(1)(i) of this section, in the 
aggregate F1, F2, F3, and F4 are treated as acquiring substantially all 
of the properties held by DC1. Because the acquisition was pursuant to 
the same plan, under paragraph (d) of this section, F1, F2, F3, and F4 
are each treated as acquiring substantially all of the properties held 
by DC1 for purposes of determining whether each foreign corporation 
shall be treated as a surrogate foreign corporation.
    Example 6. Acquisition of assets by multiple foreign corporations. 
(i) Facts. Individual A wholly owns DC1. DC1 forms F1, F2, F3, and F4, 
and transfers an equal portion of its properties to each corporation in 
exchange solely for stock of the corporation. Pursuant to the same plan 
DC1 then distributes the stock of each foreign corporation to individual 
A.
    (ii) Analysis. Because pursuant to the same plan F1, F2, F3, and F4 
acquired, in the aggregate, substantially all of the properties held by 
DC1, under paragraph (d) of this section, F1, F2, F3, and F4 are each 
treated as acquiring substantially all of the properties held by DC1 for 
purposes of determining whether each foreign corporation shall be 
treated as a surrogate foreign corporation.
    Example 7. Acquisition of multiple domestic corporations. (i) Facts. 
Individual A wholly owns DC1, and individual B wholly owns DC2. Pursuant 
to the same plan, individuals A and B transfer all of their DC1 stock 
and DC2 stock to FA, a newly formed corporation, in exchange solely for 
all 100 shares of FA stock outstanding.
    (ii) Analysis. Under paragraph (c)(1)(i) of this section, for 
purposes of section 7874(a)(2)(B)(i), FA is treated as acquiring all of 
the properties held by DC1 and DC2 on the date of the stock acquisition. 
Under paragraph (e) of this section, because pursuant to the same plan 
FA acquired substantially all of the properties held by DC1 and DC2, for 
purposes of determining whether FA shall be treated as a surrogate 
foreign corporation, DC1 and DC2 shall be treated as a single domestic 
corporation, of which individuals A and B are former domestic entity 
shareholders. Thus, individuals A and B are treated as holding all 100 
shares of the FA stock by reason of holding stock of such domestic 
corporation, and the ownership fraction under section 7874(a)(2)(B)(ii) 
is 100/100, or 100%.
    Example 8. Exchange of stock and other property. (i) Facts. 
Individual A wholly owns DC1 and F1. DC1 has a $40x value and F1 has a 
$60x value. Individual A transfers all of the DC1 stock and F1 stock to 
FA, a newly formed corporation, in exchange solely for FA stock.
    (ii) Analysis. Under paragraphs (f)(1)(i) and (f)(2)(i) of this 
section, for purposes of section 7874(a)(2)(B)(ii), individual A is 
considered to hold 40% of the FA stock by reason of holding stock in DC1 
($100x FA stock multiplied by $40x/$100x, the relative value of the DC1 
stock to all the property transferred by A to FA).
    Example 9. Stock received as a distribution. (i) Facts. Pursuant to 
a divisive reorganization described in section 368(a)(1)(D), DC1 
contributes substantially all of its properties to FA, a newly formed 
corporation, in exchange solely for FA stock and then distributes the FA 
stock to its shareholders in a transaction qualifying under section 355.
    (ii) Analysis. Under paragraph (f)(1)(i) of this section, for 
purposes of section 7874(a)(2)(B)(ii), the FA stock received by the DC1 
shareholders as a distribution with respect to the DC1 stock is 
considered held by reason of holding stock in DC1. The result would be 
the same if the transaction did not qualify as a reorganization (for 
example, if the distribution were subject to sections 301 and 311(b)).
    Example 10. Incorporation of a partnership trade or business. (i) 
Facts. Individuals A and B equally own DPS. DPS transfers substantially 
all of its properties constituting a trade or business to FA, a newly 
formed corporation, solely in exchange for FA stock.

[[Page 767]]

DPS retains the FA stock after the transaction.
    (ii) Analysis. Under paragraph (f)(1)(iii) of this section, for 
purposes of section 7874(a)(2)(B)(ii), individuals A and B are treated 
as holding a proportionate amount (that is, an equal amount) of the FA 
stock held by DPS by reason of holding an interest in DPS.
    Example 11. Publicly traded foreign partnership treated as domestic 
corporation. (i) Facts. Pursuant to a plan, DC1 and individual B 
organize a limited liability company (HPS) under the law of Country A. 
DC1 owns 90% of the membership interests in HPS, and B owns 10% of the 
membership interests in HPS. HPS is a foreign eligible entity under 
Sec. 301.7701-2, and DC1 and B make an election under Sec. 301.7701-3 
to treat HPS as a partnership for Federal tax purposes as of the date of 
the formation of HPS. HPS forms DC2. One day after the formation of HPS, 
DC2 merges with and into DC1. Pursuant to the merger agreement, the DC1 
shareholders exchange their DC1 stock solely for membership interests in 
HPS. After the merger HPS wholly owns DC1, and the former domestic 
entity shareholders of DC1 own a greater than 80% interest in HPS by 
reason of holding stock of DC1. Public trading of the HPS ownership 
interests begins the day after the date on which the merger is 
completed. HPS is not treated as a corporation under section 7704(a) by 
reason of section 7704(c). If HPS were a corporation, the condition of 
section 7874(a)(2)(B)(iii) would be satisfied.
    (ii) Analysis. HPS is a publicly traded foreign partnership that is 
described in paragraph (g)(2) of this section. Therefore, under 
paragraph (g)(1) of this section, for purposes of section 7874, HPS is 
treated as a foreign corporation organized under the law of Country A 
and the membership interests in HPS are treated as stock of the foreign 
corporation. The foreign corporation is treated as a surrogate foreign 
corporation under section 7874(a)(2)(B) because, pursuant to the merger, 
HPS acquired substantially all of the properties held by DC1, the former 
domestic entity shareholders of DC1 hold at least 60% of the stock of 
the foreign corporation by reason of holding stock of DC1, and the 
expanded affiliated group that includes the foreign corporation does not 
have substantial business activities in Country A when compared to the 
total business activities of the expanded affiliated group. Further, 
because the former domestic entity shareholders of DC1 hold at least 80% 
of the stock of the foreign corporation by reason of holding stock of 
DC1, section 7874(b) applies to the surrogate foreign corporation, and 
therefore HPS is treated as a domestic corporation for purposes of the 
Code. Under paragraph (g)(6) of this section, except for purposes of 
determining whether HPS is a surrogate foreign corporation, at the end 
of the day immediately preceding the date of the merger of DC2 with and 
into DC1, HPS is treated as transferring all of its assets and 
liabilities to a new domestic corporation in exchange solely for stock 
of the domestic corporation. HPS is then treated as proportionately 
distributing such stock to its membership interest holders in 
liquidation of the partnership. In addition, as a result of the merger 
of DC2 with and into DC1, the former domestic entity shareholders of DC1 
shall be treated as receiving stock of a domestic corporation in 
exchange for their DC1 stock.
    Example 12. Publicly traded foreign partnership not treated as a 
surrogate foreign corporation. (i) Facts. The facts are the same as in 
Example 11 of this section, except that, after the domestic entity 
acquisition, the expanded affiliated group that includes HPS (treated as 
a foreign corporation for this purpose) has substantial business 
activities in Country A when compared to the total business activities 
of the expanded affiliated group.
    (ii) Analysis. Under paragraph (g)(1) of this section, for purposes 
of section 7874, HPS is treated as a foreign corporation and the 
membership interests in HPS are treated as stock of the foreign 
corporation. However, the foreign corporation is not treated as a 
surrogate foreign corporation under section 7874(a)(2)(B) because, after 
the domestic entity acquisition, the expanded affiliated group that 
includes HPS has substantial business activities in Country A when 
compared to the total business activities of the expanded affiliated 
group. Therefore, under paragraph (g)(5) of this section, section 7874 
does not apply and the status of HPS as a foreign partnership is not 
affected. In addition, DC1 is not treated as an expatriated entity under 
section 7874(a) by reason of the acquisition.
    Example 13. Publicly traded foreign partnership treated as a 
surrogate foreign corporation but not as a domestic corporation. (i) 
Facts. FPS is a publicly traded foreign partnership organized in Country 
A that, by reason of section 7704(c), is not treated as a corporation 
under section 7704(a). FPS acquires all the stock of DC1 in exchange for 
partnership interests in FPS. After the acquisition, the former domestic 
entity shareholders of DC1 hold a 75%-interest in FPS by reason of 
holding DC1 stock. After the acquisition, the expanded affiliated group 
that includes FPS (treated as a foreign corporation for this purpose) 
does not have substantial business activities in Country A when compared 
to the total business activities of the expanded affiliated group.
    (ii) Analysis. Under paragraph (g)(1) of this section, for purposes 
of section 7874, FPS is treated as a foreign corporation and the 
partnership interests in FPS are treated as stock of the foreign 
corporation. FPS is treated as a surrogate foreign corporation because 
the conditions of section

[[Page 768]]

7874(a)(2)(B) are satisfied. However, because the former domestic entity 
shareholders of DC1 hold less than an 80%-interest in FPS by reason of 
holding DC1 stock, section 7874(b) does not apply to FPS. Therefore, 
under paragraph (g)(4) of this section FPS continues to be treated as a 
foreign partnership for purposes of the Code, but section 7874(a)(1) 
applies to DC1 and any other expatriated entity.
    Example 14. Warrant to acquire stock from the foreign corporation. 
(i) Facts. Individual A wholly owns DC1. DC1 has a $200x value. 
Individual B wholly owns FA. The value of B's FA stock is $400x. 
Individual C holds a warrant to acquire FA stock from FA at an exercise 
price of $20x. Individual A transfers all of its DC1 stock to FA in 
exchange solely for FA stock with a value of $200x. At the time of the 
transfer, the FA stock that individual C can acquire pursuant to the 
warrant has a $70x value.
    (ii) Analysis. Under paragraphs (h)(1) of this section, for purposes 
of section 7874, individual C is treated as owning FA stock with a $50x 
value. This amount represents individual C's claim on the equity of FA 
after the domestic entity acquisition ($70x value of FA stock that may 
be acquired pursuant to the warrant, less the $20x exercise price), 
without taking into account the $20x individual C would be required to 
provide to FA upon the exercise of the warrant. Thus, for purposes of 
section 7874, the value of the stock of FA immediately after the 
transaction is $650x ($600x of FA stock, plus C's $50x claim on the 
equity of FA). C's warrant is not taken into account for purposes of 
determining the voting power of FA under section 7874.
    Example 15. Option to acquire stock from another shareholder. (i) 
Facts. The facts are the same as in Example 14 except that, instead of 
holding a warrant issued by FA, individual C holds an option to acquire 
FA stock from individual B for an exercise price of $20x. At the time of 
the acquisition, the FA stock that individual C can acquire under the 
option has a $70x value.
    (ii) Analysis. Under paragraph (h)(6) of this section, for purposes 
of section 7874, individual C is not treated as owning FA stock by 
reason of holding the option because treating the option as FA stock 
would have the effect of partially duplicating individual B's claim on 
the equity of FA at the time of the domestic entity acquisition by 
reason of holding FA stock. However, all of the FA stock owned by 
individual B will be taken into account for purposes of section 7874. 
C's warrant is not taken into account for purposes of determining voting 
power of FA under section 7874.
    Example 16. Warrant to acquire stock from the domestic corporation. 
(i) Facts. A DC1 employee holds a warrant to acquire DC1 stock from DC1. 
In connection with the domestic entity acquisition by FA of 
substantially all of the properties held by DC1, the DC1 employee 
receives a warrant from FA to acquire 15 shares of FA stock in exchange 
for the warrant to acquire DC1 stock.
    (ii) Analysis. Under paragraphs (h)(1) of this section, for purposes 
of section 7874, the warrant held by the DC1 employee is treated as DC1 
stock with a value equal to the employee's claim on the equity of DC1 
immediately before the domestic entity acquisition. Further, for 
purposes of section 7874, the DC1 employee is treated as holding FA 
stock with a value equal to the employee's claim on the equity of FA 
after the domestic entity acquisition by reason of holding the warrant 
to acquire DC1 stock (treated as DC1 stock for this purpose). The option 
held by the DC1 employee is not taken into account for purposes of 
determining the voting power of FA under section 7874.
    Example 17. Stock in a subsidiary treated as stock of a foreign 
parent corporation. (i) Facts. (A) Individuals A and B equally own DC1. 
FA, a newly formed corporation, issues stock in a public offering for 
cash. FA contributes part of the cash from the public offering to DC2, a 
newly formed corporation, in exchange for all the stock of DC2. DC2 
merges with and into DC1 with DC1 surviving. Pursuant to the merger 
agreement, individuals A and B exchange their DC1 stock for cash and 
shares of class B stock of DC1. Following the merger FA owns all the 
class A stock of DC1. FA does not hold significant assets other than the 
class A stock of DC1. Individuals A and B own all the class B stock of 
DC1. DC1 has no other class of stock outstanding.
    (B) The class B stock entitles individuals A and B to dividend 
distributions approximately equal to any dividend distributions made by 
FA with respect to its publicly traded stock. In certain circumstances, 
the class B stock also permits individuals A and B to require DC1 to 
redeem the stock at fair market value. The class B stock does not 
provide individuals A and B voting rights with respect to FA.
    (ii) Analysis. The dividend rights provided by the class B stock are 
substantially similar in all material respects to the dividend rights 
provided by the FA stock. In addition, because FA does not hold 
significant assets other than the class A stock, the value of the class 
B stock held by individuals A and B is approximately equal to the value 
of a corresponding amount of publicly traded FA stock. The distribution 
rights on liquidation (or redemption) provided by the class B stock, 
therefore, are substantially similar in all material respects to the 
distribution rights on liquidation (or redemption) provided by the FA 
stock. As a result, the distribution rights provided by the class B

[[Page 769]]

stock are substantially similar in all material respects to the 
distribution rights provided by the publicly traded FA stock. Thus, if 
treating the class B stock as FA stock would have the effect of treating 
FA as a surrogate foreign corporation, under paragraph (i)(1) of this 
section the class B stock will be treated as FA stock for purposes of 
section 7874.
    Example 18. Partnership interest treated as stock of foreign 
acquiring corporation. (i) Facts. (A) Individuals A and B equally own 
DC1. FA, a newly formed corporation, issues stock in a public offering 
for cash. Individuals A and B and FA organize FPS. FA transfers part of 
the cash from the public offering to FPS in exchange for a class A 
partnership interest. FA does not hold any significant assets other than 
the class A partnership interest. Individuals A and B transfer their DC1 
stock to FPS in exchange for class B partnership interests.
    (B) The class B partnership interests entitle individuals A and B to 
cash distributions from FPS approximately equal to any dividend 
distributions made by FA with respect to its publicly traded stock. In 
certain circumstances, the class B partnership interests also permit 
individuals A and B to require FPS to redeem the interests in exchange 
for cash equal to the value of an amount of FA stock as determined on 
the redemption date. The class B partnership interests do not provide 
individuals A or B voting rights with respect to FA.
    (ii) Analysis. The non-liquidating distribution rights provided by 
the class B partnership interests are substantially similar in all 
material respects to the dividend rights provided by the FA stock. 
Because FA does not hold any significant assets other than the class A 
partnership interest, the value of the class B partnership interests 
held by individuals A and B is approximately equal to a corresponding 
amount of FA stock. The distribution rights on liquidation (or 
redemption) provided by the class B partnership interests, therefore, 
are substantially similar in all material respects to distribution 
rights on liquidation (or redemption) provided by the FA stock. Thus, 
the distribution rights provided by the class B partnership interests 
are substantially similar in all material respects to the distribution 
rights provided by the publicly traded FA stock. As a result, if 
treating the class B partnership interests as FA stock would have the 
effect of treating FA as a surrogate foreign corporation, under 
paragraph (i)(1) of this section the class B partnership interests will 
be treated as FA stock for purposes of section 7874.
    Example 19. Creditor treated as a shareholder. (i) Facts. 
Individuals A and B equally own DC1. The liabilities of DC1 exceed the 
value of its assets. Pursuant to a plan, FA, a newly formed corporation, 
acquires substantially all of the properties held by DC1 in exchange 
solely for FA stock. Pursuant to the plan, the DC1 stock held by 
individuals A and B is cancelled, and the creditors of DC1 receive all 
the FA stock in exchange for their claims against DC1.
    (ii) Analysis. Because immediately before the first date on which 
properties are acquired as part of the domestic entity acquisition the 
liabilities of DC1 exceed the value of its assets, under paragraph 
(i)(2)(i) of this section, for purposes of section 7874, the creditors 
of DC1 are treated as shareholders of DC1 and the creditors' claims 
against DC1 are treated as DC1 stock. Therefore, for purposes of section 
7874(a)(2)(B)(ii), the FA stock received by the creditors of DC1 by 
reason of their claims against DC1 is considered held by former domestic 
entity shareholders of DC1 by reason of holding DC1 stock.
    Example 20. Conversion to a domestic corporation and application of 
section 367. (i) Facts. Individuals A and B are United States persons 
and equally own DC1. Pursuant to a plan, individuals A and B transfer 
their DC1 stock to FA in exchange solely for 80% of the outstanding FA 
stock. After the acquisition, the expanded affiliated group that 
includes FA does not have substantial business activities in Country A 
when compared to the total business activities of the expanded 
affiliated group.
    (ii) Analysis. Under paragraph (c)(1)(i) of this section, for 
purposes of section 7874(a)(2)(B)(i), FA is treated as acquiring all of 
the properties held by DC1 on the date of the stock acquisition. After 
the acquisition, the former domestic entity shareholders of DC1 own 80% 
of the stock of FA by reason of holding DC1 stock. Therefore, FA is a 
surrogate foreign corporation that is treated as a domestic corporation 
under section 7874(b). Under paragraph (j)(1) of this section, except 
for purposes of determining whether FA is treated as a surrogate foreign 
corporation, the conversion of FA to a domestic corporation constitutes 
a reorganization described in section 368(a)(1)(F) that occurs at the 
end of the day immediately preceding the date of the stock acquisition. 
Section 367 applies to the conversion of FA to a domestic corporation. 
See, for example, Sec. Sec. 1.367(b)-2 and 1.367(b)-3 for the 
consequences of the conversion. Under paragraph (j)(3) of this section, 
section 367 does not apply to the transfers of DC1 stock by individuals 
A and B to FA.
    Example 21, Application of multiple-step acquisition rule. (i) 
Facts. Individual A owns all 70 shares of stock of DC1, a domestic 
corporation. Individual B owns all 30 shares of stock of F1, a foreign 
corporation that is a tax resident (as described in Sec. 1.7874-
3(d)(11)) of Country X. Pursuant to a reorganization described in 
section 368(a)(1)(D), DC1 transfers all of its properties to F1 solely 
in exchange for 70 newly issued voting shares of F1 stock (DC1 
acquisition) and distributes

[[Page 770]]

the F1 stock to Individual A in liquidation pursuant to section 
361(c)(1). Pursuant to a plan that includes the DC1 acquisition, F2, a 
newly formed foreign corporation that is also a tax resident of Country 
X, acquires 100 percent of the stock of F1 solely in exchange for 100 
newly issued shares of F2 stock (F1 acquisition). After the F1 
acquisition, Individual A owns 70 shares of F2 stock, Individual B owns 
30 shares of F2 stock, F2 owns all 100 shares of F1 stock, and F1 owns 
all the properties held by DC1 immediately before the DC1 acquisition. 
In addition, the form of the transaction is respected for U.S. federal 
income tax purposes.
    (ii) Analysis--(A) The DC1 acquisition is a domestic entity 
acquisition, and F1 is a foreign acquiring corporation, because F1 
directly acquires 100 percent of the properties of DC1. In addition, the 
70 shares of F1 stock received by A pursuant to the DC1 acquisition in 
exchange for Individual A's DC1 stock are stock of a foreign corporation 
that is held by reason of holding stock in DC1. As a result, those 70 
shares are included in both the numerator and the denominator of the 
ownership fraction when applying section 7874 to the DC1 acquisition.
    (B) The DC1 acquisition is also an initial acquisition because it is 
a domestic entity acquisition that, pursuant to a plan that includes the 
F1 acquisition, occurs before the F1 acquisition (which, as described in 
paragraph (ii)(C) of this Example 21, is a subsequent acquisition). 
Thus, F1 is the initial acquiring corporation.
    (C) The F1 acquisition is a subsequent acquisition because it 
occurs, pursuant to a plan that includes the DC1 acquisition, after the 
DC1 acquisition and, pursuant to the F1 acquisition, F2 acquires 100 
percent of the stock of F1 and therefore is treated under paragraph 
(c)(4)(ii) of this section (which applies the principles of section 
7874(a)(2)(B)(i) with certain modifications) as indirectly acquiring 
substantially all of the properties held directly or indirectly by F1. 
Thus, F2 is the subsequent acquiring corporation.
    (D) Under paragraph (c)(4)(i) of this section, the F1 acquisition is 
treated as a domestic entity acquisition, and F2 is treated as a foreign 
acquiring corporation. In addition, under paragraph (f)(1)(iv) of this 
section, the 70 shares of F2 stock received by Individual A (a former 
initial acquiring corporation shareholder) pursuant to the F1 
acquisition in exchange for Individual A's F1 stock are stock of a 
foreign corporation that is held by reason of holding stock in DC1. As a 
result, those 70 shares are included in both the numerator and the 
denominator of the ownership fraction when applying section 7874 to the 
F1 acquisition.

    (l) Applicability date--(1)In general. This section applies to 
domestic entity acquisitions completed on or after June 7, 2012. For 
domestic entity acquisitions completed prior to June 7, 2012, see Sec. 
1.7874-2T(o), as contained in 26 CFR part 1, revised as of April 1, 
2012.
    (2) Applicability date of certain provisions of this section. 
Paragraphs (a), (b)(7) through (13), (c)(2) and (4), and (f)(1)(iv) of 
this section, as well as the introductory text of paragraph (f)(1) and 
Example 21 of paragraph (k)(2), apply to domestic entity acquisitions 
completed on or after April 4, 2016.

[T.D. 9591, 77 FR 34791, June 12, 2012, as amended by T.D. 9761, 81 FR 
20894, Apr. 8, 2016; T.D. 9834, 83 FR 32544, July 12, 2018]



Sec. 1.7874-3  Substantial business activities.

    (a) Scope. This section provides rules regarding when an expanded 
affiliated group will be considered to have substantial business 
activities in the relevant foreign country when compared to the total 
business activities of the expanded affiliated group for purposes of 
section 7874(a)(2)(B)(iii). Paragraph (b) of this section describes the 
general rule for determining whether the expanded affiliated group has 
substantial business activities in the relevant foreign country when 
compared to its total business activities. Paragraph (c) of this section 
describes certain items that are not taken into account as located or 
derived in the relevant foreign country. Paragraph (d) of this section 
provides definitions and certain rules of application. Paragraph (e) of 
this section provides rules regarding the treatment of partnerships for 
purposes of this section. Paragraph (f) of this section provides the 
effective/applicability dates.
    (b) General rule. The expanded affiliated group will be considered 
to have substantial business activities in the relevant foreign country 
on the completion date when compared to the total business activities of 
the expanded affiliated group only if, subject to paragraph (c) of this 
section, each of the requirements of this paragraph (b) are satisfied.
    (1) Group employees--(i) Number of employees. The number of group 
employees based in the relevant foreign country is at least 25 percent 
of the total number of group employees on the applicable date.

[[Page 771]]

    (ii) Employee compensation. The employee compensation incurred with 
respect to group employees based in the relevant foreign country is at 
least 25 percent of the total employee compensation incurred with 
respect to all group employees during the testing period.
    (2) Group assets. The value of the group assets located in the 
relevant foreign country is at least 25 percent of the total value of 
all group assets on the applicable date.
    (3) Group income. The group income derived in the relevant foreign 
country is at least 25 percent of the total group income during the 
testing period.
    (4) Tax residence of foreign acquiring corporation. The foreign 
acquiring corporation is a tax resident of the relevant foreign country. 
However, this paragraph (b)(4) does not apply if the relevant foreign 
country does not impose corporate income tax.
    (c) Items not to be considered--(1) General rule. Except to the 
extent provided in paragraph (c)(2) of this section, the following items 
are not taken into account in the numerator, but are taken into account 
in the denominator, for each of the tests described in paragraphs (b)(1) 
through (3) of this section:
    (i) Any group assets, group employees, or group income attributable 
to business activities that are associated with properties or 
liabilities the transfer of which is disregarded under section 
7874(c)(4).
    (ii) Any group assets or group employees located in, or group income 
derived in, the relevant foreign country as part of a plan with a 
principal purpose of avoiding the purposes of section 7874.
    (iii) Any group assets or group employees located in, or group 
income derived in, the relevant foreign country if such group assets or 
group employees, or the business activities to which such group income 
is attributable, are subsequently transferred to another country in 
connection with a plan that existed at the time of the domestic entity 
acquisition .
    (2) Transfers of properties to the expanded affiliated group. Any 
group assets, group employees, or group income attributable to business 
activities that are associated with property that is transferred to the 
expanded affiliated group in a transfer that is disregarded under 
section 7874(c)(4) are not taken into account in the numerator or the 
denominator for each of the tests described in paragraphs (b)(1) through 
(3) of this section.
    (d) Definitions and special rules. In addition to the definitions in 
Sec. 1.7874-12, the following definitions and special rules apply for 
purposes of this section.
    (1) The term applicable date means either of the following dates, 
applied consistently for all purposes of this section:
    (i) The completion date; or
    (ii) The last day of the month immediately preceding the month that 
includes the completion date.
    (2) The term employee compensation means all amounts incurred by 
members of the expanded affiliated group that directly relate to 
services performed by group employees (including, for example, wages, 
salaries, deferred compensation, employee benefits, and employer payroll 
taxes). Employee compensation with respect to a particular group 
employee is treated as incurred when it would be deductible by the 
employer as compensation, and the amount of employee compensation equals 
the amount that would be deductible by the employer as compensation. 
Both the timing and the amount of the deduction for employee 
compensation must be determined for all group employees under U.S. 
federal income tax principles or for all group employees based on the 
relevant tax laws. Employee compensation is determined in U.S. dollars, 
translated, if necessary, using the weighted average exchange rate (as 
defined in Sec. 1.989(b)-1) for the testing period.
    (3) The term group assets means tangible personal property or real 
property used or held for use in the active conduct of a trade or 
business by members of the expanded affiliated group, provided such 
property is either owned or, in the circumstances described below, 
rented by members of the expanded affiliated group at the close of the 
completion date. A group asset is considered to be located in the 
relevant foreign country only if the asset was physically present in 
such country at the close of the completion date and

[[Page 772]]

the asset was physically present in such country for more time than in 
any other country during the testing period. Notwithstanding the 
foregoing, a group asset that is mobile in nature and is used in a 
transportation activity, such as a vessel, an aircraft, or a motor 
vehicle, is considered to be located in the relevant foreign country if 
the asset was physically present in such country for more time than in 
any other country during the testing period, regardless of whether the 
asset was physically present in such country at the close of the 
completion date. Group assets must be valued on a gross basis (that is, 
not reduced by liabilities) by consistently using for all group assets 
of the expanded affiliated group either the adjusted tax basis or fair 
market value determined in U.S. dollars, translated, if necessary, at 
the spot rate determined under the principles of Sec. 1.988-1(d)(1), 
(2), and (4). Tangible personal property or real property that is rented 
by members of the expanded affiliated group from a person other than a 
member of the expanded affiliated group is also treated as a group 
asset, provided such property is used in the active conduct of a trade 
or business and is being rented by members of the expanded affiliated 
group at the close of the completion date. For purposes of this section, 
a group asset that is rented is valued at eight times the net annual 
rent paid or accrued with respect to the property by members of the 
expanded affiliated group.
    (4) The term group employees means all individuals who are employees 
of members of the expanded affiliated group. Whether individuals are 
employees must be determined for all members of the expanded affiliated 
group under U.S. federal tax principles or for all members of the 
expanded affiliated group based on the relevant tax laws. A group 
employee is considered to be based in the relevant foreign country only 
if the employee spent more time providing services in such country than 
in any other single country during the testing period.
    (5) The term group income means gross income of members of the 
expanded affiliated group from transactions occurring in the ordinary 
course of business with customers that are not related persons. Group 
income must be determined consistently for all members of the expanded 
affiliated group either under U.S. federal income tax principles or as 
reflected in the relevant financial statements. Group income is 
translated into U.S. dollars, if necessary, using the weighted average 
exchange rate (as defined in Sec. 1.989(b)-1) for the testing period. 
Group income is considered derived in the relevant foreign country only 
if it is derived from a transaction with a customer located in such 
country.
    (6) The term net annual rent means the annual rent paid or accrued 
with respect to property, less any payments received or accrued from 
subleasing such property (or other similar arrangement).
    (7) The term related person has the meaning specified in section 
954(d)(3), except that section 954(d)(3) is applied by substituting 
``one or more members of the expanded affiliated group'' for ``a 
controlled foreign corporation'' and ``the controlled foreign 
corporation'' each place they appear.
    (8) The term relevant financial statements means financial 
statements prepared consistently for all members of the expanded 
affiliated group in accordance with either U.S. Generally Accepted 
Accounting Principles (U.S. GAAP) or the International Financial 
Reporting Standards (IFRS) used for the expanded affiliated group's 
consolidated financial statements, but, if, after the domestic entity 
acquisition, financial statements will not be prepared consistently for 
all members of the expanded affiliated group in accordance with either 
U.S. GAAP or IFRS, then, for each member, financial statements prepared 
in accordance with either U.S. GAAP or IFRS. The relevant financial 
statements must take into account all items of income generated by all 
members of the expanded affiliated group for the entire testing period.
    (9) The term relevant foreign country means the foreign country in 
which, or under the law of which, the foreign acquiring corporation was 
created or organized.
    (10) The term relevant tax law means, for purposes of determining 
whether a

[[Page 773]]

particular individual who performs services for a member of the expanded 
affiliated group is an employee for purposes of paragraph (d)(6) of this 
section and the timing and amount of employee compensation for a 
particular employee of a member of the expanded affiliated group for 
purposes of paragraph (d)(3) of this section, the tax law to which the 
member is subject. Notwithstanding the foregoing, if the tax law to 
which a member is subject does not distinguish between whether an 
individual is an employee, or, for example, an independent contractor, 
then for this purpose the relevant tax law is considered to be U.S. 
federal tax law.
    (11) The term tax resident means, with respect to a foreign country, 
a body corporate liable to tax under the laws of the country as a 
resident.
    (12) The term testing period means the one-year period ending on the 
applicable date.
    (e) Treatment of partnerships--(1) Stock held by a partnership. In 
determining the members of the expanded affiliated group for purposes of 
this section, each partner in a partnership, as determined without 
regard to the application of paragraph (e)(2) of this section, shall be 
treated as holding its proportionate share of the stock held by the 
partnership, as determined under the rules and principles of sections 
701 through 777.
    (2) Business activities of a partnership. For purposes of this 
section, if one or more members of the expanded affiliated group, as 
determined after the application of paragraph (e)(1) of this section, 
own, in the aggregate, more than 50 percent (by value) of the interests 
in a partnership, the partnership will be treated as a corporation that 
is a member of the expanded affiliated group. Thus, all items of such a 
partnership are taken into account for purposes of this section. No 
items of a partnership are taken into account for purposes of this 
section unless the partnership is treated as a member of the expanded 
affiliated group pursuant to this paragraph (e)(2).
    (f) Applicability dates--(1) General rule. Except as otherwise 
provided in paragraph (f)(2) of this section, this section applies to 
domestic entity acquisitions that are completed on or after June 3, 
2015. For acquisitions completed before June 3, 2015, see Sec. 1.7874-
3T as contained in 26 CFR part 1 revised as of April 1, 2016.
    (2) Paragraphs (b)(4), (d)(8), and (d)(11) of this section. The 
first sentence of paragraph (b)(4) of this section applies to domestic 
entity acquisitions completed on or after November 19, 2015, and the 
second sentence applies to domestic entity acquisitions completed on or 
after July 12, 2018. Paragraph (d)(8) of this section applies to 
domestic entity acquisitions completed on or after April 4, 2016. 
Paragraph (d)(11) of this section applies to domestic entity 
acquisitions completed on or after July 12, 2018. For domestic entity 
acquisitions completed on or after June 3, 2015, and before April 4, 
2016, however, taxpayers may elect to apply paragraph (d)(8) of this 
section. For domestic entity acquisitions completed on or after November 
19, 2015, and before July 12, 2018, taxpayers may elect to apply the 
second sentence of paragraph (b)(4) and paragraph (d)(11) of this 
section.

[T.D. 9720, 80 FR 31841, June 4, 2015, as amended by T.D. 9761, 81 FR 
20896, Apr. 8, 2016; T.D. 9834, 83 FR 32546, July 12, 2018]



Sec. 1.7874-4  Disregard of certain stock related to the domestic 
entity acquisition.

    (a) Scope. This section identifies certain stock of the foreign 
acquiring corporation that is disregarded in determining the ownership 
fraction and modifies the scope of section 7874(c)(2)(B). Paragraph (b) 
of this section sets forth the general rule that certain stock of the 
foreign acquiring corporation, and only such stock, is treated as stock 
described in section 7874(c)(2)(B) and therefore is excluded from the 
denominator of the ownership fraction. Paragraph (c) of this section 
identifies the stock of the foreign acquiring corporation that is 
subject to paragraph (b) of this section. Paragraph (d) of this section 
provides a de minimis exception to the application of the general 
exclusion rule of paragraph (b) of this section. Paragraph (e) of this 
section provides rules for transfers of stock of the foreign acquiring 
corporation in satisfaction of, or in exchange for the assumption of, 
one or more obligations of the transferor. Paragraph

[[Page 774]]

(f) of this section provides rules for certain transfers of stock of the 
foreign acquiring corporation involving multiple properties or 
obligations. Paragraph (g) of this section provides rules for the 
treatment of partnerships, and paragraph (h) of this section provides 
definitions. Paragraph (h) of this section provides definitions. 
Paragraph (i) of this section provides examples illustrating the 
application of the rules of this section. Paragraph (j) of this section 
provides dates of applicability. See Sec. 1.7874-1(d)(1) for rules 
addressing the interaction of this section with the expanded affiliated 
group rules of section 7874(c)(2)(A) and Sec. 1.7874-1.
    (b) Exclusion of disqualified stock under section 7874(c)(2)(B). 
Except as provided in paragraph (d) of this section, disqualified stock 
(as determined under paragraph (c) of this section) is treated as stock 
described in section 7874(c)(2)(B) and therefore is not included in the 
denominator of the ownership fraction. Section 7874(c)(2)(B) shall not 
apply to exclude stock from the denominator of the ownership fraction 
that is not disqualified stock.
    (c) Disqualified stock--(1) General rule. Except as provided in 
paragraph (c)(2) of this section, disqualified stock is stock of the 
foreign acquiring corporation (other than stock described in Sec. 
1.7874-2(f)) that is transferred in an exchange described in paragraph 
(c)(1)(i) or (ii) of this section that is related to the domestic entity 
acquisition. This paragraph (c) applies without regard to whether the 
stock of the foreign acquiring corporation is publicly traded at the 
time of the transfer or at any other time.
    (i) Exchanged for nonqualified property. The stock is transferred to 
a person other than the domestic entity in exchange for nonqualified 
property. See Example 1, Example 2, Example 6, Example 8, and Example 9 
of paragraph (i) of this section for illustrations of the application of 
this paragraph (c)(1)(i).
    (ii) Exchanged for property with associated obligations--(A) General 
rule. Subject to the limitation provided in in paragraph (c)(1)(ii)(B) 
of this section, the stock is transferred by a person (transferor) to 
another person (transferee) in exchange for property (exchanged 
property) and, pursuant to the same plan (or series of related 
transactions), the transferee subsequently transfers such stock (or, if 
the transferee exchanges such stock for other property, such other 
property) in satisfaction of, or in exchange for the assumption of, one 
or more obligations of the transferee or a person related (within the 
meaning of section 267 or 707(b)) to the transferee. See Example 6 and 
Example 10 of paragraph (i) of this section for illustrations of the 
application of paragraph (c)(1)(ii) of this section.
    (B) Limitation. The amount of stock treated as transferred in an 
exchange described in paragraph (c)(2)(ii)(A) of this section shall not 
exceed--
    (1) With respect to a transferee that is the domestic entity, the 
proportionate share of obligations associated with the exchanged 
property (determined based on the fair market value of the exchanged 
property relative to the fair market value of all properties with which 
the obligations are associated) that, pursuant to the same plan (or 
series of related transactions), is not assumed by the transferor.
    (2) With respect to any other transferee, the proportionate share of 
obligations associated with the exchanged property (determined based on 
the fair market value of the exchanged property relative to the fair 
market value of all properties with which the obligations are 
associated) that, pursuant to the same plan (or series of related 
transactions), is not assumed by the transferor, multiplied by a 
fraction, the numerator of which is the amount of exchanged property 
that is qualified property, and the denominator of which is the total 
amount of exchanged property.
    (C) Associated obligations. For purposes of paragraph (c)(1)(ii) of 
this section, an obligation is associated with property if, for example, 
the obligation arose from the conduct of a trade or business in which 
the property has been used, regardless of whether the obligation is a 
non-recourse obligation.
    (2) Stock transferred in an exchange that does not increase the fair 
market value of the assets or decrease the amount of liabilities of the 
foreign acquiring corporation. Stock is disqualified stock only to the 
extent that the transfer of

[[Page 775]]

the stock in the exchange increases the fair market value of the assets 
of the foreign acquiring corporation or decreases the amount of its 
liabilities. This paragraph (c)(2) is applied to an exchange without 
regard to any other exchange described in paragraph (c)(1)(i) or (ii) of 
this section or any other transaction related to the domestic entity 
acquisition. See Example 4 and Example 7 of paragraph (i) of this 
section for illustrations of the application of this paragraph (c)(2).
    (d) Exception to exclusion of disqualified stock--(1) De minimis 
ownership. Except as provided in paragraph (d)(2) of this section, 
paragraph (b) of this section does not apply if both:
    (i) The ownership percentage described in section 7874(a)(2)(B)(ii), 
determined without regard to the application of paragraph (b) of this 
section and Sec. Sec. 1.7874-7(b) and 1.7874-10(b), is less than five 
(by vote and value); and
    (ii) On the completion date, each five percent former domestic 
entity shareholder or five percent former domestic entity partner, as 
applicable, owns (applying the attribution rules of section 318(a) with 
the modifications described in section 304(c)(3)(B)) less than five 
percent (by vote and value) of the stock of (or a partnership interest 
in) each member of the expanded affiliated group. For this purpose, a 
five percent former domestic entity shareholder (or five percent former 
domestic entity partner) is a former domestic entity shareholder (or 
former domestic entity partner) that, before the domestic entity 
acquisition, owned (applying the attribution rules of section 318(a) 
with the modifications described in section 304(c)(3)(B)) at least five 
percent (by vote and value) of the stock of (or a partnership interest 
in) the domestic entity. See Example 5 of this paragraph (i) for an 
illustration of this paragraph (d).
    (2) Stock issued to avoid the purposes of section 7874. The 
exception in paragraph (d)(1) of this section does not apply to 
disqualified stock that is transferred in a transaction (or series of 
transactions) related to the domestic entity acquisition with a 
principal purpose of avoiding the purposes of section 7874.
    (e) Satisfaction or assumption of obligations. Except to the extent 
stock is treated as disqualified stock as a result of being described in 
paragraph (c)(1)(ii) of this section, this paragraph (e) applies if, in 
a transaction related to the domestic entity acquisition, stock of the 
foreign acquiring corporation is transferred to a person other than the 
domestic entity in exchange for the satisfaction or the assumption of 
one or more obligations of the transferor. In such a case, solely for 
purposes of this section, the stock of the foreign acquiring corporation 
is treated as if it is transferred in exchange for an amount of cash 
equal to the fair market value of such stock.
    (f) Transactions involving multiple properties. For purposes of this 
section, if stock and other property are exchanged for qualified 
property and nonqualified property, the stock is treated as transferred 
in exchange for the qualified property or nonqualified property, 
respectively, based on the relative fair market value of the property. 
See also Sec. 1.7874-2(f)(2) (allocating stock of a foreign acquiring 
corporation between an interest in the domestic entity and other 
property).
    (g) Treatment of partnerships. For purposes of this section, if one 
or more members of the expanded affiliated group own, in the aggregate, 
more than 50 percent (by value) of the interests in a partnership, such 
partnership is treated as a corporation that is a member of the expanded 
affiliated group.
    (h) Definitions. In addition to the definitions in Sec. 1.7874-12, 
the following definitions apply for purposes of this section:
    (1) Marketable securities has the meaning set forth in section 
453(f)(2), except that the term marketable securities does not include 
stock of a corporation or an interest in a partnership that becomes a 
member of the expanded affiliated group in a transaction (or series of 
transactions) related to the domestic entity acquisition. See Example 4 
of paragraph (i) of this section for an illustration of this paragraph 
(h)(1).
    (2) Nonqualified property is property described in paragraphs 
(h)(2)(i) through (iv) of this section. Thus, stock in a corporation or 
an interest in a partnership is nonqualified property to the extent 
provided in paragraph

[[Page 776]]

(h)(2)(ii) or (iv) of this section. Qualified property is property other 
than nonqualified property.
    (i) Cash or cash equivalents.
    (ii) Marketable securities, within the meaning of paragraph (h)(1) 
of this section.
    (iii) An obligation owed by any of the following:
    (A) A member of the expanded affiliated group, unless the holder of 
the obligation immediately before the domestic entity acquisition and 
any related transaction (or its successor) is a member of the expanded 
affiliated group after the domestic entity acquisition and all related 
transactions. See Example 6 of paragraph (i) of this section for an 
illustration of this paragraph (h)(2)(iii)(A).
    (B) A former domestic entity shareholder or former domestic entity 
partner of the domestic entity that owns (applying the attribution rules 
of section 318(a) with the modifications described in section 
304(c)(3)(B)) at least five percent (by vote or value) of the stock of, 
or partnership interests in, the domestic entity before the domestic 
entity acquisition.
    (C) A person, other than a member of the expanded affiliated group, 
that, before or after the domestic entity acquisition, either owns 
(applying the attribution rules of section 318(a) with the modifications 
described in section 304(c)(3)(B)) at least five percent (by vote or 
value) of the stock of (or partnership interests in) or is related 
(within the meaning of section 267 or 707(b)) to--
    (1) A member of the expanded affiliated group; or
    (2) A person described in paragraph (h)(2)(iii)(B) of this section.
    (iv) Any other property acquired with a principal purpose of 
avoiding the purposes of section 7874, regardless of whether the 
transaction involves an indirect transfer of property described in 
paragraph (h)(2)(i), (ii), or (iii) of this section. See Example 2 and 
Example 3 of paragraph (i) of this section for illustrations of the 
application of this paragraph (h)(2)(iv).
    (3) An obligation means any fixed or contingent obligation to make a 
payment or provide value without regard to whether the obligation is 
otherwise taken into account for purposes of the Internal Revenue Code. 
An obligation includes, but is not limited to, a debt obligation, an 
environmental obligation, a tort obligation, a contract obligation 
(including an obligation to provide goods or services), a pension 
obligation, an obligation under a short sale, and an obligation under 
derivative financial instruments such as options, forward contracts, 
futures contracts, and swaps. An obligation does not include any 
obligation treated as stock for purposes of section 7874 (see, for 
example, Sec. 1.7874-2(i), which treats certain interests, including 
certain creditor claims, as stock).
    (4) A transfer is, with respect to stock of the foreign acquiring 
corporation, an issuance, sale, distribution, exchange, or any other 
disposition of such stock.
    (i) Examples. The following examples illustrate the application of 
the rules of this section. For purposes of the examples, unless 
otherwise indicated, assume the following facts in addition to the facts 
stated in the examples:
    (1) FA, FMS, FS, and FT are foreign corporations, all of which have 
only one class of stock issued and outstanding;
    (2) DMS and DT are domestic corporations;
    (3) P and R are corporations that may be either domestic or foreign;
    (4) PRS is a partnership with individual partners;
    (5) The de minimis ownership exception in paragraph (d)(1) of this 
section does not apply;
    (6) None of the shareholders or partners in the entities described 
in the examples are related persons with respect to each other;
    (7) All transactions described in each example occur pursuant to the 
same plan;
    (8) No property is acquired with a principal purpose of avoiding the 
purposes of section 7874;
    (9) FA, FMS, FS, and FT are tax residents in the same foreign 
country;
    (10) For purposes of determining the ownership fraction, no shares 
of FA stock are excluded from the denominator pursuant to Sec. 1.7874-
7(b) (which disregards stock attributable to passive assets); and

[[Page 777]]

    (11) For purposes of determining the ownership fraction, no shares 
of FA stock are treated as received by former shareholders of DT 
pursuant to Sec. 1.7874-10(b) (which disregards certain distributions).

    Example 1. Stock transferred in exchange for marketable securities--
(i) Facts. Individual A wholly owns DT. PRS transfers marketable 
securities (within the meaning of paragraph (h)(1) of this section) to 
FA, a newly formed corporation, in exchange solely for 25 shares of FA 
stock. Then Individual A transfers all the DT stock to FA in exchange 
solely for 75 shares of FA stock.
    (ii) Analysis. Under paragraph (h)(2)(ii) of this section, the 
marketable securities constitute nonqualified property. Accordingly, the 
25 shares of FA stock transferred by FA to PRS in exchange for the 
marketable securities constitute disqualified stock described in 
paragraph (c)(1) of this section by reason of paragraph (c)(1)(i) of 
this section. Paragraph (c)(2) of this section does not reduce the 
amount of disqualified stock described in paragraph (c)(1)(i) of this 
section because the transfer of FA stock in exchange for the marketable 
securities increases the fair market value of the assets of FA by the 
fair market value of the marketable securities transferred. Under 
paragraph (b) of this section, the 25 shares of FA stock transferred to 
PRS are not included in the denominator of the ownership fraction. See 
also section 7874(c)(4). Accordingly, the only FA stock included in the 
ownership fraction is the FA stock transferred to Individual A in 
exchange for the DT stock, and that FA stock is included in both the 
numerator and the denominator of the ownership fraction. Thus, the 
ownership fraction is 75/75.
    Example 2. Stock transferred in exchange for property acquired with 
a principal purpose of avoiding the purposes of section 7874--(i) Facts. 
Individual A wholly owns DT. PRS transfers marketable securities (within 
the meaning of paragraph (h)(1) of this section) to FT, a newly formed 
corporation, in exchange solely for all the FT stock. Then PRS transfers 
the FT stock to FA, a newly formed corporation, in exchange solely for 
25 shares of FA stock. Finally, Individual A transfers all the DT stock 
to FA in exchange solely for 75 shares of FA stock. FA acquires the FT 
stock with a principal purpose of avoiding the purposes of section 7874.
    (ii) Analysis. Under paragraph (h)(2)(iv) of this section, the FT 
stock constitutes nonqualified property because a principal purpose of 
FA acquiring the FT stock is to avoid the purposes of section 7874. 
Accordingly, the 25 shares of FA stock transferred by FA to PRS in 
exchange for the FT stock constitute disqualified stock described in 
paragraph (c)(1) of this section by reason of paragraph (c)(1)(i) of 
this section. Paragraph (c)(2) of this section does not reduce the 
amount of disqualified stock described in paragraph (c)(1)(i) of this 
section because the transfer of FA stock in exchange for the FT stock 
increases the fair market value of FA's assets by the fair market value 
of the FT stock. Under paragraph (b) of this section, the 25 shares of 
FA stock transferred to PRS are not included in the denominator of the 
ownership fraction. Furthermore, even in the absence of paragraph 
(h)(2)(iv) of this section, the transfer of marketable securities to FT 
would be disregarded pursuant to section 7874(c)(4). Accordingly, the 
only FA stock included in the ownership fraction is the FA stock 
transferred to Individual A in exchange for the DT stock, and that FA 
stock is included in both the numerator and the denominator of the 
ownership fraction. Thus, the ownership fraction is 75/75.
    Example 3. Stock transferred in exchange for property acquired with 
a principal purpose of avoiding the purposes of section 7874--(i) Facts. 
DT is a publicly traded corporation. PRS is a foreign partnership that 
is unrelated to DT. PRS transfers certain business assets (PRS 
properties) to FA, a newly formed foreign corporation, in exchange 
solely for 25 shares of FA stock. The shareholders of DT transfer all of 
their DT stock to FA in exchange solely for the remaining 75 shares of 
FA stock (DT acquisition). None of the PRS properties is property 
described in paragraph (h)(2)(i) through (iii) of this section, but FA 
acquires the PRS properties with a principal purpose of avoiding the 
purposes of section 7874.
    (ii) Analysis. Under paragraph (h)(2)(iv) of this section, the PRS 
properties transferred to FA constitute nonqualified property, because 
FA acquires the PRS properties in a transaction related to the DT 
acquisition with a principal purpose of avoiding the purposes of section 
7874. Accordingly, the 25 shares of FA stock transferred by FA to PRS in 
exchange for the PRS properties constitute disqualified stock described 
in paragraph (c)(1) of this section by reason of paragraph (c)(1)(i) of 
this section. Paragraph (c)(2) of this section does not apply to reduce 
the amount of disqualified stock described in paragraph (c)(1)(i) of 
this section because the transfer of FA stock in exchange for the PRS 
properties increases the fair market value of FA's assets by the fair 
market value of the PRS properties. Accordingly, pursuant to paragraph 
(b) of this section, the 25 shares of FA stock transferred to PRS in 
exchange for the PRS properties are not included in the denominator of 
the ownership fraction. Furthermore, even in the absence of paragraph 
(h)(2)(iv) of this section, the transfer of the PRS properties to FA 
would be disregarded pursuant to section 7874(c)(4). Therefore, the only 
FA stock included in the ownership fraction is the FA stock transferred 
to the

[[Page 778]]

former domestic entity shareholders of DT in exchange for their DT 
stock, and that FA stock is included in both the numerator and the 
denominator of the ownership fraction. Thus, the ownership fraction is 
75/75.
    Example 4. Stock transferred in exchange for stock of a foreign 
corporation that becomes a member of the expanded affiliated group--(i) 
Facts. FT, a publicly traded corporation, forms FA, and then FA forms 
DMS and FMS. FMS merges with and into FT, with FT surviving the merger 
(FMS-FT merger). Pursuant to the FMS-FT merger, the FT shareholders 
exchange their FT stock solely for 100 shares of FA stock and FT becomes 
a wholly owned subsidiary of FA. Following the FMS-FT merger, DMS merges 
with and into DT, also a publicly traded corporation, with DT surviving 
the merger (DT acquisition). Pursuant to the DT acquisition, the DT 
shareholders exchange their DT stock solely for the remaining 100 shares 
of FA stock, and DT becomes a wholly owned subsidiary of FA. After the 
completion of the plan, FA wholly owns FT and DT, DMS and FMS cease to 
exist, and the stock of FA is publicly traded.
    (ii) Analysis. Because FT becomes a member of the expanded 
affiliated group that includes FA in a transaction related to the DT 
acquisition, the FT stock does not constitute marketable securities 
(within the meaning of paragraph (h)(1) of this section) and therefore 
does not constitute nonqualified property pursuant to paragraph 
(h)(2)(ii) of this section. Accordingly, no FA stock is disqualified 
stock described in paragraph (c)(1) of this section and therefore the FA 
stock transferred in exchange for the FT stock and DT stock is included 
in the denominator of the ownership fraction. Thus, the ownership 
fraction is 100/200.
    (iii) Alternative facts. The facts are the same as in paragraph (i) 
of this Example 4, except that, instead of undertaking the FMS-FT 
merger, FT merges with and into FA with FA surviving the merger (FT-FA 
merger). Pursuant to the FT-FA merger, the FT shareholders exchange 
their FT stock solely for 100 shares of FA stock. At the time of the FT-
FA merger, FT does not hold nonqualified property and has no 
obligations. Accordingly, FA stock transferred by FA to FT in exchange 
for the property of FT is not disqualified stock described in paragraph 
(c)(1) of this section. Furthermore, pursuant to paragraph (c)(2) of 
this section, the 100 shares of FA stock transferred by FT to the 
shareholders of FT in exchange for their FT stock do not constitute 
disqualified stock described in paragraph (c)(1) of this section. 
Although the FT stock is nonqualified property (the FT stock constitutes 
marketable securities within the meaning of paragraph (h)(2)(ii) of this 
section because the stock of FT is publicly traded and FT is not a 
member of the expanded affiliated group that includes FA after the DT 
acquisition), under paragraph (c)(2) of this section, the transfer of FA 
stock by FT to the shareholders of FT neither increases the fair market 
value of the assets of FA nor decreases the liabilities of FA. 
Accordingly, no FA stock is disqualified stock described in paragraph 
(c)(1) of this section and, therefore, the FA stock transferred in 
exchange for the assets of FT and the DT stock is included in the 
denominator of the ownership fraction. Thus, the ownership fraction is 
100/200.
    Example 5. De minimis exception--(i) Facts. Individual A wholly owns 
DT. The fair market value of the DT stock is $100x. PRS transfers $96x 
of cash to FA, a newly formed corporation, in exchange solely for 96 
shares of FA stock. Then Individual A transfers the DT stock to FA in 
exchange for $96x of cash and 4 shares of FA stock (DT acquisition).
    (ii) Analysis. Under paragraph (h)(2)(i) of this section, cash 
constitutes nonqualified property. Accordingly, the 96 shares of FA 
stock transferred by FA to PRS in exchange for $96x of cash constitute 
disqualified stock described in paragraph (c)(1) of this section by 
reason of paragraph (c)(1)(i) of this section. Furthermore, paragraph 
(c)(2) of this section does not reduce the amount of disqualified stock 
described in paragraph (c)(1)(i) of this section because the transfer of 
FA stock in exchange for $96x of cash increases the fair market value of 
the assets of FA by $96x. However, without regard to the application of 
paragraph (b) of this section and Sec. Sec. 1.7874-7(b) and 1.7874-
10(b), the ownership percentage described in section 7874(a)(2)(B)(ii) 
would be less than 5 (by vote and value), or 4 (4/100, or 4 shares of FA 
stock held by Individual A by reason of owning the DT stock, determined 
under Sec. 1.7874-2(f)(2), over 100 shares of FA stock outstanding 
after the DT acquisition). Furthermore, after the DT acquisition and all 
related transactions, Individual A owns less than 5% (by vote and value, 
applying the attribution rules of section 318(a) with the modifications 
described in section 304(c)(3)(B)) of the stock of FA and DT (the 
members of the expanded affiliated group that includes FA). Accordingly, 
the de minimis exception in paragraph (d)(1) of this section applies and 
therefore paragraph (b) of this section does not apply to exclude the FA 
stock transferred to PRS from the denominator of the ownership fraction. 
Therefore, the FA stock transferred to Individual A and PRS is included 
in the denominator of the ownership fraction. Thus, the ownership 
fraction is 4/100.
    Example 6. Obligation of the expanded affiliated group satisfied 
with stock--(i) Facts. Individual A wholly owns DT. The stock of DT held 
by Individual A has a fair market value of $75x. Individual A also holds 
an obligation of DT with a value and face amount of $25x. DT holds 
property with a value of $100x, and the $25x obligation is associated 
with the

[[Page 779]]

property. FA, a newly formed corporation, transfers 100 shares of FA 
stock to Individual A in exchange for all the DT stock and the $25x 
obligation of DT.
    (ii) Analysis. Under paragraph (h)(2)(iii)(A) of this section, the 
$25x obligation of DT constitutes nonqualified property because DT is a 
member of the expanded affiliated group that includes FA, and Individual 
A (the holder of the obligation immediately before the domestic entity 
acquisition and any related transaction) is not a member of the EAG 
after the domestic entity acquisition and all related transactions. 
Thus, the shares of FA stock transferred by FA to Individual A in 
exchange for the obligation of DT constitute disqualified stock 
described in paragraph (c)(1) of this section by reason of paragraph 
(c)(1)(i) of this section. Under Sec. 1.7874-2(f)(2), Individual A is 
treated as receiving 75 shares of FA stock in exchange for the DT stock 
(100 x $75x/$100x) and 25 shares of FA stock in exchange for the 
obligation of DT (100 x $25x/$100x). Thus, 25 shares of FA stock 
constitute disqualified stock described in paragraph (c)(1) of this 
section by reason of paragraph (c)(1)(i) of this section. Paragraph 
(c)(2) of this section does not reduce the amount of disqualified stock 
described in paragraph (c)(1)(i) of this section because the transfer of 
FA stock for the $25x obligation increases the fair market value of FA's 
assets by $25x. Therefore, under paragraph (b) of this section, the 25 
shares of FA stock transferred to Individual A in exchange for the 
obligation of DT are not included in the denominator of the ownership 
fraction. Accordingly, the only FA stock included in the ownership 
fraction is the 75 shares of FA stock transferred to Individual A in 
exchange for the DT stock, and that FA stock is included in both the 
numerator and the denominator of the ownership fraction. Thus, the 
ownership fraction is 75/75.
    (iii) Alternative facts. The facts are the same as in paragraph (i) 
of this Example 6, except that instead of acquiring the stock of DT and 
the $25x obligation of DT, FA acquires the $100x of property from DT in 
exchange solely for 100 shares of FA stock. DT distributes 75 shares of 
FA stock to Individual A in exchange for Individual A's DT stock and 
transfers 25 shares of FA stock to Individual A in satisfaction of DT's 
obligation to Individual A, and liquidates. The 25 shares of FA stock 
transferred by FA to DT in exchange for the property of DT and then 
transferred by DT in satisfaction of DT's obligation to Individual A 
constitute disqualified stock described in paragraph (c)(1) of this 
section by reason of paragraph (c)(1)(ii) of this section. Paragraph 
(c)(2) of this section does not reduce the amount of disqualified stock 
described in paragraph (c)(1)(ii) of this section because the transfer 
of FA stock in exchange for the property of DT increases the fair market 
value of FA's assets by $100x (although the amount of disqualified stock 
is limited to 25 shares of FA stock in this case). Therefore, under 
paragraph (b) of this section, the 25 shares of FA stock that constitute 
disqualified stock are not included in the denominator of the ownership 
fraction. Accordingly, only 75 shares of FA stock are included in the 
ownership fraction, and that FA stock is included in both the numerator 
and the denominator of the ownership fraction. Thus, the ownership 
fraction is 75/75.
    Example 7. ``Over-the-top'' stock transfer--(i) Facts. Individual A 
wholly owns DT. Individual B holds all 100 outstanding shares of FA 
stock. Individual C acquires 20 shares of FA stock from Individual B for 
cash, and then FA acquires all of the stock of DT from Individual A in 
exchange solely for 100 shares of FA stock.
    (ii) Analysis. Under paragraph (h)(2)(i) of this section, cash 
constitutes nonqualified property. Accordingly, absent the application 
of paragraph (c)(2) of this section, the 20 shares of FA stock 
transferred by Individual B to Individual C in exchange for cash would 
constitute disqualified stock described in paragraph (c)(1) of this 
section by reason of paragraph (c)(1)(i) of this section. Nevertheless, 
because Individual B's sale of FA stock neither increases the assets of 
FA nor decreases the liabilities of FA, such FA stock is not 
disqualified stock by reason of paragraph (c)(2) of this section. 
Accordingly, paragraph (b) of this section does not apply to exclude the 
20 shares of FA stock sold by Individual B to Individual C, and that FA 
stock is included in the denominator of the ownership fraction. The 100 
shares of FA stock received by Individual A are the only shares included 
in the numerator of the ownership fraction. Thus, the ownership fraction 
is 100/200.
    Example 8. Interaction with internal group restructuring rule--(i) 
Facts. P holds 85 shares of DT stock. The remaining 15 shares of DT 
stock are held by Individual A. P and Individual A transfer their shares 
of DT stock to FA, a newly formed corporation, in exchange for 85 and 15 
shares of FA stock, respectively (DT acquisition), and PRS transfers 
$75x of cash to FA in exchange for the remaining 75 shares of FA stock.
    (ii) Analysis. Under paragraph (h)(2)(i) of this section, cash 
constitutes nonqualified property. Accordingly, the 75 shares of FA 
stock transferred by FA to PRS in exchange for $75x of cash constitute 
disqualified stock described in paragraph (c)(1) of this section by 
reason of paragraph (c)(1)(i) of this section. Furthermore, paragraph 
(c)(2) of this section does not reduce the amount of disqualified stock 
described in paragraph (c)(1)(i) of this section because the transfer of 
FA stock in exchange for $75x of cash increases the fair market value of 
the assets of FA by $75x. Therefore, under paragraph (b) of

[[Page 780]]

this section, the 75 shares of FA stock transferred to PRS are not 
included in the denominator of the ownership fraction. Although PRS's 
shares of FA stock are excluded from the denominator of the ownership 
fraction under paragraph (b) of this section, under 1.7874-1(d)(1), such 
shares of FA stock nonetheless are taken into account for purposes of 
determining whether P is a member of the expanded affiliated group that 
includes FA and for purposes of determining whether the DT acquisition 
qualifies as an internal group restructuring. Because P holds 48.6% of 
the FA stock (85/175) after the DT acquisition and all transactions 
related to the DT acquisition, it is not a member of the expanded 
affiliated group that includes FA. In addition, the DT acquisition does 
not qualify as an internal group restructuring described in Sec. 
1.7874-1(c)(2) because P does not hold, directly or indirectly, 80% or 
more of the shares of FA stock (by vote and value) after the DT 
acquisition and all transactions related to the DT acquisition. 
Therefore, the FA stock held by P (along with the FA stock held by 
Individual A) is included in the numerator and the denominator of the 
ownership fraction. Thus, the ownership fraction is 100/100.
    Example 9. Interaction with loss of control rule--(i) Facts. P 
wholly owns DT. P transfers all of its shares of DT stock to FA, a newly 
formed corporation, in exchange for 49 shares of FA stock (DT 
acquisition), and R transfers marketable securities (within the meaning 
of paragraph (h)(1) of this section) to FA in exchange for the remaining 
51 shares of FA stock.
    (ii) Analysis. Under paragraph (h)(2)(ii) of this section, the 
marketable securities constitute nonqualified property. Accordingly, the 
shares of FA stock transferred by FA to R in exchange for the marketable 
securities constitute disqualified stock described in paragraph (c)(1) 
of this section by reason of paragraph (c)(1)(i) of this section. 
Paragraph (c)(2) of this section does not reduce the amount of 
disqualified stock described in paragraph (c)(1)(i) of this section 
because the transfer of FA stock in exchange for the marketable 
securities increases the fair market value of the assets of FA by the 
fair market value of the marketable securities transferred. Therefore, 
under paragraph (b) of this section, the shares of FA stock transferred 
to R are not included in the denominator of the ownership fraction. 
Although under paragraph (b) of this section R's shares of FA stock are 
excluded from the denominator of the ownership fraction, under 1.7874-
1(d)(1), such stock is taken into account for purposes of determining 
whether P or R is a member of the expanded affiliated group that 
includes FA. Because P holds 49% of the shares of FA stock (49/100), P 
is not a member of the expanded affiliated group that includes FA, and 
P's FA stock is included in both the numerator and the denominator of 
the ownership fraction. Because R holds 51% of the shares of FA stock 
(51/100), R is a member of the expanded affiliated group that includes 
FA and, before taking into account Sec. 1.7874-1(c), R's FA stock would 
be excluded from the numerator and denominator of the ownership fraction 
under section 7874(c)(2)(A) and Sec. 1.7874-1(b). However, the DT 
acquisition results in a loss of control described in Sec. 1.7874-
1(c)(3) because P does not hold, in the aggregate, directly or 
indirectly, more than 50% of the shares of stock (by vote or value) of 
R, FA, or DT after the acquisition. Accordingly, the FA stock held by R 
would be included in the denominator of the ownership fraction under 
Sec. 1.7874-1(c)(1). Nevertheless, the FA stock held by R is excluded 
from the denominator of the ownership fraction under paragraph (b) of 
this section and Sec. 1.7874-1(d)(1). Thus, the ownership fraction is 
49/49.
    (iii) Alternative facts. The facts are the same as in paragraph (i) 
of this Example 9, except that, in exchange for 51 shares of FA stock, R 
transfers marketable securities (within the meaning of paragraph (h)(1) 
of this section) with a value equal to that of 16 shares of FA stock and 
qualified property (within the meaning of paragraph (h)(2) of this 
section) with a value equal to that of 35 shares of FA stock. 
Accordingly, 16 of the 51 shares of FA stock transferred to R constitute 
disqualified stock described in paragraph (c)(1) of this section by 
reason of paragraph (c)(1)(i) of this section, and 35 of such shares do 
not constitute disqualified stock. Paragraph (c)(2) of this section does 
not reduce the amount of disqualified stock described in paragraph 
(c)(1)(i) of this section because the transfer of FA stock in exchange 
for the marketable securities increases the fair market value of the 
assets of FA by the fair market value of the marketable securities 
transferred. Therefore, under paragraph (b) of this section, 16 of the 
51 shares of FA stock transferred to R are not included in the 
denominator of the ownership fraction. Although 16 of the 51 shares of 
FA stock that are transferred to R are excluded from the denominator of 
the ownership fraction, underSec. 1.7874-1(d)(1), all 51 of R's shares 
of FA stock are taken into account for purposes of determining whether P 
or R is a member of the expanded affiliated group that includes FA. 
Because P holds 49% of the shares of FA stock (49/100), it is not a 
member of the expanded affiliated group that includes FA, and its FA 
stock is included in both the numerator and the denominator of the 
ownership fraction. Because R holds 51% of the shares of FA stock (51/
100), it is a member of the expanded affiliated group that includes FA 
and, before taking into account Sec. 1.7874-1(c), its FA stock is 
excluded from the numerator and denominator of the ownership fraction 
under section 7874(c)(2)(A) and

[[Page 781]]

Sec. 1.7874-1(b). However, the DT acquisition results in a loss of 
control described in Sec. 1.7874-1(c)(3) because P does not hold, in 
the aggregate, directly or indirectly, more than 50% of the shares of 
stock (by vote or value) of R, FA, or DT after the acquisition. 
Accordingly, the 51 shares of FA stock held by R would be included in 
the denominator of the ownership fraction under Sec. 1.7874-1(c)(1). 
Nevertheless, the 16 shares of FA stock that constitute disqualified 
stock are excluded from the denominator of the ownership fraction under 
paragraph (b) of this section and Sec. 1.7874-1(d)(1). In addition, the 
35 shares of FA stock received by R that do not constitute disqualified 
stock are included in the denominator. Thus, the ownership fraction is 
49/84.
    Example 10. Stock issued in lieu of assuming associated obligation--
(i) Facts. Individual A wholly owns DT. The stock of DT has a fair 
market value of $100x. Individual B wholly owns FT, a foreign 
corporation, which conducts two businesses, Business C and Business D. 
Business C comprises property with a gross fair market value of $70x and 
$20x of associated obligations. Business D comprises property with a 
gross fair market value of $45x and $35x of associated obligations. 
Individual A transfers all of the shares of DT stock to FA, a newly 
formed corporation, in exchange for $100x of FA stock (DT acquisition). 
In transactions related to the DT acquisition, FA acquires all of the 
Business C property from FT in exchange for $70x of FA stock and then FT 
transfers $30x of the FA stock to its creditors in satisfaction of $30x 
of its obligations. None of the Business C property is nonqualified 
property.
    (ii) Analysis. Under paragraph (c)(1) of this section by reason of 
paragraph (c)(1)(ii) of this section, the $30x of FA stock transferred 
to FT (the transferee) in exchange for the Business C property (the 
exchanged property) and then transferred by FT in satisfaction of $30x 
of its obligations is disqualified stock, except to the extent limited 
by paragraph (c)(1)(ii)(B) of this section. Under paragraph 
(c)(1)(ii)(B)(1) of this section, the proportionate share of obligations 
associated with the exchanged property that is not assumed by FA must be 
determined. The proportionate share of obligations associated with the 
exchanged property is $20x, calculated as $20x (the obligations 
associated with the Business C properties) multiplied by $70x/$70x (the 
fair market value of the exchanged property, $70x, relative to the fair 
market value of all the Business C property, $70x). The proportionate 
share of obligations associated with the exchanged property that is not 
assumed by FA is $20x, calculated as the proportionate share of 
obligations associated with the exchanged property ($20x) less the 
obligations assumed by FA ($0x). Under paragraph (c)(1)(ii)(B)(2) of 
this section, the amount of disqualified stock is limited to the 
proportionate share of obligations associated with the exchanged 
property that is not assumed ($20x) multiplied by a fraction, which in 
this case is $70x/$70x (the amount of exchanged property that is 
qualified property, $70x, divided by the total amount of exchanged 
property, $70x). Accordingly, $20x of FA stock is disqualified stock 
under paragraph (c)(1) of this section by reason of paragraph (c)(1)(ii) 
of this section. Paragraph (c)(2) of this section does not reduce the 
amount of disqualified stock described in paragraph (c)(1)(ii) of this 
section because the transfer of the FA stock in exchange for the 
exchanged property increases the fair market value of FA's assets by 
$70x (although the amount of disqualified stock is limited to $20x of FA 
stock in this case). Therefore, under paragraph (b) of this section, the 
$20x of FA stock that constitutes disqualified stock is not included in 
the denominator of the ownership fraction. Accordingly, only $150x of FA 
stock is included in the denominator of the ownership fraction, 
calculated as the $100x of FA stock received by Individual A plus the 
$70x of FA stock received by FT less the $20x of FA stock that is 
disqualified stock. Thus, the ownership fraction is $100x/$150x. The 
result would be the same if, in transactions related to the DT 
acquisition, FT instead sold the $30x of FA stock for $30x cash and then 
transferred the cash in satisfaction of $30x of its obligations.
    (iii) Alternative facts. The facts are the same as in paragraph (i) 
of this Example 10, except that FA acquires only $42x of the Business C 
property in exchange for $30x of FA stock and the assumption of $12x of 
the obligations associated with the Business C property. Under paragraph 
(c)(1) of this section by reason of paragraph (c)(1)(ii) of this 
section, the $30x of FA stock transferred to FT (the transferee) in 
exchange for the Business C property (the exchanged property) and then 
transferred by FT in satisfaction of $30x of its obligations is 
disqualified stock, except to the extent limited by paragraph 
(c)(1)(ii)(B) of this section. Under paragraph (c)(1)(ii)(B)(1) of this 
section, the proportionate share of obligations associated with the 
exchanged property that is not assumed by FA must be determined. The 
proportionate share of obligations associated with the exchanged 
property is $12x, calculated as $20x (the obligations associated with 
the Business C property) multiplied by $42x/$70x (the fair market value 
of the exchanged property, $42x, relative to the fair market value of 
all the Business C property, $70x). The proportionate share of 
obligations associated with the exchanged property that is not assumed 
by FA is $0, calculated as the proportionate share of obligations 
associated with the exchanged property ($12x) less the

[[Page 782]]

obligations assumed by FA ($12x). Accordingly, as a result of the 
application of paragraph (c)(1)(ii)(B)(2) of this section, no FA stock 
is disqualified stock under paragraph (c)(1) of this section by reason 
of paragraph (c)(1)(ii) of this section. As a result, $130x of FA stock 
is included in the denominator of the ownership fraction, calculated as 
the $100x of FA stock received by Individual A plus the $30x of FA stock 
received by FT. Thus, the ownership fraction is $100x/$130x.

    (j) Applicability dates--(1) General rule. Except to the extent 
otherwise provided in paragraph (j) of this section, this section 
applies to domestic entity acquisitions completed on or after September 
17, 2009. Paragraphs (h)(1) and (h)(2)(iv) of this section apply to 
domestic entity acquisitions completed on or after November 19, 2015. 
Paragraph (d)(1)(i) of this section applies to domestic entity 
acquisitions completed on or after April 4, 2016. Paragraphs (c)(1)(ii), 
(h)(2)(iii), and (h)(3) of this section apply to domestic entity 
acquisitions completed on or after January 13, 2017. For domestic entity 
acquisitions completed before November 19, 2015, see Sec. 1.7874-
4T(i)(6) and (i)(7)(iv) (the predecessors of paragraphs (h)(1) and 
(h)(2)(iv) of this section) as contained in 26 CFR part 1 revised as of 
April 1, 2016. For domestic entity acquisitions completed on or after 
September 22, 2014, and before April 4, 2016, see Sec. 1.7874-
4T(d)(1)(i) as contained in 26 CFR part 1 revised as of April 1, 2016. 
For domestic entity acquisitions completed before January 13, 2017, see 
Sec. 1.7874-4T(c)(1)(ii), (i)(7)(iii) (the predecessor of paragraph 
(h)(2)(iii) of this section), and (i)(8) (the predecessor of paragraph 
(h)(3) of this section) as contained in 26 CFR part 1 revised as of 
April 1, 2016. Paragraph (d)(1)(ii) of this section applies to domestic 
entity acquisitions completed on or after July 12, 2018, though 
taxpayers may elect to consistently apply paragraph (d)(1)(ii) of this 
section to domestic entity acquisitions completed before July 12, 2018. 
For domestic entity acquisitions completed before July 12, 2018, see 
Sec. 1.7874-4(d)(1)(ii) as contained in 26 CFR part 1 revised as of 
April 1, 2017.
    (2) Transitional rules for domestic entity acquisitions completed on 
or after September 17, 2009, but before January 16, 2014. For domestic 
entity acquisitions completed on or after September 17, 2009, but before 
January 16, 2014, except as provided in paragraph (j)(3) of this 
section, this section shall be applied with the following modifications:
    (i) Nonqualified property does not include property described in 
paragraph (h)(2)(iii) of this section.
    (ii) A transfer is limited to an issuance of stock of the foreign 
acquiring corporation.
    (iii) The determination of whether stock of the foreign acquiring 
corporation is described in paragraph (c)(1) of this section is made 
without regard to paragraphs (c)(1)(ii), (c)(2), and (e) of this 
section.
    (iv) Paragraph (d) of this section and Sec. 1.7874-1(d)(1)do not 
apply.
    (3) Election for domestic entity acquisitions completed on or after 
September 17, 2009, and before January 13, 2017. If, pursuant to 
paragraph (j)(1) or (2) of this section, a paragraph of this section 
would not otherwise apply to a domestic entity acquisition completed on 
or after September 17, 2009, and before January 13, 2017 (transition 
period), a taxpayer may elect to apply the paragraph if the taxpayer 
applies the paragraph consistently to all acquisitions completed during 
the transition period. The election is made by applying the paragraph to 
all such acquisitions on a timely filed original return (including 
extensions) or an amended return filed no later than six months after 
January 13, 2017. A separate statement or form evidencing the election 
need not be filed.

[T.D. 9812, 82 FR 5394, Jan. 18, 2017; 82 FR 42233, Sept. 7, 2017; T.D. 
9834, 83 FR 32547, July 12, 2018]



Sec. 1.7874-5  Effect of certain transfers of stock related to 
the acquisition.

    (a) General rule. Stock of a foreign acquiring corporation that is 
described in section 7874(a)(2)(B)(ii) shall not cease to be so 
described as a result of any subsequent transfer of the stock by the 
former domestic entity shareholder or former domestic entity partner 
that received such stock, even if the subsequent transfer is related to 
the domestic entity acquisition.
    (b) Example. The rule of this section is illustrated by the 
following example:

    Example. (i) Facts. Individual A wholly owns DT, a domestic 
corporation. FA, a

[[Page 783]]

newly formed foreign corporation, acquires all of the stock of DT from 
Individual A in exchange solely for 100 shares of FA stock. Pursuant to 
a binding commitment that was entered into in connection with FA's 
acquisition of the DT stock, Individual A sells 25 shares of FA stock to 
B, an unrelated person, in exchange for cash. For federal income tax 
purposes, the form of the steps of the transaction is respected.
    (ii) Analysis. Under Sec. 1.7874-2(f)(1), the 100 shares of FA 
stock received by Individual A are stock of a foreign corporation (FA) 
that is held by reason of holding stock in a domestic corporation (DT). 
Accordingly, such stock is described in section 7874(a)(2)(B)(ii). Under 
paragraph (a) of this section, all 100 shares of FA stock retain their 
status as being described in section 7874(a)(2)(B)(ii), even though 
Individual A sells 25 of the 100 shares in connection with the 
acquisition described in section 7874(a)(2)(B)(i) pursuant to the 
binding commitment. Therefore, all 100 of the shares of FA stock are 
included in both the numerator and denominator of the ownership 
fraction.

    (c) Certain transfers involving expanded affiliated group members. 
For rules addressing whether certain stock is treated as held by members 
of the expanded affiliated group for purposes of applying section 
7874(c)(2)(A) and Sec. 1.7874-1, see Sec. 1.7874-6.
    (d) Definitions. The definitions provided in Sec. 1.7874-12 apply 
for purposes of this section.
    (e) Applicability dates. This section applies to domestic entity 
acquisitions that are completed on or after January 16, 2014.

[T.D. 9812, 82 FR 5400, Jan. 18, 2017, as amended by T.D. 9834, 83 FR 
32548, July 12, 2018]



Sec. 1.7874-6  Stock transferred by members of the EAG.

    (a) Scope. This section provides rules regarding whether transferred 
stock is treated as held by members of the EAG for purposes of applying 
section 7874(c)(2)(A) and Sec. 1.7874-1. Paragraph (b) of this section 
sets forth the general rule under which transferred stock is not treated 
as held by members of the EAG for purposes of applying section 
7874(c)(2)(A) and Sec. 1.7874-1. Paragraph (c) of this section provides 
exceptions to the general rule. Paragraph (d) of this section provides 
rules regarding the treatment of partnerships, and paragraph (e) of this 
section provides rules regarding transactions related to the 
acquisition. Paragraph (f) of this section provides definitions. 
Paragraph (g) of this section provides examples illustrating the 
application of the rules of this section. Paragraph (h) of this section 
provides dates of applicability.
    (b) General rule. Except as provided in paragraph (c) of this 
section, transferred stock is not treated as held by members of the EAG 
for purposes of applying section 7874(c)(2)(A) and Sec. 1.7874-1. 
Transferred stock that is not treated as held by members of the EAG for 
purposes of applying section 7874(c)(2)(A) and Sec. 1.7874-1 is 
included in the numerator and the denominator of the ownership fraction. 
See Sec. 1.7874-5(a).
    (c) Exceptions. Transferred stock is treated as held by members of 
the EAG for purposes of applying section 7874(c)(2)(A) and Sec. 1.7874-
1 if paragraph (c)(1) or (2) of this section applies. Transferred stock 
that is treated as held by members of the EAG for purposes of applying 
section 7874(c)(2)(A) and Sec. 1.7874-1 is excluded from the numerator 
of the ownership fraction and, depending upon the application of Sec. 
1.7874-1(c), may be excluded from the denominator of the ownership 
fraction. See Sec. 1.7874-1(b) and (c).
    (1) Transfers involving a U.S.-parented group. This paragraph (c)(1) 
applies if the following conditions are satisfied:
    (i) Before the domestic entity acquisition, the transferring 
corporation is a member of a U.S.-parented group.
    (ii) After the domestic entity acquisition, each of the transferring 
corporation (or its successor), any person that holds transferred stock, 
and the foreign acquiring corporation are members of a U.S.-parented 
group the common parent of which--
    (A) Before the domestic entity acquisition, was a member of the 
U.S.-parented group described in paragraph (c)(1)(i) of this section; or
    (B) Is a corporation that was formed in a transaction related to the 
domestic entity acquisition, provided that, immediately after the 
corporation was formed (and without regard to any related transactions), 
the corporation was a member of the U.S.-parented group described in 
paragraph (c)(1)(i) of this section.

[[Page 784]]

    (2) Transfers involving a foreign-parented group. This paragraph 
(c)(2) applies if the following conditions are satisfied:
    (i) Before the domestic entity acquisition, the transferring 
corporation and the domestic entity are members of the same foreign-
parented group.
    (ii) After the domestic entity acquisition, the transferring 
corporation--
    (A) Is a member of the EAG; or
    (B) Would be a member of the EAG absent one or more transfers (other 
than by issuance), in a transaction (or series of transactions) after 
and related to the domestic entity acquisition, of stock of the foreign 
acquiring corporation by one or more members of the foreign-parented 
group described in paragraph (c)(2)(i) of this section.
    (d) Treatment of partnerships--(1) Stock held by a partnership. For 
purposes of this section, each partner in a partnership, as determined 
without regard to the application of paragraph (d)(2) of this section, 
is treated as holding its proportionate share of the stock held by the 
partnership, as determined under the rules and principles of sections 
701 through 777.
    (2) Partnership treated as corporation. For purposes of this 
section, if one or more members of an affiliated group, as determined 
after the application of paragraph (d)(1) of this section, own, in the 
aggregate, more than 50 percent (by value) of the interests in a 
partnership, the partnership will be treated as a corporation that is a 
member of the affiliated group.
    (e) Treatment of transactions related to the acquisition. Except as 
provided in paragraphs (c)(1)(ii)(B) and (c)(2)(ii)(B) of this section, 
all transactions that are related to a domestic entity acquisition are 
taken into account in applying this section.
    (f) Definitions. In addition to the definitions provided in Sec. 
1.7874-12, the following definitions apply for purposes of this section.
    (1) A foreign-parented group means an affiliated group that has a 
foreign corporation as the common parent corporation. A member of the 
foreign-parented group is an entity included in the foreign-parented 
group.
    (2) Transferred stock--(i) In general. Transferred stock means stock 
of the foreign acquiring corporation described in section 
7874(a)(2)(B)(ii) that is received by a transferring corporation and, in 
a transaction (or series of transactions) related to the domestic entity 
acquisition, is subsequently transferred.
    (ii) Special rule. This paragraph (f)(2)(ii) applies in certain 
cases in which a transferring corporation receives stock of the foreign 
acquiring corporation described in section 7874(a)(2)(B)(ii) that has 
the same terms as other stock of the foreign acquiring corporation that 
is received by the transferring corporation in a transaction (or series 
of transactions) related to the domestic entity acquisition or that is 
owned by the transferring corporation prior to the domestic entity 
acquisition (the stock described in this sentence, collectively, 
fungible stock). Pursuant to this paragraph (f)(2)(ii), if, in a 
transaction (or series of transactions) related to the domestic entity 
acquisition, the transferring corporation subsequently transfers less 
than all of the fungible stock, a pro rata portion of the stock 
subsequently transferred is treated as consisting of stock of the 
foreign acquiring corporation described in section 7874(a)(2)(B)(ii). 
The pro rata portion is based, at the time of the subsequent transfer, 
on the relative fair market value of the fungible stock that is stock of 
the foreign acquiring corporation described in section 7874(a)(2)(B)(ii) 
to the fair market value of all the fungible stock.
    (3) A transferring corporation means a corporation that is a former 
domestic entity shareholder or former domestic entity partner.
    (4) A U.S.-parented group means an affiliated group that has a 
domestic corporation as the common parent corporation. A member of the 
U.S.-parented group is an entity included in the U.S.-parented group, 
including the common parent corporation.
    (g) Examples. The following examples illustrate the application of 
this section.

    Example 1. U.S.-parented group exception not available--(i) Facts. 
USP, a domestic corporation wholly owned by Individual A, owns all the 
stock of DT, a domestic corporation, as well as other property. The DT 
stock does

[[Page 785]]

not represent substantially all of the property of USP for purposes of 
section 7874. Pursuant to a reorganization described in section 
368(a)(1)(D), USP transfers all the DT stock to FA, a newly formed 
foreign corporation, in exchange for 100 shares of FA stock (DT 
acquisition) and distributes the FA stock to Individual A pursuant to 
section 361(c)(1).
    (ii) Analysis. The 100 FA shares received by USP are stock of a 
foreign acquiring corporation described in section 7874(a)(2)(B)(ii) 
and, under Sec. 1.7874-5(a), the shares retain their status as such 
even though USP subsequently distributes the shares to Individual A 
pursuant to section 361(c)(1). Thus, the 100 FA shares are included in 
the ownership fraction, unless the shares are treated as held by members 
of the EAG for purposes of applying section 7874(c)(2)(A) and Sec. 
1.7874-1 and are excluded from the ownership fraction under those rules. 
For purposes of applying section 7874(c)(2)(A) and Sec. 1.7874-1, the 
100 FA shares, which constitute transferred stock under paragraph (f)(2) 
of this section, are treated as held by members of the EAG only if an 
exception in paragraph (c) of this section applies. See paragraph (b) of 
this section. The U.S.-parented group exception described in paragraph 
(c)(1) of this section does not apply. Although before the DT 
acquisition, USP (the transferring corporation) is a member of a U.S.-
parented group of which USP is the common parent, after the DT 
acquisition, and taking into account all transactions related to the 
acquisition, each of USP, Individual A (the person that holds the 
transferred stock), and FA (the foreign acquiring corporation) are not 
members of a U.S.-parented group described in paragraph (c)(1)(ii)(A) or 
(B) of this section. Accordingly, because the 100 FA shares are not 
treated as held by members of the EAG, those shares are included in the 
numerator and the denominator of the ownership fraction. Therefore, the 
ownership fraction is 100/100.
    Example 2. U.S.-parented group exception available--(i) Facts. USP, 
a domestic corporation wholly owned by Individual A, owns all the stock 
of USS, a domestic corporation, and USS owns all the stock of FT, a 
foreign corporation. FT owns all the stock of DT, a domestic 
corporation. FT does not own any other property and has no liabilities. 
Pursuant to a reorganization described in section 368(a)(1)(F), FT 
transfers all of its DT stock to FA, a newly formed foreign corporation, 
in exchange for 100 shares of FA stock (DT acquisition) and distributes 
the FA stock to USS in liquidation pursuant to section 361(c)(1). In a 
transaction after and related to the DT acquisition, USP sells 60 
percent of the stock of USS (by vote and value) to Individual B.
    (ii) Analysis. The 100 FA shares received by FT are stock of a 
foreign acquiring corporation described in section 7874(a)(2)(B)(ii) 
and, under Sec. 1.7874-5(a), the shares retain their status as such 
even though FT subsequently distributes the shares to USS pursuant to 
section 361(c)(1). Thus, the 100 FA shares are included in the ownership 
fraction, unless the shares are treated as held by members of the EAG 
for purposes of applying section 7874(c)(2)(A) and Sec. 1.7874-1 and 
are excluded from the ownership fraction under those rules. For purposes 
of applying section 7874(c)(2)(A) and Sec. 1.7874-1, the 100 FA shares, 
which constitute transferred stock under paragraph (f)(2) of this 
section, are treated as held by members of the EAG only if an exception 
in paragraph (c) of this section applies. See paragraph (b) of this 
section. The U.S.-parented group exception described in paragraph (c)(1) 
of this section applies. The requirement set forth in paragraph 
(c)(1)(i) of this section is satisfied because before the DT 
acquisition, FT (the transferring corporation) is a member of a U.S.-
parented group of which USP is the common parent (the USP group). The 
requirement set forth in paragraph (c)(1)(ii) of this section is 
satisfied because after the DT acquisition, and taking into account all 
transactions related to the acquisition, each of FA (which is both the 
successor to FT, the transferring corporation, and the foreign acquiring 
corporation) and USS (the person that holds the transferred stock) are 
members of a U.S.-parented group of which USS (a member of the USP group 
before the DT acquisition) is the common parent. Moreover, the DT 
acquisition qualifies as an internal group restructuring under Sec. 
1.7874-1(c)(2). The requirement set forth in Sec. 1.7874-1(c)(2)(i) is 
satisfied because before the DT acquisition, 80 percent or more of the 
stock (by vote and value) of DT was held directly or indirectly by USS 
(the corporation that after the acquisition, and taking into account all 
transactions related to the acquisition, is the common parent of the 
EAG). The requirement set forth in Sec. 1.7874-1(c)(2)(ii) is satisfied 
because after the acquisition, and taking into account all transactions 
related to the acquisition, 80 percent or more of the stock (by vote and 
value) of FA (the foreign acquiring corporation) is held directly or 
indirectly by USS. Therefore, the 100 FA shares are excluded from the 
numerator, but included in the denominator, of the ownership fraction. 
Accordingly, the ownership fraction is 0/100.
    Example 3. U.S.-parented group exception available--(i) Facts. USP, 
a domestic corporation wholly owned by Individual A, owns all the stock 
of USS, a domestic corporation, and USS owns all the stock of DT, also a 
domestic corporation. DT owns all the stock of FT, a foreign 
corporation. The FT stock represents substantially all of the property 
of DT for purposes of section 7874. Pursuant to a reorganization 
described in section 368(a)(1)(D), DT transfers all the FT stock to

[[Page 786]]

FA, a newly formed foreign corporation, in exchange for 100 shares of FA 
stock (DT acquisition) and distributes the FA stock to USS pursuant to 
section 361(c)(1). In a related transaction, USS distributes all the FA 
stock to USP under section 355(c)(1). Lastly, in another related 
transaction and pursuant to a divisive reorganization described in 
section 368(a)(1)(D), USP transfers all the stock of USS and FA to DP, a 
newly formed domestic corporation, in exchange for all the stock of DP 
and distributes the DP stock to Individual A pursuant to section 
361(c)(1).
    (ii) Analysis. The 100 FA shares received by USS are stock of a 
foreign acquiring corporation described in section 7874(a)(2)(B)(ii) 
and, under Sec. 1.7874-5(a), the shares retain their status as such 
even though USS subsequently transfers the shares to USP. Thus, the 100 
FA shares are included in the ownership fraction, unless the shares are 
treated as held by members of the EAG for purposes of applying section 
7874(c)(2)(A) and Sec. 1.7874-1 and are excluded from the ownership 
fraction under those rules. For purposes of applying section 
7874(c)(2)(A) and Sec. 1.7874-1, the 100 FA shares, which constitute 
transferred stock under paragraph (f)(2) of this section, are treated as 
held by members of the EAG only if an exception in paragraph (c) of this 
section applies. See paragraph (b) of this section. The U.S.-parented 
group exception described in paragraph (c)(1) of this section applies. 
The requirement set forth in paragraph (c)(1)(i) of this section is 
satisfied because before the DT acquisition, USS (the transferring 
corporation) is a member of a U.S.-parented group of which USP is the 
common parent (the USP group). The requirement set forth in paragraph 
(c)(1)(ii) of this section is satisfied because after the DT 
acquisition, and taking into account all transactions related to the 
acquisition, each of USS, DP (the person that holds the transferred 
stock), and FA (the foreign acquiring corporation) are members of a 
U.S.-parented group of which DP (a corporation that was formed in a 
transaction related to the DT acquisition and that, immediately after it 
was formed (but without regard to any related transactions) was a member 
of the USP group) is the common parent. Therefore, the 100 FA shares are 
excluded from the numerator and the denominator of the ownership 
fraction. Accordingly, the ownership fraction is 0/0.
    Example 4. Foreign-parented group exception--(i) Facts. Individual A 
owns all the stock of FT, a foreign corporation, and FT owns all the 
stock of DT, a domestic corporation. FT does not own any other property 
and has no liabilities. Pursuant to a reorganization described in 
section 368(a)(1)(F), FT transfers all the stock of DT to FA, a newly 
formed foreign corporation, in exchange for 100 shares of FA stock (DT 
acquisition) and distributes the FA stock to Individual A in liquidation 
pursuant to section 361(c)(1).
    (ii) Analysis. The 100 FA shares received by FT are stock of a 
foreign acquiring corporation described in section 7874(a)(2)(B)(ii) 
and, under Sec. 1.7874-5(a), the shares retain their status as such 
even though FT subsequently distributes the shares to Individual A 
pursuant to section 361(c)(1). Thus, the 100 FA shares are included in 
the ownership fraction, unless the shares are treated as held by members 
of the EAG of purposes of applying section 7874(a)(2)(A) and Sec. 
1.7874-1 and are excluded from the ownership fraction under those rules. 
For purposes of applying section 7874(c)(2)(A) and Sec. 1.7874-1, the 
100 FA shares, which constitute transferred stock under paragraph (f)(2) 
of this section, are treated as held by members of the EAG only if an 
exception in paragraph (c) of this section applies. See paragraph (b) of 
this section. The foreign-parented group exception described in 
paragraph (c)(2) of this section applies. The requirement set forth in 
paragraph (c)(2)(i) of this section is satisfied because before the DT 
acquisition, FT (the transferring corporation) and DT are members of the 
foreign-parented group of which FT is the common parent. The requirement 
set forth in paragraph (c)(2)(ii) of this section is satisfied because 
after the acquisition, and taking into account all transactions related 
to the acquisition, FT would be a member of the EAG absent the 
distribution of the FA shares pursuant to section 361(c)(1). Moreover, 
the DT acquisition qualifies as an internal group restructuring under 
Sec. 1.7874-1(c)(2). The requirement set forth in Sec. 1.7874-
1(c)(2)(i) is satisfied because before the acquisition, 80 percent or 
more of the stock (by vote and value) of DT was held directly or 
indirectly by FT, the corporation that, without regard to the 
distribution of the FA shares pursuant to section 361(c)(1), would be 
common parent of the EAG after the acquisition. See Sec. 1.7874-
1(c)(2)(iii). The requirement set forth in Sec. 1.7874-1(c)(2)(ii) is 
satisfied because after the acquisition, but without regard to the 
distribution of the FA shares pursuant to the section 361(c)(1) 
distribution, FT would directly or indirectly hold 80 percent or more of 
the stock (by vote and value) of FA (the foreign acquiring corporation). 
See Sec. 1.7874-1(c)(2)(iii). Therefore, the 100 FA shares are excluded 
from the numerator, but included in the denominator, of the ownership 
fraction. Accordingly, the ownership fraction is 0/100.
    (iii) Alternative facts. The facts are the same as in paragraph (i) 
of this Example 4, except that in a transaction after and related to the 
DT acquisition, FA issues 200 shares of FA stock to Individual B in 
exchange for qualified property (within the meaning of Sec. 1.7874-
4(h)(2)). The foreign-parented group exception does not apply because 
after the acquisition, and taking into

[[Page 787]]

account FA's issuance of the 200 FA shares to Individual B, FT would not 
be a member of the EAG absent FT's distribution of the 100 FA shares 
pursuant to section 361(c)(1). Accordingly, the 100 FA shares received 
by FT are not treated as held by a member of the EAG for purposes of 
applying section 7874(c)(2)(A) and Sec. 1.7874-1. As a result, the 
ownership fraction is 100/300.

    (h) Applicability dates. Except as otherwise provided in this 
paragraph (h), this section applies to domestic entity acquisitions 
completed on or after September 22, 2014. Paragraphs (d)(2) and 
(f)(2)(ii) of this section apply to domestic entity acquisitions 
completed on or after April 4, 2016. Taxpayers, however, may elect 
either to apply paragraph (c)(2) of this section to domestic entity 
acquisitions completed before September 22, 2014, or to consistently 
apply paragraphs (c)(2), (d)(2), and (f)(2)(ii) of this section and 
Sec. 1.7874-1(c)(2)(iii) and (g) to domestic entity acquisitions 
completed before April 4, 2016.

[T.D. 9834, 83 FR 32548, July 12, 2018]



Sec. 1.7874-7  Disregard of certain stock attributable to passive 
assets.

    (a) Scope. This section identifies certain stock of a foreign 
acquiring corporation that is attributable to passive assets and that is 
disregarded in determining the ownership fraction by value. Paragraph 
(b) of this section sets forth the general rule regarding when stock of 
a foreign acquiring corporation is excluded from the denominator of the 
ownership fraction under this section. Paragraph (c) of this section 
provides a de minimis exception to the application of the general rule 
of paragraph (b) of this section. Paragraph (d) of this section provides 
rules for the treatment of partnerships, and paragraph (e) of this 
section provides definitions. Paragraph (f) of this section provides 
examples illustrating the application of the rules of this section. 
Paragraph (g) of this section provides dates of applicability. The rules 
provided in this section are also subject to section 7874(c)(4). See 
Sec. 1.7874-1(d)(1) for rules addressing the interaction of this 
section with the expanded affiliated group rules of section 
7874(c)(2)(A) and Sec. 1.7874-1.
    (b) General rule. If, on the completion date, more than fifty 
percent of the gross value of all foreign group property constitutes 
foreign group nonqualified property, then, for purposes of determining 
the ownership percentage by value (but not vote) described in section 
7874(a)(2)(B)(ii), stock of the foreign acquiring corporation is 
excluded from the denominator of the ownership fraction in an amount 
equal to the product of--
    (1) The value of the stock of the foreign acquiring corporation, 
other than stock that is described in section 7874(a)(2)(B)(ii) and 
stock that is excluded from the denominator of the ownership fraction 
under Sec. 1.7874-1(b), Sec. 1.7874-4(b), Sec. 1.7874-8(b), Sec. 
1.7874-9(b), or section Sec. 7874(c)(4); and
    (2) The foreign group nonqualified property fraction.
    (c) De minimis ownership. Paragraph (b) of this section does not 
apply if--
    (1) The ownership percentage described in section 7874(a)(2)(B)(ii), 
determined without regard to the application of paragraph (b) of this 
section and Sec. Sec. 1.7874-4(b) and 1.7874-10(b), is less than five 
(by vote and value); and
    (2) On the completion date, each five percent former domestic entity 
shareholder or five percent former domestic entity partner, as 
applicable, owns (applying the attribution rules of section 318(a) with 
the modifications described in section 304(c)(3)(B)) less than five 
percent (by vote and value) of the stock of (or a partnership interest 
in) each member of the expanded affiliated group. For this purpose, a 
five percent former domestic entity shareholder (or five percent former 
domestic entity partner) is a former domestic entity shareholder (or 
former domestic entity partner) that, before the domestic entity 
acquisition, owned (applying the attribution rules of section 318(a) 
with the modifications described in section 304(c)(3)(B)) at least five 
percent (by vote and value) of the stock of (or a partnership interest 
in) the domestic entity.
    (d) Treatment of partnerships. For purposes of this section, if one 
or more members of the modified expanded affiliated group own, in the 
aggregate, more than 50 percent (by value) of the

[[Page 788]]

interests in a partnership, the partnership is treated as a corporation 
that is a member of the modified expanded affiliated group.
    (e) Definitions. In addition to the definitions provided in Sec. 
1.7874-12, the following definitions apply for purposes of this section.
    (1) Foreign group nonqualified property--(i) General rule. Foreign 
group nonqualified property means foreign group property described in 
Sec. 1.7874-4(h)(2), other than the following:
    (A) Property that gives rise to income described in section 954(h), 
determined--
    (1) In the case of property held by a foreign corporation, by 
substituting the term ``foreign corporation'' for the term ``controlled 
foreign corporation;'' and
    (2) In the case of property held by a domestic corporation, by 
substituting the term ``domestic corporation'' for the term ``controlled 
foreign corporation,'' without regard to the phrase ``other than the 
United States'' in section 954(h)(3)(A)(ii)(I), and without regard to 
any inference that the tests in section 954(h) should be calculated or 
determined without taking transactions with customers located in the 
United States into account.
    (B) Property that gives rise to income described in section 954(i), 
determined by substituting the term ``foreign corporation'' for the term 
``controlled foreign corporation.''
    (C) Property that gives rise to income described in section 
1297(b)(2)(A) or (B) (determined without regard to other passive foreign 
investment company rules).
    (D) Property held by a domestic corporation that is subject to tax 
as an insurance company under subchapter L of chapter 1 of subtitle A of 
the Internal Revenue Code, provided that the property is required to 
support, or is substantially related to, the active conduct of an 
insurance business.
    (ii) Special rule. Foreign group nonqualified property also means 
any foreign group property that, in a transaction related to the 
domestic entity acquisition, is acquired in exchange for other property, 
including cash, if such other property would be described in paragraph 
(e)(1)(i) of this section had the transaction not occurred.
    (2) Foreign group property means any property (including excluded 
property, as described in paragraph (e)(3)(ii) of this section)) held on 
the completion date by the modified expanded affiliated group, other 
than--
    (i) Property that is directly or indirectly acquired in the domestic 
entity acquisition;
    (ii) Stock or a partnership interest in a member of the modified 
expanded affiliated group; and
    (iii) An obligation of a member of the modified expanded affiliated 
group.
    (3) Foreign group nonqualified property fraction--(i) In general. 
Foreign group nonqualified property fraction means a fraction calculated 
with the following numerator and denominator:
    (A) The numerator of the fraction is the gross value of all foreign 
group nonqualified property, other than excluded property (as described 
in paragraph (e)(3)(ii) of this section).
    (B) The denominator of the fraction is the gross value of all 
foreign group property, other than excluded property (as described in 
paragraph (e)(3)(ii) of this section)
    (ii) Excluded property. For purposes of paragraph (e)(3) of this 
section, excluded property means property that gives rise to stock that 
is excluded from the ownership fraction with respect to the domestic 
entity acquisition under Sec. 1.7874-4(b), Sec. 1.7874-8(b), Sec. 
1.7874-9(b), or section 7874(c)(4). For this purpose, only property that 
was directly or indirectly acquired in a prior domestic entity 
acquisition (as described in Sec. 1.7874-8(g)(4)) or covered foreign 
acquisition (as described in Sec. 1.7874-9(d)(4)) with respect to the 
domestic entity acquisition may be considered to give rise to stock that 
is excluded from the ownership fraction with respect to the domestic 
entity acquisition under Sec. 1.7874-8(b) or Sec. 1.7874-9(b). If only 
a portion of the consideration provided in a prior domestic entity 
acquisition or covered foreign acquisition consisted of stock of the 
foreign acquiring corporation, then only a pro rata portion of a 
property directly or

[[Page 789]]

indirectly acquired in the prior domestic entity acquisition or covered 
foreign acquisition may be considered excluded property, based on a 
fraction the numerator of which is the amount of the consideration that 
consisted of stock of the foreign acquiring corporation and the 
denominator of which is the total amount of consideration.
    (4) Modified expanded affiliated group means, with respect to a 
domestic entity acquisition, the group described in either paragraph 
(e)(4)(i) of this section or paragraph (e)(4)(ii) of this section. A 
member of the modified expanded affiliated group is an entity included 
in the modified expanded affiliated group.
    (i) When the foreign acquiring corporation is not the common parent 
corporation of the expanded affiliated group, the expanded affiliated 
group determined as if the foreign acquiring corporation was the common 
parent corporation.
    (ii) When the foreign acquiring corporation is the common parent 
corporation of the expanded affiliated group, the expanded affiliated 
group.
    (f) Examples. The following examples illustrate the rules of this 
section.

    Example 1. Application of general rule--(i) Facts. Individual A owns 
all 20 shares of the sole class of stock of FA, a foreign corporation. 
FA acquires all the stock of DT, a domestic corporation, solely in 
exchange for 76 shares of newly issued FA stock (DT acquisition). In a 
transaction related to the DT acquisition, FA issues 4 shares of stock 
to Individual A in exchange for Asset A, which has a gross value of 
$50x. On the completion date, in addition to the DT stock and Asset A, 
FA holds Asset B, which has a gross value of $150x, and Asset C, which 
has a gross value of $100x. Assets A and B, but not Asset C, are 
nonqualified property (within the meaning of Sec. 1.7874-4(h)(2)). 
Further, Asset C was not acquired in a transaction related to the DT 
acquisition.
    (ii) Analysis. The 4 shares of FA stock issued to Individual A in 
exchange for Asset A are disqualified stock under Sec. 1.7874-4(c) and 
are excluded from the denominator of the ownership fraction pursuant to 
Sec. 1.7874-4(b). Furthermore, additional shares of FA stock are 
excluded from the denominator of the ownership fraction pursuant to 
paragraph (b) of this section. This is because on the completion date, 
the gross value of all foreign group property is $300x (the sum of the 
gross values of Assets A, B, and C), the gross value of all foreign 
group nonqualified property is $200x (the sum of the gross values of 
Assets A and B), and thus 66.67% of the gross value of all foreign group 
property constitutes foreign group nonqualified property ($200x/$300x). 
Because FA has only one class of stock outstanding, the shares of FA 
stock that are excluded from the denominator of the ownership fraction 
pursuant to paragraph (b) of this section are calculated by multiplying 
20 shares of FA stock (100 shares less the 76 shares described in 
section 7874(a)(2)(B)(ii) and the 4 shares of disqualified stock) by the 
foreign group nonqualified property fraction. The numerator of the 
foreign group nonqualified property fraction is $150x (the gross value 
of Asset B) and the denominator is $250x (the sum of the gross values of 
Assets B and C). Asset A is not taken into account for purposes of the 
foreign group nonqualified property fraction because it gives rise to FA 
stock that is excluded under Sec. 1.7874-4(b) (4 shares) and, as a 
result, is excluded property. Accordingly, 12 shares of FA stock are 
excluded from the denominator of the ownership fraction pursuant to 
paragraph (b) of this section (20 shares multiplied by $150x/$250x). 
Thus, a total of 16 shares are excluded from the denominator of the 
ownership fraction (4 + 12). As a result, the ownership fraction by 
value is 76/84.
    Example 2. Application of de minimis exception--(i) Facts. 
Individual A owns all 96 shares of the sole class of stock of FA, a 
foreign corporation. Individual B wholly owns DT, a domestic 
corporation. Individuals A and B are not related. FA acquires all the 
stock of DT solely in exchange for 4 shares of newly issued FA stock (DT 
acquisition). On the completion date, in addition to all of the stock of 
DT, FA holds Asset A, which is nonqualified property (within the meaning 
of Sec. 1.7874-4(h)(2)).
    (ii) Analysis. Without regard to the application of Sec. Sec. 
1.7874-4(b) and 1.7874-10(b) as well as paragraph (b) of this section, 
the ownership percentage described in section 7874(a)(2)(B)(ii) would be 
less than 5 (by vote and value), or 4 (4/100, or 4 shares of FA stock 
held by Individual B by reason of owning the DT stock, determined under 
Sec. 1.7874-2(f)(2), over 100 shares of FA stock outstanding after the 
DT acquisition). Furthermore, on the completion date, Individual B owns 
less than 5% (by vote and value) of the stock of FA and DT (the members 
of the expanded affiliated group). Accordingly, the de minimis exception 
in paragraph (c) of this section applies. Therefore, paragraph (b) of 
this section does not apply and the ownership fraction is 4/100.
    Example 3. Foreign acquiring corporation not common parent of EAG--
(i) Facts. FP, a foreign corporation, owns all 85 shares of the sole 
class of stock of FA, a foreign corporation. FA acquires all the stock 
of DT, a domestic corporation, solely in exchange for 65

[[Page 790]]

shares of newly issued FA stock (DT acquisition). On the completion 
date, FA, in addition to all of the stock of DT, owns Asset A, which has 
a gross value of $40x, and Asset B, which has a gross value of $45x. 
Moreover, on the completion date, in addition to the 85 shares of FA 
stock, FP owns Asset C, which has a gross value of $10x. Assets A and C, 
but not Asset B, are nonqualified property (within the meaning of Sec. 
1.7874-4(h)(2)). Further, Asset B was not acquired in a transaction 
related to the DT acquisition in exchange for nonqualified property.
    (ii) Analysis. Under paragraph (e)(2) of this section, Assets A and 
B, but not Asset C, are foreign group property. Although Asset C is held 
on the completion date by FP, a member of the expanded affiliated group, 
Asset C is not foreign group property because FP is not a member of the 
modified expanded affiliated group. This is the case because if the 
expanded affiliated group were determined based on FA as the common 
parent corporation, FP would not be a member of such expanded affiliated 
group (see paragraph (e)(4)(i) of this section). Under paragraph (e)(1) 
of this section, Asset A, but not Asset B, is foreign group nonqualified 
property. Therefore, on the completion date, the gross value of all 
foreign group property is $85x (the sum of the gross values of Assets A 
and B), and the gross value of all foreign group nonqualified property 
is $40x (the gross value of Asset A). Accordingly, on the completion 
date, only 47.06% of the gross value of all foreign group property 
constitutes foreign group nonqualified property ($40x/$85x). 
Consequently, paragraph (b) of this section does not apply to exclude 
any FA stock from the denominator of the ownership fraction.
    Example 4. Coordination with serial acquisition rule--(i) Facts. 
Individual A owns all 30 shares of the sole class of stock of FA, a 
foreign corporation. In Year 1, FA acquires all the stock of DT1, a 
domestic corporation, solely in exchange for 40 shares of newly issued 
FA stock (DT1 acquisition). In Year 2, FA acquires all the stock of DT2, 
a domestic corporation, solely in exchange for 50 shares of newly issued 
FA stock (DT2 acquisition). On the completion date for the DT2 
acquisition, in addition to the DT2 stock, FA holds Asset A, which has a 
gross value of $15x, Asset B, which has a gross value of $15x, and all 
the stock of DT1, which has a gross value of $40x. At all times, DT1 
holds only Asset C, which has a gross value of $30x, and Asset D, which 
has a gross value of $10x. Assets A and C, but not Assets B and D, are 
nonqualified property (within the meaning of Sec. 1.7874-4(h)(2)). In 
addition, at all times, the fair market value of each share of FA stock 
is $1x. Further, there have been no redemptions of FA stock subsequent 
to the DT1 acquisition. Lastly, under Sec. 1.7874-8, the DT1 
acquisition is a prior domestic entity acquisition with respect to the 
DT2 acquisition and $40x of FA stock is excluded from the denominator of 
the ownership fraction with respect to the DT2 acquisition.
    (ii) Analysis. Shares of FA stock are excluded from the denominator 
of the ownership fraction pursuant to paragraph (b) of this section. 
This is because on the completion date, the gross value of all foreign 
group property is $70x (the sum of the gross values of Assets A, B, C, 
and D), the gross value of all foreign group nonqualified property is 
$45x (the sum of the gross values of Assets A and C), and thus 64.29% of 
the gross value of all foreign group property constitutes foreign group 
nonqualified property ($45x/$70x). The shares of FA stock that are 
excluded from the denominator of the ownership fraction pursuant to 
paragraph (b) of this section are calculated by multiplying $30x ($120x, 
the value of all the shares of FA stock, less $50x, the value of the 
stock described in section 7874(a)(2)(B)(ii), less $40x, the value of 
the stock excluded under Sec. 1.7874-8(b)) by the foreign group 
nonqualified property fraction. The property taken into account for 
purposes of determining the foreign group nonqualified property fraction 
is Asset A and Asset B. Asset C and Asset D are not taken into account 
for purposes of the foreign group nonqualified property fraction because 
they are excluded property. This is because FA indirectly acquired the 
Assets in the DT1 acquisition (a prior domestic entity acquisition with 
respect to the DT2 acquisition) and, as a result of that acquisition, 
$40x of FA stock is excluded from the denominator of the ownership 
fraction with respect to the DT2 acquisition under Sec. 1.7874-8(b). 
Thus, the numerator of the foreign group nonqualified property fraction 
is $15x (the gross value of Asset A) and the denominator is $30x (the 
sum of the gross values of Asset A, $15x, and Asset B, $15x). 
Accordingly, $15x of FA stock is excluded from the denominator of the 
ownership fraction pursuant to paragraph (b) of this section ($30x 
multiplied by $15x/$30x). Thus, a total of $55x of FA stock is excluded 
from the denominator of the ownership fraction ($40x + $15x), making the 
denominator $65x ($120x - $55x). As a result, the ownership percentage 
with respect to the DT2 acquisition by value is 76.92 ($50x/$65x).
    (ii) Alternative facts. The facts are the same as in paragraph (i) 
of this Example 4, except as follows. Initially, there are 40 shares of 
FA stock outstanding, all of which are owned by Individual A. At all 
times, the gross value of asset D is $20x. In the DT1 acquisition, FA 
acquires all the stock of DT1 ($50x fair market value) solely in 
exchange for 40 shares of newly issued FA stock and $10x of other 
property. As in paragraph (i) of this Example 4, shares of FA stock are 
excluded from the denominator of the ownership fraction pursuant to 
paragraph (b) of this section. This is because on the completion date, 
the gross value of all foreign group

[[Page 791]]

property is $80x (the sum of the gross values of Assets A, B, C, and D), 
the gross value of all foreign group nonqualified property is $45x (the 
sum of the gross values of Assets A and C), and thus 56.25% of the gross 
value of all foreign group property constitutes foreign group 
nonqualified property ($45x/$80x). The shares of FA stock that are 
excluded from the denominator of the ownership fraction pursuant to 
paragraph (b) of this section are calculated by multiplying $40x ($130x, 
the value of all the shares of FA stock, less $50x, the value of the 
stock described in section 7874(a)(2)(B)(ii), less $40x, the value of 
the stock excluded under Sec. 1.7874-8(b)) by the foreign group 
nonqualified property fraction. The property taken into account for 
purposes of determining the foreign group nonqualified property fraction 
is Asset A, Asset B, and the portion of Asset C and Asset D that is not 
excluded property. Eighty percent of each of Asset C and Asset D are 
considered excluded property because FA indirectly acquired Asset C and 
Asset D in the DT1 acquisition (a prior domestic entity acquisition with 
respect to the DT2 acquisition); as a result of that acquisition, $40x 
of FA stock is excluded from the denominator of the ownership fraction 
with respect to the DT2 acquisition under Sec. 1.7874-8(b); and 80% of 
the consideration provided in the DT1 acquisition consisted of stock of 
FA ($40x/$50x). Thus, the numerator of the foreign group nonqualified 
property fraction is $21x (the sum of the gross values of Asset A, $15x, 
and the portion of Asset C that is not excluded property, $6x) and the 
denominator is $40x (the sum of the gross values of Asset A, $15x, Asset 
B, $15x, and the portion of Asset C and Asset D that is not excluded 
property, $6x and $4x, respectively). Accordingly, $21x of FA stock is 
excluded from the denominator of the ownership fraction pursuant to 
paragraph (b) of this section ($40x multiplied by $21x/$40x). Thus, a 
total of $61x of FA stock is excluded from the denominator of the 
ownership fraction pursuant to paragraph (b) of this section ($40x + 
$21x), making the denominator $69x ($130x - $61x). As a result, the 
ownership percentage with respect to D2 acquisition by value is 72.46 
($50x/$69x).

    (g) Applicability dates. This section applies to domestic entity 
acquisitions completed on or after July 12, 2018. For domestic entity 
acquisitions completed before July 12, 2018, see Sec. 1.7874-7T, as 
contained in 26 CFR part 1 revised as of April 1, 2017. However, to the 
extent this section differs from Sec. 1.7874-7T, as contained in 26 CFR 
part 1 revised as of April 1, 2017, taxpayers may elect to consistently 
apply the differences to domestic entity acquisitions completed before 
July 12, 2018.

[T.D. 9834, 83 FR 32551, July 12, 2018]



Sec. 1.7874-8  Disregard of certain stock attributable to serial
acquisitions.

    (a) Scope. This section identifies stock of a foreign acquiring 
corporation that is disregarded in determining an ownership fraction by 
value because it is attributable to certain prior domestic entity 
acquisitions. Paragraph (b) of this section sets forth the general rule 
regarding the amount of stock of a foreign acquiring corporation that is 
excluded from the denominator of the ownership fraction by value under 
this section, and paragraphs (c) through (f) of this section provide 
rules for determining this amount. Paragraph (g) provides definitions. 
Paragraph (h) of this section provides examples illustrating the 
application of the rules of this section. Paragraph (i) of this section 
provides dates of applicability. This section applies after taking into 
account Sec. 1.7874-2(e). See Sec. 1.7874-1(d)(1) for rules addressing 
the interaction of this section with the expanded affiliated group rules 
of section 7874(c)(2)(A) and Sec. 1.7874-1.
    (b) General rule. This paragraph (b) applies to a domestic entity 
acquisition (relevant domestic entity acquisition) when the foreign 
acquiring corporation (including a predecessor, as defined in Sec. 
1.7874-10(f)(1)) has completed one or more prior domestic entity 
acquisitions. When this paragraph (b) applies, then, for purposes of 
determining the ownership percentage by value (but not vote) described 
in section 7874(a)(2)(B)(ii), stock of the foreign acquiring corporation 
is excluded from the denominator of the ownership fraction in an amount 
equal to the sum of the excluded amounts computed separately with 
respect to each prior domestic entity acquisition and each relevant 
share class.
    (c) Computation of excluded amounts. With respect to each prior 
domestic entity acquisition and each relevant share class, the excluded 
amount is the product of--
    (1) The total number of prior acquisition shares, reduced by the sum 
of the number of allocable redeemed shares for all redemption testing 
periods; and

[[Page 792]]

    (2) The fair market value of a single share of stock of the relevant 
share class on the completion date of the relevant domestic entity 
acquisition.
    (d) Computation of allocable redeemed shares--(1) In general. With 
respect to each prior domestic entity acquisition and each relevant 
share class, the allocable redeemed shares, determined separately for 
each redemption testing period, is the product of the number of redeemed 
shares during the redemption testing period and the redemption fraction.
    (2) Redemption fraction. The redemption fraction is determined 
separately with respect to each prior domestic entity acquisition, each 
relevant share class, and each redemption testing period, as follows:
    (i) The numerator is the total number of prior acquisition shares, 
reduced by the sum of the number of allocable redeemed shares for all 
prior redemption testing periods.
    (ii) The denominator is the sum of--
    (A) The number of outstanding shares of the foreign acquiring 
corporation stock as of the end of the last day of the redemption 
testing period; and
    (B) The number of redeemed shares during the redemption testing 
period.
    (e) Rules for determining redemption testing periods--(1) In 
general. Except as provided in paragraph (e)(2) of this section, a 
redemption testing period with respect to a prior domestic entity 
acquisition is the period beginning on the day after the completion date 
of the prior domestic entity acquisition and ending on the day prior to 
the completion date of the relevant domestic entity acquisition.
    (2) Election to use multiple redemption testing periods. A foreign 
acquiring corporation may establish a reasonable method for dividing the 
period described in paragraph (e)(1) of this section into shorter 
periods (each such shorter period, a redemption testing period). A 
reasonable method would include a method based on a calendar convention 
(for example, daily, monthly, quarterly, or yearly), or on a convention 
that triggers the start of a new redemption testing period whenever a 
share issuance occurs that exceeds a certain threshold. In order to be 
reasonable, the method must be consistently applied with respect to all 
prior domestic entity acquisitions and all relevant share classes.
    (f) Appropriate adjustments required to take into account share 
splits and similar transactions. For purposes of this section, 
appropriate adjustments must be made to take into account changes in a 
foreign acquiring corporation's capital structure, including, for 
example, stock splits, reverse stock splits, stock distributions, 
recapitalizations, and similar transactions. Thus, for example, in 
determining the total number of prior acquisition shares with respect to 
a relevant share class, appropriate adjustments must be made to take 
into account a stock split with respect to that relevant share class 
that occurs after the completion date with respect to a prior domestic 
entity acquisition.
    (g) Definitions. In addition to the definitions provided in Sec. 
1.7874-12, the following definitions apply for purposes of this section.
    (1) A binding contract means an instrument enforceable under 
applicable law against the parties to the instrument. The presence of a 
condition outside the control of the parties (including, for example, 
regulatory agency approval) does not prevent an instrument from being a 
binding contract. Further, the fact that insubstantial terms remain to 
be negotiated by the parties to the contract, or that customary 
conditions remain to be satisfied, does not prevent an instrument from 
being a binding contract. A tender offer that is subject to section 
14(d) of the Securities and Exchange Act of 1934, (15 U.S.C. 78n(d)(1)), 
and Regulation 14D (17 CFR 240.14d-1 through 240.14d-103) and that is 
not pursuant to a binding contract, is treated as a binding contract 
made on the date of its announcement, notwithstanding that it may be 
modified by the offeror or that it is not enforceable against the 
offerees.
    (2) A relevant share class means, with respect to a prior domestic 
entity acquisition, each separate legal class of shares in the foreign 
acquiring corporation from which prior acquisition shares were issued. 
See also paragraph (f) of this section (requiring appropriate 
adjustments in certain cases).
    (3) Total number of prior acquisition shares means, with respect to 
a prior

[[Page 793]]

domestic entity acquisition and each relevant share class, the total 
number of shares of stock of the foreign acquiring corporation that were 
described in section 7874(a)(2)(B)(ii) as a result of that acquisition 
(without regard to whether the 60 percent test of section 
7874(a)(2)(B)(ii) was satisfied), other than stock treated as received 
by former domestic entity shareholders or former domestic entity 
partners under Sec. 1.7874-10(b) or section 7874(c)(4), adjusted as 
appropriate under paragraph (f) of this section.
    (4) A prior domestic entity acquisition--(i) General rule. Except as 
provided in this paragraph (g)(4), a prior domestic entity acquisition 
means, with respect to a relevant domestic entity acquisition, a 
domestic entity acquisition that occurred within the 36-month period 
ending on the signing date of the relevant domestic entity acquisition.
    (ii) Exception. A domestic entity acquisition is not a prior 
domestic entity acquisition if it is described in paragraph 
(g)(4)(ii)(A) or (B) of this section.
    (A) De minimis. A domestic entity acquisition is described in this 
paragraph (g)(4)(ii)(A) if--
    (1) The ownership percentage described in section 7874(a)(2)(B)(ii) 
with respect to the domestic entity acquisition was less than five (by 
vote and value); and
    (2) The fair market value of the stock of the foreign acquiring 
corporation described in section 7874(a)(2)(B)(ii) as a result of the 
domestic entity acquisition (without regard to whether the 60 percent 
test of section 7874(a)(2)(B)(ii) was satisfied) did not exceed $50 
million, as determined on the completion date with respect to the 
domestic entity acquisition.
    (B) Foreign-parented group. A domestic entity acquisition is 
described in this paragraph (g)(4)(ii)(B) if--
    (1) Before the domestic entity acquisition and any related 
transaction, the domestic entity was a member of a foreign-parented 
group (as described in Sec. 1.7874-6(f)(1)); and
    (2) The domestic entity acquisition qualified for the internal group 
restructuring exception under Sec. 1.7874-1(c)(2).
    (5) A redeemed share means a share of stock in a relevant share 
class that was redeemed (within the meaning of section 317(b)).
    (6) A signing date means the first date on which the contract to 
effect the relevant domestic entity acquisition is a binding contract, 
or if another binding contract to effect a substantially similar 
acquisition was terminated with a principal purpose of avoiding section 
7874, the first date on which such other contract was a binding 
contract.
    (h) Examples. The following examples illustrate the rules of this 
section.

    Example 1. Application of general rule--(i) Facts. Individual A 
wholly owns DT1, a domestic corporation. Individual B owns all 100 
shares of the sole class of stock of FA, a foreign corporation. In Year 
1, FA acquires all the stock of DT1 solely in exchange for 100 shares of 
newly issued FA stock (DT1 acquisition). On the completion date with 
respect to the DT1 acquisition, the fair market value of each share of 
FA stock is $1x. In Year 3, FA enters into a binding contract to acquire 
all the stock of DT2, a domestic corporation wholly owned by Individual 
C. Thereafter, FA acquires all the stock of DT2 solely in exchange for 
150 shares of newly issued FA stock (DT2 acquisition). On the completion 
date with respect to the DT2 acquisition, the fair market value of each 
share of FA stock is $1.50x. FA did not complete the DT1 acquisition and 
DT2 acquisition pursuant to a plan (or series of related transactions) 
for purposes of applying Sec. 1.7874-2(e). In addition, there have been 
no redemptions of FA stock subsequent to the DT1 acquisition.
    (ii) Analysis. The DT1 acquisition is a prior domestic entity 
acquisition with respect to the DT2 acquisition (the relevant domestic 
entity acquisition) because the DT1 acquisition occurred within the 36-
month period ending on the signing date with respect to the DT2 
acquisition. Accordingly, paragraph (b) of this section applies to the 
DT2 acquisition. As a result, and because there were no redemptions of 
FA stock, the excluded amount is $150x, calculated as 100 (the total 
number of prior acquisition shares) multiplied by $1.50x (the fair 
market value of a single share of FA stock on the completion date with 
respect to the DT2 acquisition). Accordingly, the numerator of the 
ownership fraction by value is $225x (the fair market value of the stock 
of FA that, with respect to the DT2 acquisition, is described in section 
7874(a)(2)(B)(ii)) (150 shares x $1.50x per share). In addition, the 
denominator of the ownership fraction is $375x (calculated as $525x, the 
fair market value of all 350 shares of FA stock as of the completion 
date with respect to the DT2 acquisition, less $150x, the excluded 
amount). Therefore, the ownership

[[Page 794]]

percentage by value is 60 ($225x divided by $375x).
    Example 2. Effect of certain redemptions--(i) Facts. The facts are 
the same as in paragraph (i) of Example 1 of this paragraph (h), except 
that in Year 2 FA redeems 50 shares of its stock (the Year 2 
redemption).
    (ii) Analysis. As is the case in paragraph (ii) of Example 1 of this 
paragraph (h), the DT1 acquisition is a prior domestic entity 
acquisition with respect to the DT2 acquisition (the relevant domestic 
entity acquisition), and paragraph (b) of this section thus applies to 
the DT2 acquisition. Because of the Year 2 redemption, the allocable 
redeemed shares, and thus the redemption fraction, must be calculated. 
For this purpose, the redemption testing period is the period beginning 
on the day after the completion date with respect to the DT1 acquisition 
and ending on the day prior to the completion date with respect to the 
DT2 acquisition. The redemption fraction for the redemption testing 
period is thus 100/200, calculated as 100 (the total number of prior 
acquisition shares) divided by 200 (150, the number of outstanding 
shares of FA stock on the last day of the redemption testing period, 
plus 50, the number of redeemed shares during the redemption testing 
period), and the allocable redeemed shares for the redemption testing 
period is 25, calculated as 50 (the number of redeemed shares during the 
redemption testing period) multiplied by 100/200 (the redemption 
fraction for the redemption testing period). As a result, the excluded 
amount is $112.50x, calculated as 75 (100, the total number of prior 
acquisition shares, less 25, the allocable redeemed shares) multiplied 
by $1.50x (the fair market value of a single share of FA stock on the 
completion date with respect to the DT2 acquisition). Accordingly, the 
numerator of the ownership fraction by value is $225x (the fair market 
value of the stock of FA that, with respect to the DT2 acquisition, is 
described in section 7874(a)(2)(B)(ii)) (150 shares x $1.50x per share), 
and the denominator of the ownership fraction is $337.50x (calculated as 
$450x, the fair market value of all 300 shares of FA stock as of the 
completion date with respect to the DT2 acquisition, less $112.50x, the 
excluded amount). Therefore, the ownership percentage by value is 66.67 
($225x divided by $337.50x).
    Example 3. Stock split--(i) Facts. The facts are the same as in 
paragraph (i) of Example 2 of this paragraph (h), except as follows. 
After the Year 2 redemption, but before the DT2 acquisition, FA 
undergoes a stock split and, as a result, each of the 150 shares of FA 
stock outstanding are converted into two shares (Year 2 stock split). 
Further, pursuant to the DT2 acquisition, FA acquires all the stock of 
DT2 solely in exchange for 300 shares of newly issued FA stock. 
Moreover, on the completion date with respect to the DT2 acquisition, 
the fair market value of each share of FA stock is $0.75x.
    (ii) Analysis. As is the case in paragraph (ii) of Example 1 of this 
paragraph (h), the DT1 acquisition is a prior domestic entity 
acquisition with respect to the DT2 acquisition (the relevant domestic 
entity acquisition), and paragraph (b) of this section thus applies to 
the DT2 acquisition. In addition, as is the case in paragraph (ii) of 
Example 2 of this paragraph (h), the redemption testing period is the 
period beginning on the day after the completion date with respect to 
the DT1 acquisition and ending on the day prior to the completion date 
with respect to the DT2 acquisition. To calculate the redemption 
fraction, the total number of prior acquisition shares and the number of 
redeemed shares during the redemption testing period must be 
appropriately adjusted to take into account the Year 2 stock split. See 
paragraph (f) of this section. In this case, the appropriate adjustment 
is to increase the total number of prior acquisition shares from 100 to 
200 and to increase the number of redeemed shares during the redemption 
testing period from 50 to 100. Thus, the redemption fraction for the 
redemption testing period is 200/400, calculated as 200 (the total 
number of prior acquisition shares) divided by 400 (300, the number of 
outstanding shares of FA stock on the last day of the redemption testing 
period, plus 100, the number of redeemed shares during the redemption 
testing period), and the allocable redeemed shares for the redemption 
testing period is 50, calculated as 100 (the number of redeemed shares 
during the redemption testing period) multiplied by 200/400 (the 
redemption fraction for the redemption testing period). In addition, for 
purposes of calculating the excluded amount, the total number of prior 
acquisition shares must be adjusted from 100 to 200. See paragraph (f) 
of this section. Accordingly, the excluded amount is $112.50x, 
calculated as 150 (200, the total number of prior acquisition shares, 
less 50, the allocable redeemed shares) multiplied by $0.75x (the fair 
market value of a single share of FA stock on the completion date with 
respect to the DT2 acquisition). Consequently, the numerator of the 
ownership fraction by value is $225x (the fair market value of the stock 
of FA that, with respect to the DT2 acquisition, is described in section 
7874(a)(2)(B)(ii)) (300 shares x $0.75x per share), and the denominator 
of the ownership fraction is $337.50x (calculated as $450x, the fair 
market value of all 600 shares of FA stock as of the completion date 
with respect to the DT2 acquisition, less $112.50x, the excluded 
amount). Therefore, the ownership percentage by value is 66.67 ($225 
divided by $337.50x).

    (i) Applicability dates. Except as provided in this paragraph (i), 
this section applies to domestic entity acquisitions

[[Page 795]]

completed on or after April 4, 2016, regardless of when a prior domestic 
entity acquisition was completed. Paragraphs (g)(3) and (g)(4)(ii) of 
this section apply to domestic entity acquisitions completed on or after 
July 12, 2018. However, taxpayers may elect to consistently apply 
paragraphs (g)(3) and (g)(4)(ii) of this section to domestic entity 
acquisitions completed on or after April 4, 2016, and before July 12, 
2018. For domestic entity acquisitions completed on or after April 4, 
2016, and before July 12, 2018, see Sec. 1.7874-8T(g)(3) and (g)(4)(ii) 
as contained in 26 CFR part 1 revised as of April 1, 2017.

[T.D. 9834, 83 FR 32553, July 12, 2018]



Sec. 1.7874-9  Disregard of certain stock in third-country 
transactions.

    (a) Scope. This section identifies certain stock of a foreign 
acquiring corporation that is disregarded in determining the ownership 
fraction. Paragraph (b) of this section provides a rule that, in a 
third-country transaction, excludes from the denominator of the 
ownership fraction stock in the foreign acquiring corporation held by 
former shareholders of an acquired foreign corporation by reason of 
holding certain stock in that foreign corporation. Paragraph (c) of this 
section defines a third-country transaction, and paragraph (d) of this 
section provides other definitions. Paragraph (e) of this section 
provides operating rules. Paragraph (f) of this section provides an 
example illustrating the application of the rules of this section. 
Paragraph (g) of this section provides the dates of applicability. See 
Sec. 1.7874-1(d)(1) for rules addressing the interaction of this 
section with the expanded affiliated group rules of section 
7874(c)(2)(A) and Sec. 1.7874-1.
    (b) Exclusion of certain stock of a foreign acquiring corporation 
from the ownership fraction. When a domestic entity acquisition is a 
third-country transaction, stock of the foreign acquiring corporation 
held by reason of holding stock in the acquired foreign corporation 
(within the meaning of paragraph (e)(4) of this section) is, to the 
extent the stock otherwise would be included in the denominator of the 
ownership fraction, excluded from the denominator of the ownership 
fraction pursuant to this paragraph.
    (c) Third-country transaction. A domestic entity acquisition is a 
third-country transaction if the following requirements are satisfied:
    (1) The foreign acquiring corporation completes a covered foreign 
acquisition pursuant to a plan (or series of related transactions) that 
includes the domestic entity acquisition.
    (2) After the covered foreign acquisition and all related 
transactions are complete, the foreign acquiring corporation is not a 
tax resident of the foreign country in which the acquired foreign 
corporation was a tax resident before the covered foreign acquisition 
and all related transactions.
    (3) The ownership percentage described in section 7874(a)(2)(B)(ii), 
determined without regard to the application of paragraph (b) of this 
section, is at least 60.
    (d) Definitions. In addition to the definitions provided in Sec. 
1.7874-12, the following definitions apply for purposes of this section.
    (1) A foreign acquisition means a transaction in which a foreign 
acquiring corporation directly or indirectly acquires substantially all 
of the properties held directly or indirectly by an acquired foreign 
corporation (within the meaning of paragraph (e)(2) of this section).
    (2) An acquired foreign corporation means a foreign corporation 
whose properties are acquired in a foreign acquisition.
    (3) Foreign ownership percentage means, with respect to a foreign 
acquisition, the percentage of stock (by vote or value) of the foreign 
acquiring corporation held by reason of holding stock in the acquired 
foreign corporation (within the meaning of paragraph (e)(3) of this 
section).
    (4) Covered foreign acquisition--(i) In general. Except as provided 
in paragraphs (d)(4)(ii) and (iii) of this section, a covered foreign 
acquisition means a foreign acquisition in which, after the acquisition 
and all related transactions are complete, the foreign ownership 
percentage is at least 60.
    (ii) Substantial business activities exception. A foreign 
acquisition is not a covered foreign acquisition if, on the

[[Page 796]]

completion date, the following requirements are satisfied:
    (A) The foreign acquiring corporation is a tax resident of a foreign 
country.
    (B) The expanded affiliated group has substantial business 
activities in the country in which the foreign acquiring corporation is 
a tax resident when compared to the total business activities of the 
expanded affiliated group. For this purpose, the principles of Sec. 
1.7874-3 apply and the determination of whether there are substantial 
business activities is made without regard to the domestic entity 
acquisition.
    (iii) No income tax exception. A foreign acquisition is not a 
covered foreign acquisition if--
    (A) Before the acquisition and all related transactions, the 
acquired foreign corporation was created or organized in, or under the 
law of, a foreign country that does not impose corporate income tax and 
was not a tax resident of any other foreign country; and
    (B) After the acquisition and all related transactions are complete, 
the foreign acquiring corporation is created or organized in, or under 
the law of, a foreign country that does not impose corporate income tax 
and is not a tax resident of any other foreign country.
    (5) A tax resident of a foreign country has the meaning set forth in 
Sec. 1.7874-3(d)(11).
    (e) Operating rules. The following rules apply for purposes of this 
section.
    (1) Acquisition of multiple foreign corporations that are tax 
residents of the same foreign country. When multiple foreign 
acquisitions occur pursuant to the same plan (or a series of related 
transactions) and two or more of the acquired foreign corporations were 
tax residents of the same foreign country before the foreign 
acquisitions and all related transactions, then those foreign 
acquisitions are treated as a single foreign acquisition and those 
acquired foreign corporations are treated as a single acquired foreign 
corporation for purposes of this section.
    (2) Acquisition of properties of an acquired foreign corporation. 
For purposes of determining whether a foreign acquisition occurs, the 
principles of section 7874(a)(2)(B)(i) and Sec. 1.7874-2(c) and (d) 
(regarding acquisitions of properties of a domestic entity and 
acquisitions by multiple foreign corporations) apply with the following 
modifications:
    (i) The principles of Sec. 1.7874-2(c)(1) (providing rules for 
determining whether there is an indirect acquisition of properties of a 
domestic entity), including Sec. 1.7874-2(b)(5) (providing rules for 
determining the proportionate amount of properties indirectly acquired), 
apply by substituting the term ``foreign'' for ``domestic'' wherever it 
appears.
    (ii) The principles of Sec. 1.7874-2(c)(2) (regarding acquisitions 
of stock of a foreign corporation that owns a domestic entity) apply by 
substituting the term ``domestic'' for ``foreign'' wherever it appears.
    (3) Computation of foreign ownership percentage. For purposes of 
determining a foreign ownership percentage, the principles of all rules 
applicable to calculating an ownership percentage apply (including 
Sec. Sec. 1.7874-2, 1.7874-4, 1.7874-5, 1.7874-7, and section 
7874(c)(4)) with the following modifications:
    (i) Stock of a foreign acquiring corporation described in section 
7874(a)(2)(B)(ii) is not taken into account.
    (ii) The principles of this section, section 7874(c)(2)(A), and 
Sec. Sec. 1.7874-1, 1.7874-6, 1.7874-8, and 1.7874-10 do not apply.
    (iii) The principles of Sec. 1.7874-7 apply by, in addition to the 
exclusions listed in Sec. 1.7874-7(e)(2)(i) through (iii), also 
excluding from the definition of foreign group property any property 
held directly or indirectly by the acquired foreign corporation 
immediately before the foreign acquisition and directly or indirectly 
acquired in the foreign acquisition.
    (4) Stock held by reason of holding stock in an acquired foreign 
corporation. For purposes of determining stock of a foreign acquiring 
corporation held by reason of holding stock in an acquired foreign 
corporation, the principles of section 7874(a)(2)(B)(ii) and Sec. Sec. 
1.7874-2(f) and 1.7874-5 apply.
    (5) Change in the tax residency of a foreign corporation. For 
purposes of this section, a change in a country in which a foreign 
corporation is a tax resident is treated as a transaction. Further, for

[[Page 797]]

purposes of this section, if a foreign acquiring corporation changes the 
country in which it is a tax resident in a manner that would not 
otherwise be considered to result in a foreign acquisition (for example, 
by changing where it is managed and controlled), then the foreign 
acquiring corporation is treated as--
    (i) Both an acquired foreign corporation and a foreign acquiring 
corporation; and
    (ii) Directly or indirectly acquiring all of the properties held 
directly or indirectly by the acquired foreign corporation solely in 
exchange for stock of the foreign acquiring corporation.
    (f) Example. The following example illustrates the rules of this 
section.

    Example. Third-country transaction--(i) Facts. FA, a newly formed 
foreign corporation that is a tax resident of Country Y, acquires all 
the stock of DT, a domestic corporation that is wholly owned by 
Individual A, solely in exchange for 65 shares of newly issued FA stock 
(DT acquisition). Pursuant to a plan that includes the DT acquisition, 
FA acquires all the stock of FT, a foreign corporation that is a tax 
resident of Country X and wholly owned by Individual B, solely in 
exchange for the remaining 35 shares of newly issued FA stock (FT 
acquisition). After the FT acquisition and all related transactions, the 
expanded affiliated group does not have substantial business activities 
in Country Y when compared to the total business activities of the 
expanded affiliated group, as determined under the principles of Sec. 
1.7874-3 and without regard to the DT acquisition.
    (ii) Analysis. As described in paragraphs (A) through (C) of this 
Example, the requirements set forth in paragraphs (c)(1) through (3) of 
this section are satisfied and, as result, the DT acquisition is a 
third-country transaction.
    (A) The FT acquisition is a foreign acquisition because, pursuant to 
the FT acquisition, FA (a foreign acquiring corporation) acquires 100 
percent of the stock of FT and is thus treated as indirectly acquiring 
100 percent of the properties held by FT (an acquired foreign 
corporation). See Sec. 1.7874-2(c)(1) and paragraph (e)(2) of this 
section. Moreover, Individual B is treated as receiving 35 shares of FA 
stock by reason of holding stock in FT. See Sec. 1.7874-2(f)(1)(i) and 
paragraph (e)(4) of this section. As a result, not taking into account 
the 65 shares of FA stock held by Individual A (a former domestic entity 
shareholder), 100 percent (35/35) of the stock of FA is held by reason 
of holding stock in FT and, thus, the foreign ownership percentage is 
100. See paragraph (e)(3) of this section. Accordingly, the FT 
acquisition is a covered foreign acquisition. Therefore, because the FT 
acquisition occurs pursuant to a plan that includes the DT acquisition, 
the requirement set forth in paragraph (c)(1) of this section is 
satisfied.
    (B) The requirement set forth in paragraph (c)(2) of this section is 
satisfied because, after the FT acquisition and all related 
transactions, the foreign country in which FA is a tax resident (Country 
Y) is different than the foreign country in which FT was a resident 
(Country X) before the FT acquisition and all related transactions.
    (C) The requirement set forth in paragraph (c)(3) of this section is 
satisfied because, not taking into account paragraph (b) of this 
section, the ownership fraction is 65/100 and the ownership percentage 
is 65.
    (D) Because the DT acquisition is a third-country transaction, the 
35 shares of FA stock held by reason of holding stock in FT are excluded 
from the denominator of the ownership fraction. See paragraph (b) of 
this section. As a result, the ownership fraction is 65/65 and the 
ownership percentage is 100. The result would be the same if instead FA 
had directly acquired all of the properties held by FT in exchange for 
FA stock, for example, in a transaction that would qualify for U.S. 
federal income tax purposes as an asset reorganization under section 
368.
    (iii) Alternative facts. The facts are the same as in paragraph (i) 
of this example, except that before the FT acquisition, but in a 
transaction related to the FT acquisition, FT becomes a tax resident of 
Country Y by reincorporating in Country Y. As is the case in paragraph 
(ii) of this Example, the requirements set forth in paragraphs (c)(1) 
and (3) of this section are satisfied. The requirement set forth in 
paragraph (c)(2) of this section is satisfied because, after the FT 
acquisition and any related transactions, the foreign country of which 
FA is a tax resident (Country Y) is different than the foreign country 
of which FT was a tax resident (Country X) before the FT acquisition and 
the reincorporation. See paragraph (e)(5) of this section. Accordingly, 
the DT acquisition is a third-country transaction and the consequences 
are the same as in paragraph (ii)(D) of this Example.
    (iv) Alternative facts. The facts are the same as in paragraph (i) 
of this Example, except that, instead of FA acquiring all of the stock 
of FT, FS, a newly formed foreign corporation that is wholly owned by FA 
and that is a tax resident of Country X, acquires all the stock of FT 
solely in exchange for 35 shares of newly issued FA stock (FT 
acquisition). As a result of the FT acquisition, FS and FA are each 
treated as indirectly acquiring 100 percent of the properties held by 
FT. See Sec. 1.7874-2(c)(1)(i) and (iii) and paragraph (e)(2) of this 
section. Accordingly, each of FS's and FA's indirect acquisition of 
properties of FT

[[Page 798]]

(an acquired foreign corporation) is a foreign acquisition. However, 
FS's indirect acquisition of FT's properties is not a covered foreign 
acquisition because no shares of FS stock are held by reason of holding 
stock in FT; thus, with respect to this foreign acquisition, the foreign 
ownership percentage is zero. See Sec. 1.7874-2(f) and paragraphs 
(e)(3) and (4) of this section. FA's indirect acquisition of FT's 
properties is a covered foreign acquisition because 35 shares of FA 
stock (the shares received by Individual B) are held by reason of 
holding stock in FT; thus, the foreign ownership percentage is 100 
percent (35/35). See Sec. 1.7874-2(f)(1)(i) and paragraphs (e)(3) and 
(4) of this section. Accordingly, because the FT acquisition occurs 
pursuant to a plan that includes the DT acquisition, the requirement set 
forth in paragraph (c)(1) of this section is satisfied. Further, as is 
the case in paragraphs (ii)(B) through (C) of this Example, the 
requirements set forth in paragraphs (c)(2) and (3) of this section are 
satisfied. Therefore, the DT acquisition is a third-country transaction 
and the consequences are the same as in paragraph (ii)(D) of this 
Example.

    (g) Applicability dates. This section applies to domestic entity 
acquisitions completed on or after July 12, 2018. For domestic entity 
acquisitions completed before July 12, 2018, see Sec. 1.7874-9T, as 
contained in 26 CFR part 1 revised as of April 1, 2017. However, to the 
extent this section differs from Sec. 1.7874-9T, as contained in 26 CFR 
part 1 revised as of April 1, 2017, taxpayers may elect to consistently 
apply the differences to domestic entity acquisitions completed before 
July 12, 2018.

[T.D. 9834, 83 FR 32555, July 12, 2018]



Sec. 1.7874-10  Disregard of certain distributions.

    (a) Scope. This section identifies distributions made by a domestic 
entity that are disregarded in determining an ownership fraction. 
Paragraph (b) of this section provides the general rule that former 
domestic entity shareholders or former domestic entity partners are 
treated as receiving additional stock of the foreign acquiring 
corporation when the domestic entity has made non-ordinary course 
distributions (NOCDs). Paragraph (c) of this section identifies 
distributions that, in whole or in part, are outside the scope of this 
section. Paragraph (d) of this section provides a de minimis exception 
to the application of the general rule in paragraph (b) of this section. 
Paragraph (e) of this section provides rules concerning the treatment of 
distributions made by a predecessor, and paragraph (f) of this section 
provides rules for identifying a predecessor. Paragraph (g) of this 
section provides a special rule for certain distributions described in 
section 355. Paragraph (h) of this section provides rules regarding the 
allocation of NOCD stock. Paragraph (i) of this section addresses cases 
in which there are multiple foreign acquiring corporations, and 
paragraph (j) of this section addresses cases in which multiple domestic 
entities are treated as a single domestic entity. Paragraph (k) of this 
section provides definitions. Paragraph (l) of this section provides 
dates of applicability. See Sec. 1.7874-1(d)(2) for rules addressing 
the interaction of this section with the expanded affiliated group rules 
of section 7874(c)(2)(A) and Sec. 1.7874-1.
    (b) General rule regarding NOCDs. Except as provided in paragraph 
(d) of this section, for purposes of determining the ownership 
percentage by value (but not vote) described in section 
7874(a)(2)(B)(ii), former domestic entity shareholders or former 
domestic entity partners, as applicable, are treated as receiving, by 
reason of holding stock or partnership interests in a domestic entity, 
stock of the foreign acquiring corporation with a fair market value 
equal to the amount of the non-ordinary course distributions (NOCDs), 
determined as of the date of the distributions, made by the domestic 
entity during the look-back period. The stock of the foreign acquiring 
corporation treated as received under this paragraph (b) (NOCD stock) is 
in addition to stock of the foreign acquiring corporation otherwise 
treated as received by the former domestic entity shareholders or former 
domestic entity partners by reason of holding stock or partnership 
interests in the domestic entity.
    (c) Distributions that are not NOCDs. If only a portion of a 
distribution is an NOCD, section 7874(c)(4) may apply to the remainder 
of the distribution. This section does not, however, create a 
presumption that section 7874(c)(4) applies to the remainder of the 
distribution.

[[Page 799]]

    (d) De minimis exception to the general rule. Paragraph (b) of this 
section does not apply if--
    (1) The ownership percentage described in section 7874(a)(2)(B)(ii), 
determined without regard to the application of paragraph (b) of this 
section and Sec. Sec. 1.7874-4(b) and 1.7874-7(b), is less than five 
(by vote and value); and
    (2) On the completion date, each five percent former domestic entity 
shareholder or five percent former domestic entity partner, as 
applicable, owns (applying the attribution rules of section 318(a) with 
the modifications described in section 304(c)(3)(B)) less than five 
percent (by vote and value) of the stock of (or a partnership interest 
in) each member of the expanded affiliated group. For this purpose, a 
five percent former domestic entity shareholder (or five percent former 
domestic entity partner) is a former domestic entity shareholder (or 
former domestic entity partner) that, before the domestic entity 
acquisition, owned (applying the attribution rules of section 318(a) 
with the modifications described in section 304(c)(3)(B)) at least five 
percent (by vote and value) of the stock of (or a partnership interest 
in) the domestic entity.
    (e) Treatment of distributions made by a predecessor. For purposes 
of this section, a corporation or a partnership (relevant entity), 
including a domestic entity, is treated as making the following 
distributions made by a predecessor with respect to the relevant entity:
    (1) A distribution made before the predecessor acquisition with 
respect to the predecessor; and
    (2) A distribution made in connection with the predecessor 
acquisition to the extent the property distributed is directly or 
indirectly provided by the predecessor. See paragraph (k)(1)(iv) of this 
section.
    (f) Rules for identifying a predecessor--(1) Definition of 
predecessor. A corporation or a partnership (tentative predecessor) is a 
predecessor with respect to a relevant entity if--
    (i) The relevant entity completes a predecessor acquisition; and
    (ii) After the predecessor acquisition and all related transactions 
are complete, the tentative predecessor ownership percentage is at least 
10.
    (2) Definition of predecessor acquisition--(i) In general. 
Predecessor acquisition means a transaction in which a relevant entity 
directly or indirectly acquires substantially all of the properties held 
directly or indirectly by a tentative predecessor.
    (ii) Acquisition of properties of a tentative predecessor. For 
purposes of determining whether a predecessor acquisition occurs, the 
principles of section 7874(a)(2)(B)(i) apply, including Sec. 1.7874-
2(c) other than Sec. 1.7874-2(c)(2) and (4) (regarding acquisitions of 
properties of a domestic entity), without regard to whether the 
tentative predecessor is domestic or foreign.
    (iii) Lower-tier entities of a predecessor. If, before a predecessor 
acquisition and all related transactions, the predecessor held directly 
or indirectly stock in a corporation or an interest in a partnership, 
then, for purposes of this section, the relevant entity is not 
considered to directly or indirectly acquire the properties held 
directly or indirectly by the corporation or partnership.
    (3) Definition of tentative predecessor ownership percentage. 
Tentative predecessor ownership percentage means, with respect to a 
predecessor acquisition, the percentage of stock or partnership 
interests (by value) in a relevant entity held by reason of holding 
stock or partnership interests in the tentative predecessor. For 
purposes of computing the tentative predecessor ownership percentage, 
the following rules apply:
    (i) For purposes of determining the stock or partnership interests 
in a relevant entity held by reason of holding stock or partnership 
interests in the tentative predecessor, the principles of section 
7874(a)(2)(B)(ii) and Sec. Sec. 1.7874-2(f)(1)(i) through (iii) and 
1.7874-5 apply.
    (ii) For purposes of determining the stock or partnership interests 
in a relevant entity included in the numerator of the fraction used to 
compute the tentative predecessor ownership percentage, the rules of 
paragraph (f)(3)(i) of this section apply, and all the rules

[[Page 800]]

applicable to calculating the numerator of an ownership fraction with 
respect to a domestic entity acquisition apply, except that--
    (A) The principles of section 7874(c)(2)(A) and Sec. Sec. 1.7874-1 
and 1.7874-6 do not apply; and
    (B) The principles of paragraph (b) of this section do not apply.
    (iii) For purposes of determining stock or partnership interests in 
a relevant entity included in the denominator of the fraction used to 
compute the tentative predecessor ownership percentage, the principles 
of section 7874(a)(2)(B)(ii) and all rules applicable to calculating the 
denominator of an ownership fraction with respect to a domestic entity 
acquisition apply, except that--
    (A) The principles of section 7874(c)(2)(A) and Sec. Sec. 1.7874-1 
and 1.7874-6 do not apply; and
    (B) The principles of Sec. Sec. 1.7874-4 and 1.7874-7 through 
1.7874-9 do not apply.
    (g) Rule regarding direction of a section 355 distribution. For 
purposes of this section, if a domestic corporation (distributing 
corporation) distributes the stock of another domestic corporation 
(controlled corporation) pursuant to a transaction described in section 
355, and, immediately before the distribution, the fair market value of 
the stock of the controlled corporation owned by the distributing 
corporation and any related person (determined under section 7874(d)(3), 
without regard to whether the person is foreign) represents more than 50 
percent of the fair market value of the stock of the distributing 
corporation, then, the controlled corporation is deemed, on the date of 
the distribution, to have distributed the stock of the distributing 
corporation. The deemed distribution is equal to the fair market value 
of the stock of the distributing corporation (but not taking into 
account the fair market value of the stock of the controlled 
corporation) on the date of the distribution.
    (h) Allocation of NOCD stock. NOCD stock is allocated among the 
former domestic entity shareholders or former domestic entity partners, 
as applicable, based on the amount of NOCDs that the former domestic 
entity shareholders or former domestic entity partners, as applicable, 
are treated as having received under this paragraph (h). Under this 
paragraph (h), a pro rata portion of each distribution during a look-
back year is treated as comprising an NOCD with respect to the look-back 
year, based on a fraction the numerator of which is the amount of NOCDs 
during the look-back year and the denominator of which is the amount of 
distributions during the look-back year. Thus, each former domestic 
entity shareholder or former domestic entity partner, as applicable, is 
treated as receiving an amount of NOCD stock equal to the amount of 
NOCDs treated as received by the former domestic entity shareholder or 
former domestic entity partner, as applicable.
    (i) Multiple foreign acquiring corporations. If there are multiple 
foreign acquiring corporations with respect to a domestic entity 
acquisition, then the foreign acquiring corporation or corporations as 
to which NOCD stock is considered comprised is based on the proportion 
of consideration directly or indirectly provided by a foreign acquiring 
corporation in the domestic entity acquisition relative to the total 
amount of consideration directly or indirectly provided by the foreign 
acquiring corporations in the domestic entity acquisition. For purposes 
of this paragraph (i), consideration is not considered directly provided 
by a foreign acquiring corporation if it was indirectly provided by 
another foreign acquiring corporation. In addition, for purposes of this 
paragraph (i), consideration provided in the domestic entity acquisition 
does not include money or other property described in paragraph 
(k)(1)(iii) of this section.
    (j) Multiple domestic entities. If pursuant to Sec. 1.7874-2(e) two 
or more domestic entities are treated as a single domestic entity, then 
the determination of the amount of NOCDs made by the single domestic 
entity is made by--
    (1) Applying the rules of this section to each domestic entity on a 
separate basis, with the result that the amount of NOCDs made by each 
domestic entity is separately computed; and
    (2) Treating the amount of NOCDs made by the single domestic entity 
as the sum of the separately computed NOCDs made by each domestic 
entity.

[[Page 801]]

    (k) Definitions. In addition to the definitions provided in Sec. 
1.7874-12, the following definitions apply for purposes of this section.
    (1) A distribution means the following:
    (i) Any distribution made by a corporation with respect to its stock 
other than--
    (A) A distribution to which section 305 applies;
    (B) A distribution to which section 304(a)(1) applies; and
    (C) Except as provided in paragraphs (k)(1)(iii) and (iv) of this 
section, a distribution pursuant to section 361(c)(1) (other than a 
distribution to which section 355 applies).
    (ii) Any distribution by a partnership (other than a distribution 
pursuant to section 752(b) to the extent that the transaction giving 
rise to such distribution does not reduce the partnership's value).
    (iii) In the case of a domestic entity, a transfer of money or other 
property to the former domestic entity shareholders or former domestic 
entity partners that is made in connection with the domestic entity 
acquisition to the extent the money or other property is directly or 
indirectly provided by the domestic entity.
    (iv) In the case of a predecessor, a transfer of money or other 
property to the former owners of the predecessor that is made in 
connection with the predecessor acquisition to the extent the money or 
other property is directly or indirectly provided by the predecessor.
    (2) Distribution history period--(i) In general. Except as provided 
in paragraph (k)(2)(ii) or (iii) of this section, a distribution history 
period means, with respect to a look-back year, the 36-month period 
preceding the start of the look-back year.
    (ii) Formation date less than 36 months but at least 12 months 
before look-back year. If the formation date is less than 36 months, but 
at least 12 months, before the start of a look-back year, then the 
distribution history period with respect to that look-back year means 
the entire period, starting with the formation date, that precedes the 
start of the look-back year.
    (iii) Formation date less than 12 months before look-back year. If 
the formation date is less than 12 months before the start of a look-
back year, then there is no distribution history period with respect to 
that look-back year.
    (3) Formation date means, with respect to a domestic entity, the 
date that the domestic entity was created or organized, or, if earlier, 
the earliest date that any predecessor of the domestic entity was 
created or organized.
    (4) Look-back period means, with respect to a domestic acquisition, 
the 36-month period ending on the completion date or, if shorter, the 
entire period, starting with the formation date, that ends on the 
completion date.
    (5) Look-back year means, with respect to a look-back period, the 
following:
    (i) If the look-back period is 36 months, the three consecutive 12-
month periods that comprise the look-back period.
    (ii) If the look-back period is less than 36 months, but at least 24 
months--
    (A) The 12-month period that ends on the completion date;
    (B) The 12-month period that immediately precedes the period 
described in paragraph (k)(5)(ii)(A) of this section; and
    (C) The period, if any, that immediately precedes the period 
described in paragraph (k)(5)(ii)(B) of this section.
    (iii) If the look-back period is less than 24 months, but at least 
12 months--
    (A) The 12-month period that ends on the completion date; and
    (B) The period, if any, that immediately precedes the period 
described in paragraph (k)(5)(iii)(A) of this section.
    (iv) If the look-back period is less than 12 months, the entire 
period, starting with the formation date, that ends on the completion 
date.
    (6) NOCDs mean, with respect to a look-back year, the excess of all 
distributions made during the look-back year over the NOCD threshold for 
the look-back year.
    (7) NOCD threshold means, with respect to a look-back year, the 
following:
    (i) If the look-back year has at least a 12-month distribution 
history period,

[[Page 802]]

110 percent of the sum of all distributions made during the distribution 
history period multiplied by a fraction. The numerator of the fraction 
is the number of days in the look-back year and the denominator is the 
number of days in the distribution history period with respect to the 
look-back year.
    (ii) If the look-back year has no distribution history period, zero.
    (l) Applicability date. This section applies to domestic entity 
acquisitions completed on or after July 12, 2018. For domestic entity 
acquisitions completed before July 12, 2018, see Sec. 1.7874-10T, as 
contained in 26 CFR part 1 revised as of April 1, 2017. However, to the 
extent this section differs from Sec. 1.7874-10T, as contained in 26 
CFR part 1 revised as of April 1, 2017, taxpayers may elect to 
consistently apply the differences to domestic entity acquisitions 
completed before July 12, 2018.

[T.D. 9834, 83 FR 32557, July 12, 2018]



Sec. 1.7874-11  Rules regarding inversion gain.

    (a) Scope. This section provides rules for determining the inversion 
gain of an expatriated entity for purposes of section 7874. Paragraph 
(b) of this section provides rules for determining the inversion gain of 
an expatriated entity. Paragraph (c) of this section provides special 
rules with respect to certain foreign partnerships in which an 
expatriated entity owns an interest. Paragraph (d) of this section 
provides additional definitions. Paragraph (e) of this section provides 
an example that illustrates the rules of this section. Paragraph (f) of 
this section provides the applicability dates.
    (b) Inversion gain--(1) General rule. Except as provided in 
paragraphs (b)(2) and (3) of this section, inversion gain includes 
income (including an amount treated as a dividend under section 78) or 
gain recognized by an expatriated entity for any taxable year that 
includes any portion of the applicable period by reason of a direct or 
indirect transfer of stock or other properties or license of any 
property either as part of the domestic entity acquisition, or after 
such acquisition if the transfer or license is to a specified related 
person.
    (2) Exception for property described in section 1221(a)(1). 
Inversion gain does not include income or gain recognized by reason of 
the transfer or license, after the domestic entity acquisition, of 
property that is described in section 1221(a)(1) in the hands of the 
transferor or licensor.
    (3) Treatment of partnerships. Except to the extent provided in 
paragraph (c) of this section and section 7874(e)(2), inversion gain 
does not include income or gain recognized by reason of the transfer or 
license of property by a partnership.
    (c) Transfers and licenses by partnerships. If a partnership that is 
a foreign related person transfers or licenses property, a partner of 
the partnership shall be treated as having transferred or licensed its 
proportionate share of that property, as determined under the rules and 
principles of sections 701 through 777, for purposes of determining the 
inversion gain of an expatriated entity. See section 7874(e)(2) for 
rules regarding the treatment of transfers and licenses by domestic 
partnerships and transfers of interests in certain domestic 
partnerships.
    (d) Definitions. The definitions provided in Sec. 1.7874-12 apply 
for purposes of this section.
    (e) Example. The following example illustrates the rules of this 
section.

    Example. --(i) Facts. On July 1, 2016, FA, a foreign corporation, 
acquires all the stock of DT, a domestic corporation, in an inversion 
transaction. When the inversion transaction occurred, DT wholly owned 
FS, a foreign corporation that is a controlled foreign corporation 
(within the meaning of section 957(a)). During the applicable period, FS 
sells to FA property that is not described in section 1221(a)(1) in the 
hands of FS. Under section 951(a)(1)(A), DT has a $80x gross income 
inclusion that is attributable to FS's gain from the sale of the 
property. Under section 960(a)(1), DT is deemed to have paid $20x of the 
post-1986 foreign income taxes of FS by reason of this income inclusion 
and includes $20x in gross income as a deemed dividend under section 78. 
Accordingly, DT recognizes $100x ($80x + $20x) of gross income because 
of FS's sale of property to FA.
    (ii) Analysis. Pursuant to section 7874(a)(2)(A), DT is an 
expatriated entity. Under paragraph (b)(1) of this section, DT's $100x 
gross income recognized under sections 951(a)(1)(A) and 78 is inversion 
gain, because it is income recognized by an expatriated entity during 
the applicable period by reason of an indirect transfer of property by 
DT (through its wholly-owned CFC, FS) after

[[Page 803]]

the inversion transaction to a specified related person (FA). Sections 
7874(a)(1) and (e) therefore prevent the use of certain tax attributes 
(such as net operating losses) to reduce the U.S. tax owed with respect 
to DT's $100x gross income recognized under sections 951(a)(1)(A) and 
78.

    (f) Applicability dates. Except as otherwise provided in this 
paragraph (f), this section applies to transfers and licenses of 
property completed on or after November 19, 2015, but only if the 
inversion transaction was completed on or after September 22, 2014. For 
inversion transactions completed on or after September 22, 2014, 
however, taxpayers may elect to apply paragraph (b) of this section by 
excluding the phrase ``(including an amount treated as a dividend under 
section 78)'' for transfers and licenses of property completed on or 
after November 19, 2015, and before April 4, 2016.

[T.D. 9834, 83 FR 32559, July 12, 2018]



Sec. 1.7874-12  Definitions.

    (a) Definitions. Except as otherwise provided, the following 
definitions apply for purposes of this section and Sec. Sec. 1.367(b)-
4, 1.956-2, 1.7701(l)-4, and 1.7874-1 through 1.7874-11.
    (1) An affiliated group has the meaning set forth in section 1504(a) 
but without regard to section 1504(b)(3), except that section 1504(a) is 
applied by substituting ``more than 50 percent'' for ``at least 80 
percent'' each place it appears. A member of the affiliated group is an 
entity included in the affiliated group.
    (2) The applicable period means, with respect to an inversion 
transaction, the period described in section 7874(d)(1). However, see 
also Sec. 1.7874-2(b)(13) in the case of a subsequent acquisition (or a 
similar acquisition under the principles of Sec. 1.7874-2(c)(4)(i)) 
that is an inversion transaction.
    (3) The completion date means, with respect to a domestic entity 
acquisition, the date that the domestic entity acquisition and all 
transactions related to the domestic entity acquisition are complete.
    (4) A controlled foreign corporation (or CFC) has the meaning 
provided in section 957.
    (5) A domestic entity acquisition means an acquisition described in 
section 7874(a)(2)(B)(i).
    (6) A domestic entity means, with respect to a domestic entity 
acquisition, a domestic corporation or domestic partnership described in 
section 7874(a)(2)(B)(i). A reference to a domestic entity includes a 
successor to such domestic corporation or domestic partnership, 
including a corporation that succeeds to and takes into account amounts 
with respect to the domestic entity pursuant to section 381.
    (7) An expanded affiliated group (or EAG) means, with respect to a 
domestic entity acquisition, an affiliated group that includes the 
foreign acquiring corporation, determined as of the completion date. A 
member of the EAG is an entity included in the EAG, and a reference to a 
member of the EAG includes a predecessor with respect to such member.
    (8) An expatriated entity means, with respect to an inversion 
transaction--
    (i) The domestic entity; and
    (ii) A United States person that, on any date on or after the 
completion date, is or was related (within the meaning of section 267(b) 
or 707(b)(1)) to the domestic entity.
    (9) Expatriated foreign subsidiary--(i) General rule. Except as 
provided in paragraph (a)(9)(ii) of this section, an expatriated foreign 
subsidiary means a foreign corporation that is a CFC (determined without 
applying subparagraphs (A), (B), and (C) of section 318(a)(3) so as to 
consider a United States person as owning stock which is owned by a 
person who is not a United States person) and in which an expatriated 
entity is a United States shareholder (determined without applying 
subparagraphs (A), (B), and (C) of section 318(a)(3) so as to consider a 
United States person as owning stock which is owned by a person who is 
not a United States person).
    (ii) Exception to the general rule. A foreign corporation is not an 
expatriated foreign subsidiary if, with respect to the inversion 
transaction as a result of which the foreign corporation otherwise would 
be an expatriated foreign subsidiary--

[[Page 804]]

    (A) On the completion date, the foreign corporation was both a CFC 
(determined without applying subparagraphs (A), (B), and (C) of section 
318(a)(3) so as to consider a United States person as owning stock which 
is owned by a person who is not a United States person) and a member of 
the EAG; and
    (B) On or before the completion date, the domestic entity was not a 
United States shareholder (determined without applying subparagraphs 
(A), (B), and (C) of section 318(a)(3) so as to consider a United States 
person as owning stock which is owned by a person who is not a United 
States person) with respect to the foreign corporation.
    (10) A foreign acquiring corporation means, with respect to a 
domestic entity acquisition, the foreign corporation described in 
section 7874(a)(2)(B). A reference to a foreign acquiring corporation 
includes a successor to the foreign acquiring corporation, including a 
corporation that succeeds to and takes into account amounts with respect 
to the foreign acquiring corporation pursuant to section 381.
    (11) A foreign related person means, with respect to an inversion 
transaction, a foreign person that is related (within the meaning of 
section 267(b) or 707(b)(1)) to, or under the same common control as 
(within the meaning of section 482), a person that is an expatriated 
entity with respect to the inversion transaction.
    (12) A former domestic entity partner of a domestic entity that is a 
domestic partnership is any person that held an interest in the 
partnership before the domestic entity acquisition, including any person 
that holds an interest in the partnership both before and after the 
domestic entity acquisition.
    (13) A former domestic entity shareholder of a domestic entity that 
is a domestic corporation is any person that held stock in the domestic 
corporation before the domestic entity acquisition, including any person 
that holds stock in the domestic corporation both before and after the 
domestic entity acquisition.
    (14) An interest in a partnership includes a capital or profits 
interest.
    (15) An inversion transaction means a domestic entity acquisition in 
which the foreign acquiring corporation is treated as a surrogate 
foreign corporation under section 7874(a)(2)(B), taking into account 
section 7874(a)(3).
    (16) A non-EFS foreign related person means, with respect to an 
inversion transaction, a foreign related person that is not an 
expatriated foreign subsidiary.
    (17) The ownership fraction means, with respect to a domestic entity 
acquisition, the ownership percentage described in section 
7874(a)(2)(B)(ii), expressed as a fraction.
    (18) A specified related person means, with respect to an inversion 
transaction--
    (i) A non-EFS foreign related person;
    (ii) A domestic partnership in which a non-EFS foreign related 
person is a partner; and
    (iii) A domestic trust of which a non-EFS foreign related person is 
a beneficiary.
    (19) A United States person means a person described in section 
7701(a)(30).
    (20) A United States shareholder has the meaning provided in section 
951(b).
    (b) Applicability dates. Except as otherwise provided in this 
paragraph (b), this section applies to domestic entity acquisitions 
completed on or after September 22, 2014. The following apply to 
domestic entity acquisitions completed on or after April 4, 2016: 
paragraph (a)(8) of this section; in paragraph (a)(6) of this section, 
the phrase ``, including a corporation that succeeds to and takes into 
account amounts with respect to the domestic entity pursuant to section 
381''; and the second sentence of paragraph (a)(10) of this section. For 
domestic entity acquisitions completed on or after September 22, 2014, 
and before April 4, 2016, however, taxpayers, may elect to apply the 
provisions in the immediately prior sentence.

[T.D. 9834, 83 FR 32560, July 12, 2018]

                      PUBLIC LAW 74, 84TH CONGRESS

    Source: Sections 1.9000-1 through 1.9000-8 contained in T.D. 6500, 
25 FR 12155, Nov. 26, 1960, unless otherwise noted.

[[Page 805]]



Sec. 1.9000-1  Statutory provisions.

    The Act of June 15, 1955 (Pub. L. 74, 84th Cong., 69 Stat. 134), 
provides as follows:

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,
    Section 1. Repeal of sections 452 and 462--(a) Prepaid income. 
Section 452 of the Internal Revenue Code of 1954 is hereby repealed.
    (b) Reserves for estimated expenses, etc. Section 462 of the 
Internal Revenue Code of 1954 is hereby repealed.
    Sec. 2. Technical amendments. The following provisions of the 
Internal Revenue Code of 1954 are hereby amended as follows:
    (1) Subsection (c) of section 381 is amended by striking out 
paragraph (7) (relating to carryover of prepaid income in certain 
corporate acquisitions).
    (2) The table of sections for subpart B of part II of subchapter E 
of chapter 1 (relating to taxable year for which items of gross income 
included) is amended by striking out
    ``Sec. 452. Prepaid income.''
    (3) The table of sections for subpart C of such part II (relating to 
taxable year for which deductions are taken) is amended by striking out:
    ``Sec. 462. Reserves for estimated expenses, etc.''
    Sec. 3. Effective date. The amendments made by this act shall apply 
with respect to taxable years beginning after December 31, 1953, and 
ending after August 16, 1954.
    Sec. 4. Saving provisions--(a) Filing of statement. If:
    (1) the amount of any tax required to be paid for any taxable year 
ending on or before the date of the enactment of this act is increased 
by reason of the enactment of this act, and
    (2) the last date prescribed for payment of such tax (or any 
installment thereof) is before December 15, 1955,

then the taxpayer shall, on or before December 15, 1955, file a 
statement which shows the increase in the amount of such tax required to 
be paid by reason of the enactment of this act.
    (b) Form and effect of statement--(1) Form of statement, etc. The 
statement required by subsection (a) shall be filed at the place fixed 
for filing the return. Such statement shall be in such form, and shall 
include such information necessary or appropriate to show the increase 
in the amount of the tax required to be paid for the taxable year by 
reason of the enactment of this act, as the Secretary of the Treasury or 
his delegate shall by regulations prescribe.
    (2) Treatment as amount shown on return. The amount shown on a 
statement filed under subsection (a) as the increase in the amount of 
the tax required to be paid for the taxable year by reason of the 
enactment of this act shall, for all purposes of the internal revenue 
laws, be treated as tax shown on the return. Notwithstanding the 
preceding sentence, that portion of the amount of increase in tax for 
any taxable year which is attributable to a decrease (by reason of the 
enactment of this act) in the net operating loss for a succeeding 
taxable year shall not be treated as tax shown on the return.
    (3) Waiver of interest in case of payment on or before December 15, 
1955. If the taxpayer, on or before December 15, 1955, files the 
statement referred to in subsection (a) and pays in full that portion of 
the amount shown thereon for which the last date prescribed for payment 
is before December 15, 1955, then for purposes of computing interest 
(other than interest on overpayments) such portion shall be treated as 
having been paid on the last date prescribed for payment. This paragraph 
shall not apply if the amount shown on the statement as the increase in 
the amount of the tax required to be paid for the taxable year by reason 
of the enactment of this act is greater than the actual increase unless 
the taxpayer establishes, to the satisfaction of the Secretary of the 
Treasury or his delegate, that his computation of the greater amount was 
based upon a reasonable interpretation and application of sections 452 
and 462 of the Internal Revenue Code of 1954, as those sections existed 
before the enactment of this act.
    (c) Special rules--(1) Interest for period before enactment. 
Interest shall not be imposed on the amount of any increase in tax 
resulting from the enactment of this act for any period before the day 
after the date of the enactment of this act.
    (2) Estimated tax. Any addition to the tax under section 294(d) of 
the Internal Revenue Code of 1939 shall be computed as if this act had 
not been enacted. In the case of any installment for which the last date 
prescribed for payment is before December 15, 1955, any addition to the 
tax under section 6654 of the Internal Revenue Code of 1954 shall be 
computed as if this act had not been enacted.
    (3) Treatment of certain payments which taxpayer is required to 
make. If:
    (A) The taxpayer is required to make a payment (or an additional 
payment) to another person by reason of the enactment of this act, and
    (B) The Internal Revenue Code of 1954 prescribes a period, which 
expires after the close of the taxable year, within which the taxpayer 
must make such payment (or additional payment) if the amount thereof is 
to be taken into account (as a deduction or otherwise) in computing 
taxable income for such taxable year,

then, subject to such regulations as the Secretary of the Treasury or 
his delegate may prescribe, if such payment (or additional payment) is 
made on or before December 15,

[[Page 806]]

1955, it shall be treated as having been made within the period 
prescribed by such Code.
    (4) Treatment of certain dividends. Subject to such regulations as 
the Secretary of the Treasury or his delegate may prescribe, for 
purposes of section 561(a)(1) of the Internal Revenue Code of 1954, 
dividends paid after the 15th day of the third month following the close 
of the taxable year and on or before December 15, 1955, may be treated 
as having been paid on the last day of the taxable year, but only to the 
extent (A) that such dividends are attributable to an increase in 
taxable income for the taxable year resulting from the enactment of this 
act, and (B) elected by the taxpayer.
    (5) Determination of date prescribed. For purposes of this section, 
the determination of the last date prescribed for payment or for filing 
a return shall be made without regard to any extension of time therefor 
and without regard to any provision of this section.
    (6) Regulations. For requirement that the Secretary of the Treasury 
or his delegate shall prescribe all rules and regulations as may be 
necessary by reason of the enactment of this act, see section 7805(a) of 
the Internal Revenue Code of 1954.



Sec. 1.9000-2  Effect of repeal in general.

    (a) Section 452 (relating to prepaid income) and section 462 
(relating to reserves for estimated expenses) of the Internal Revenue 
Code of 1954 were repealed by the Act of June 15, 1955 (Pub. L. 74, 84th 
Cong., 69 Stat. 134), with respect to all years subject to such Code. 
The effect of the repeal will generally be to increase the tax liability 
of taxpayers who elected to adopt the methods of accounting provided by 
sections 452 and 462. References to sections of law in Sec. Sec. 
1.9000-2 to 1.9000-8, inclusive, are references to the Internal Revenue 
Code of 1954 unless otherwise specified.
    (b) The Act of June 15, 1955, provides that if the amount of any tax 
is increased by the repeal of sections 452 and 462 and if the last date 
prescribed for the payment of such tax (or any installment thereof) is 
before December 15, 1955, then the taxpayer shall on or before such date 
file a statement as prescribed in Sec. 1.9000-3. The last date 
prescribed for payment for this purpose shall be determined without 
regard to any extensions of time and without regard to the provisions of 
the Act of June 15, 1955.



Sec. 1.9000-3  Requirement of statement showing increase in tax 
liability.

    (a) Returns filed before June 15, 1955. Where a return reflecting an 
election under section 452 or 462 was filed before June 15, 1955, the 
taxpayer must file on or before December 15, 1955, a statement on Form 
2175 showing the increase in tax liability resulting from the repeal of 
sections 452 and 462. The provisions of this paragraph may be 
illustrated by the following example:

    Example. Corporation X filed its income tax return for the calendar 
year 1954 on March 15, 1955, and elected under section 6152 to pay the 
unpaid amount of the tax shown thereon in two equal installments. Such 
installment payments are due on March 15, 1955, and June 15, 1955, 
respectively. The corporation elected to compute its tax for such 
taxable year under the methods of accounting provided by sections 452 
and 462. Corporation X's tax liability is increased by reason of the 
enactment of Public Law 74, and since the last date prescribed for 
paying its tax expires before December 15, 1955, it is required to 
submit the prescribed statement on or before December 15, 1955, showing 
its increase in tax liability.

    (b) Returns filed on or after June 15, 1955. A taxpayer filing a 
return on or after June 15, 1955, for a taxable year ending on or before 
such date, may elect to apply the accounting methods provided in 
sections 452 and 462. The election may be exercised by either of the 
following methods:
    (1) By computing the tax liability shown on such return as though 
the provisions of sections 452 and 462 had not been repealed. In such a 
case, the taxpayer must file on or before December 15, 1955, a statement 
on Form 2175 showing the increase in tax liability resulting from the 
repeal of sections 452 and 462.
    (2) By computing his tax liability without regard to sections 452 
and 462. In this case, Form 2175 must be filed with the return. However, 
taxable income and the tax liability computed with the application of 
sections 452 and 462 shall be shown on lines 8 and 14, respectively, of 
the form in lieu of the amounts otherwise called for on those lines.


If a taxpayer does not make an election to have the provisions of 
sections 452 and 462 apply, the savings provisions of

[[Page 807]]

section 4 of the Act of June 15, 1955, are not applicable.
    (c) Taxable years ending after June 15, 1955. A taxpayer having a 
taxable year ending after June 15, 1955, may not elect to apply the 
methods of accounting prescribed in sections 452 and 462 in computing 
taxable income for such taxable year. Such a taxpayer must file his 
return and pay the tax as if such sections had not been enacted.
    (d) Other situations requiring statements. (1) A person who made an 
election under section 452 or 462 but whose tax liability was not 
increased by reason of the enactment of the Act of June 15, 1955, is 
nevertheless required to file a statement on Form 2175 if his gross 
income is increased or his deductions are decreased as the result of the 
repeal of sections 452 and 462. A partnership which makes an election 
under such sections must file such a statement. In addition, a partner, 
stockholder, distributee, etc. (whether or not such person made an 
election under section 452 or 462), shall file a statement showing any 
increase in his tax liability resulting from the effects of the repeal 
on the gross income or deductions of any person mentioned in the 
previous sentences of this subparagraph.
    (2) A statement shall also be filed for a taxable year, other than a 
year to which an election under section 452 or 462 is applicable, if the 
repeal of such sections increases the tax liability of such year. Thus, 
a statement must be filed for any taxable year to which a net operating 
loss is carried from a year to which an election under section 452 or 
462 is applicable, provided that the repeal of such sections affects the 
amount of the tax liability for the year to which such loss is carried. 
A separate statement must also be filed for a year in which there is a 
net operating loss which is changed by reason of the repeal of sections 
452 and 462. Where there is a short taxable year involved, a taxpayer 
may have two taxable years to which elections under sections 452 and 462 
are applicable and, in such a case, a statement, on Form 2175, must be 
filed for each such year.



Sec. 1.9000-4  Form and content of statement.

    (a) Information to be shown. The statement shall be filed on Form 
2175 which may be obtained from district directors. It shall be filed 
with the district director for the internal revenue district in which 
the return was filed. The statement shall be prepared in accordance with 
the instructions contained thereon and shall show the following 
information:
    (1) The name and address of the taxpayer,
    (2) The amounts of each type of income deferred under section 452,
    (3) The amount of the addition to each reserve deducted under 
section 462,
    (4) The taxable income and the tax liability of the taxpayer 
computed with the application of sections 452 and 462,
    (5) The taxable income and the tax liability of the taxpayer 
computed without the application of sections 452 and 462,
    (6) The details of the recomputation of taxable income and tax 
liability, including any changes in other items of income, deductions, 
and credits resulting from the repeal of sections 452 and 462, and
    (7) If self-employment tax is increased, the computations and 
information required on page 3 of Schedule C, Form 1040.
    (b) Procedure for recomputing tax liability. In determining the 
taxable income and the tax liability computed without the application of 
sections 452 and 462, such items as vacation pay and prepaid 
subscription income shall be reported under the law and regulations 
applicable to the taxable year as if such sections had not been enacted. 
The tax liability for the year shall be recomputed by restoring to 
taxable income the amount of income deferred under section 452 and the 
amount of the deduction taken under section 462. Other deductions or 
credits affected by such changes in taxable income shall be adjusted. 
For example, if the deduction for contributions allowed for the taxable 
year was limited under section 170(b), the amount of such deduction 
shall be recomputed, giving effect to the increase in adjusted gross 
income or taxable income, as the case may be,

[[Page 808]]

by reason of the adjustments required by the repeal of sections 452 and 
462.



Sec. 1.9000-5  Effect of filing statement.

    (a) Years other than years affected by a net operating loss 
carryback. If the taxpayer files a timely statement in accordance with 
the provisions of Sec. 1.9000-3, the amount of the increase in tax 
shown on such statement for a taxable year shall, except as provided in 
paragraph (b) of this section, be considered for all purposes of the 
Code, as tax shown on the return for such year. In general, such 
increase shall be assessed and collected in the same manner as if it had 
been tax shown on the return as originally filed. The provisions of this 
paragraph may be illustrated by the following example:

    Example. A taxpayer filed his return showing a tax liability 
computed under the methods of accounting provided by sections 452 and 
462 as $1,000 and filed the statement in accordance with Sec. 1.9000-3 
showing an increase in tax liability of $200. The tax computed as though 
sections 452 and 462 had not been enacted is $1,200, and the difference 
of $200 is the increase in the tax attributable to the repeal of 
sections 452 and 462. This increase is considered to be tax shown on the 
return for such taxable year. Additions to the tax for fraud or 
negligence under section 6653 will be determined by reference to $1,200 
(that is, $1,000 plus $200) as the tax shown on the return.

    (b) Years affected by a net operating loss carryback. In the case of 
a year which is affected by a net operating loss carryback from a year 
to which an election under section 452 or 462 applies, that portion of 
the amount of increase in tax shown on the statement for the year to 
which the loss is carried back which is attributable to a decrease in 
such net operating loss shall not be treated as tax shown on the return.



Sec. 1.9000-6  Provisions for the waiver of interest.

    (a) In general. If the statement is filed in accordance with Sec. 
1.9000-3 and if that portion of the increase in tax which is due before 
December 15, 1955 (without regard to any extension of time for payment 
and without regard to the provisions of Sec. Sec. 1.9000-2 to 1.9000-8, 
inclusive), is paid in full on or before such date, then no interest 
shall be due with respect to that amount. The provisions of this 
paragraph may be illustrated by the following example:

    Example. Corporation M's return for the calendar year 1954 was filed 
on March 15, 1955, and the tax liability shown thereon was paid in equal 
installments on March 15, 1955, and June 15, 1955. M filed a statement 
on December 15, 1955, showing the increase in its tax liability 
resulting from the repeal of sections 452 and 462 and paid at that time 
the increase in tax shown thereon. No interest will be imposed with 
respect to the amount of such payment.


Interest shall be computed under the applicable provisions of the 
internal revenue laws on any portion of the increase in tax shown on the 
statement which is due after December 15, 1955, and which is not paid 
when due.
    (b) Limitation on application of waiver. The provisions of paragraph 
(a) of this section shall not apply to any portion of the increase in 
tax shown on the statement if such increase reflects an amount in excess 
of that attributable solely to the repeal of sections 452 and 462, i. 
e., is attributable in whole or in part to excessive or unwarranted 
deferrals or accruals under section 452 or 462, as the case may be, in 
computing the tax liability with the application of such sections. 
Notwithstanding the preceding sentence, paragraph (a) of this section 
shall be applicable if the taxpayer can show that the tax liability as 
computed with the application of sections 452 and 462 is based upon a 
reasonable interpretation and application of such sections as they 
existed prior to repeal. If the taxpayer complied with the provisions of 
the regulations under sections 452 and 462 in computing the tax 
liability with the application of such sections, he will be regarded as 
having reasonably interpreted and applied sections 452 and 462. In this 
regard, it is not essential that the taxpayer submit with his return the 
detailed information required by such regulations in support of the 
deduction claimed under section 462, but such information shall be 
supplied at the request of the Commissioner.
    (c) Interest for periods prior to June 16, 1955. No interest shall 
be imposed with respect to any increase in tax resulting solely from the 
repeal of sections 452 and 462 for any period prior to June 16,

[[Page 809]]

1955 (the day after the date of the enactment of the Act of June 15, 
1955). The preceding sentence does not apply to that part of any 
increase in tax which is due to the improper application of sections 452 
and 462. The provisions of this paragraph shall not apply to interest 
imposed under section 3779 of the Internal Revenue Code of 1939. (See 
paragraph (d) of this section.)
    (d) Amounts deferred by corporations expecting carrybacks. Interest 
shall be imposed at the rate of 6 percent on so much of the amount of 
tax deferred under section 3779 of the Internal Revenue Code of 1939 as 
is not satisfied within the meaning of section 3779(i)(1), 
notwithstanding the fact that a greater amount would have been 
satisfied, had sections 452 and 462 not been repealed. Interest will be 
imposed at such rate until the amount not so satisfied is paid.



Sec. 1.9000-7  Provisions for estimated tax.

    (a) Additions to tax under section 294(d) of the Internal Revenue 
Code of 1939. Any addition to the tax under section 294(d) (relating to 
estimated tax) of the Internal Revenue Code of 1939 shall be computed as 
if the tax for the year for which the estimate was made were computed 
with sections 452 and 462 still applicable to such taxable year. For the 
purpose of the preceding sentence, it is not necessary for the taxpayer 
actually to have made an election under section 452 or 462; it is only 
necessary for the taxpayer to have taken such sections into account in 
estimating its tax liability for the year. Thus, if in determining the 
amount of estimated tax, the taxpayer computed his estimated tax 
liability by applying those sections, that portion of any additions to 
tax under section 294(d) resulting from the repeal of sections 452 and 
462 shall be disregarded.
    (b) Additions to tax under section 6654. In the case of an 
underpayment of estimated tax, any additions to the tax under section 
6654, with respect to installments due before December 15, 1955, shall 
be computed without regard to any increase in tax resulting from the 
repeal of sections 452 and 462. Any additions to the tax with respect to 
installments due on or after December 15, 1955, shall be imposed in 
accordance with the applicable provisions of the Code, and as though 
sections 452 and 462 had not been enacted. Thus, a taxpayer whose 
declaration of estimated tax was based upon an estimate of his taxable 
income for the year of the estimate which was determined by taking 
sections 452 and 462 into account, must file an amended declaration on 
or before the due date of the next installment of estimated tax due on 
or after December 15, 1955. Such amended declaration shall reflect an 
estimate of the tax without the application of such sections. If the 
taxpayer bases his estimate on the tax for the preceding taxable year 
under section 6654(d)(1)(A), an amended declaration must be filed on or 
before the due date of the next installment due on or after December 15, 
1955, if the tax for the preceding taxable year is increased as the 
result of the repeal of sections 452 and 462. Similarly, if the taxpayer 
bases his estimate on the tax computed under section 6654(d)(1)(B), he 
must file an amended declaration on or before the due date of the next 
installment due on or after December 15, 1955, taking into account the 
repeal of sections 452 and 462 with respect to the preceding taxable 
year. Any increase in estimated tax shown on an amended declaration 
filed in accordance with this paragraph must be paid in accordance with 
section 6153(c).
    (c) Estimated tax of corporations. Corporations required to file a 
declaration of estimated tax under section 6016 for taxable years ending 
on and after December 31, 1955, shall estimate their tax liability for 
such year as if sections 452 and 462 had not been enacted. Thus, if the 
corporation bases its estimated tax liability under section 6655(d) (1) 
or (2) on its operations for the preceding taxable year, the effect of 
the repeal of sections 452 and 462 with respect to such year must be 
taken into account.



Sec. 1.9000-8  Extension of time for making certain payments.

    (a) Time for payment specified in Code. (1) If the treatment of any 
payment (including its allowance as a deduction or otherwise) is 
dependent upon the making of a payment within a period of time specified 
in the Code the period within which the payment is to be

[[Page 810]]

made is extended where the amount to be paid is increased by reason of 
the repeal of sections 452 and 462: Provided, That:
    (i) The taxpayer, because of a pre-existing obligation, is required 
to make a payment or an additional payment to another person by reason 
of such repeal;
    (ii) The deductibility of the payment or additional payment is 
contingent upon its being made within a period prescribed by the Code, 
which period expires after the close of the taxable year; and
    (iii) The payment or additional payment is made on or before 
December 15, 1955.


If the foregoing conditions are met, the payment or additional payment 
will be treated as having been made within the time specified in the 
Code, and, subject to any other conditions in the Code, it shall be 
deductible for the year to which it relates. The provision of this 
paragraph may be illustrated by the following examples:

    Example 1. Section 267 (relating to losses, expenses and interest 
between related taxpayers) applies to amounts accrued by taxpayer A for 
salary payable to B. For the calendar year 1954, A is obligated to pay B 
a salary equal to 5 percent of A's taxable income for the taxable year. 
The amount accrued as salary payable to B for 1954 is $5,000 with the 
taxable income reflecting the application of section 462. As a result of 
the repeal of section 462 the salary payable to B for 1954 is increased 
to $6,000. The additional $1,000 is paid to B on December 15, 1955. In 
recomputing A's tax liability for 1954 the additional deduction of 
$1,000 for salary payable to B will be treated as having been made 
within two and one-half months after the close of the taxable year and 
will be deductible in that year.
    Example 2. On March 1, 1955, Corporation X, a calendar year taxpayer 
using the accrual method of accounting, makes a payment described in 
section 404(a)(6) (relating to contributions to an employees' trust) of 
$10,000 which is accrued for 1954 and is determined on the basis of the 
amount of taxable income for that year. The taxpayer filed its return on 
March 15, 1955. By reason of the repeal of section 462, X's taxable 
income is increased so that it is required to make an additional 
contribution of $2,000 to the employees' trust. The additional payment 
is made on December 15, 1955. For purposes of recomputing X's tax 
liability for 1954, this additional payment is deemed to have been made 
on the last day of 1954.

    (2) The time for inclusion in the taxable income of the payee of any 
additional payment of the type described in subparagraph (1) of this 
paragraph, shall be determined without regard to section 4(c)(3) of the 
Act of June 15, 1955, and Sec. Sec. 1.9000-2 to 1.9000-8, inclusive.
    (b) Dividends paid under section 561. under section 4(c)(4) of the 
Act of June 15, 1955, the period during which distributions may be 
recognized as dividends paid under section 561 for a taxable year to 
which section 452 or 462 apply may be extended under the conditions set 
forth below.
    (1) Accumulated earnings tax or personal holding company tax. In the 
case of the accumulated earnings tax or the personal holding company 
tax, if:
    (i) The income of a corporation is increased for a taxable year by 
reason of the repeal of sections 452 and 462 so that it would become 
liable for the tax (or an increase in the tax) imposed on accumulated 
earnings or personal holding companies unless additional dividends are 
distributed;
    (ii) The corporation distributes dividends to its stockholders after 
the 15th day of the 3d month following the close of its taxable year and 
on or before December 15, 1955, which dividends are attributable to an 
increase in its accumulated taxable income or undistributed personal 
holding company income, as the case may be, resulting from the repeal of 
sections 452 and 462, and
    (iii) The corporation elects in its statement, submitted under Sec. 
1.9000-3, to have the provisions of section 4(c)(4) of the Act of June 
15, 1955, apply:


Then such dividends shall be treated as having been paid on the last day 
of the taxable year to which the statement applies.
    (2) Regulated investment companies. In the case of a regulated 
investment company taxable under section 852, if:
    (i) The taxable income of the regulated investment company is 
increased by reason of the repeal of sections 452 and 462 (without 
regard to any deduction for dividends paid as provided for in this 
subparagraph);
    (ii) The company distributes dividends to its stockholders after the 
15th

[[Page 811]]

day of the 3d month following the close of its taxable year and on or 
before December 15, 1955, which dividends are attributable to an 
increase in its investment company income resulting from the repeal of 
sections 452 and 462; and
    (iii) The company elects in its statement, submitted under Sec. 
1.9000-3, to have the provisions of section 4(c)(4) of the Act of June 
15, 1955, apply:


then such dividends are to be treated as having been paid on the last 
day of the taxable year to which the statement applies. The dividends 
paid are to be determined under this subparagraph without regard to the 
provisions of section 855.
    (3) Related provisions. An election made under subparagraph (1) or 
(2) of this paragraph is irrevocable. The time for inclusion in the 
taxable income of the distributees of any distributions of the type 
described in subparagraph (1) or (2) of this paragraph shall be 
determined without regard to section 4(c)(4) of the Act of June 15, 
1955, and Sec. Sec. 1.9000-2 to 1.9000-8, inclusive.

             RETIREMENT-STRAIGHT LINE ADJUSTMENT ACT OF 1958

    Source: Sections 1.9001 through 1.9001-4 contained in T.D. 6500, 25 
FR 12158, Nov. 26, 1960, unless otherwise noted.



Sec. 1.9001  Statutory provisions; Retirement-Straight Line Adjustment
Act of 1958.

    Section 94 of the Technical Amendments Act of 1958 (72 Stat. 1669) 
provides as follows:

    Sec. 94. Change from retirement to straight line method of computing 
depreciation in certain cases--(a) Short title. This section may be 
cited as the ``Retirement-Straight Line Adjustment Act of 1958''.
    (b) Making of election. Any taxpayer who held retirement-straight 
line property on his 1956 adjustment date may elect to have this section 
apply. Such an election shall be made at such time and in such manner as 
the Secretary shall prescribe. Any election under this section shall be 
irrevocable and shall apply to all retirement-straight line property as 
hereinafter provided in this section (including such property for 
periods when held by predecessors of the taxpayer).
    (c) Retirement-straight line property defined. For purposes of this 
section, the term ``retirement-straight line property'' means any 
property of a kind or class with respect to which the taxpayer or a 
predecessor (under the terms and conditions prescribed for him by the 
Commissioner) for any taxable year beginning after December 31, 1940, 
and before January 1, 1956, changed from the retirement to the straight 
line method of computing the allowance of deductions for depreciation.
    (d) Basis adjustments as of 1956 adjustment date. If the taxpayer 
has made an election under this section, then in determining the 
adjusted basis on his 1956 adjustment date of all retirement-straight 
line property held by the taxpayer, in lieu of the adjustments for 
depreciation provided in section 1016(a) (2) and (3) of the Internal 
Revenue Code of 1954, the following adjustments shall be made (effective 
as of his 1956 adjustment date) in respect of all periods before the 
1956 adjustment date:
    (1) Depreciation sustained before March 1, 1913. For depreciation 
sustained before March 1, 1913, on retirement-straight line property 
held by the taxpayer or a predecessor on such date for which cost was or 
is claimed as basis and which either:
    (A) Retired before changeover. Was retired by the taxpayer or a 
predecessor before the changeover date, but only if (i) a deduction was 
allowed in computing net income by reason of such retirement, and (ii) 
such deduction was computed on the basis of cost without adjustment for 
depreciation sustained before March 1, 1913. In the case of any such 
property retired during any taxable year beginning after December 31, 
1929, the adjustment under this subparagraph shall not exceed that 
portion of the amount attributable to depreciation sustained before 
March 1, 1913, which resulted (by reason of the deduction so allowed) in 
a reduction in taxes under the Internal Revenue Code of 1954 or prior 
income, war-profits, or excess-profits tax laws.
    (B) Held on changeover date. Was held by the taxpayer or a 
predecessor on the changeover date. This subparagraph shall not apply to 
property to which paragraph (2) applies.

The adjustment determined under this paragraph shall be allocated (in 
the manner prescribed by the Secretary) among all retirement-straight 
line property held by the taxpayer on his 1956 adjustment date.
    (2) Property disposed of after changeover and before 1956 adjustment 
date. For that portion of the reserve prescribed by the Commissioner in 
connection with the changeover which was applicable to property:
    (A) Sold, or
    (B) With respect to which a deduction was allowed for Federal income 
tax purposes by reason of casualty or ``abnormal'' retirement in the 
nature of special obsolescence, if such sale occurred in, or such 
deduction was allowed for, a period on or after the changeover date and 
before the taxpayer's 1956 adjustment date.

[[Page 812]]

    (3) Depreciation allowable from changeover to 1956 adjustment date. 
For depreciation allowable, under the terms and conditions prescribed by 
the Commissioner in connection with the changeover, for all periods on 
and after the changeover date and before the taxpayer's 1956 adjustment 
date.

This subsection shall apply only with respect to taxable years beginning 
after December 31, 1955.
    (e) Effect on period from changeover to 1956 adjustment date. If the 
taxpayer has made an election under this section, then in determining 
the adjusted basis of any retirement-straight line property as of any 
time on or after the changeover date and before the taxpayer's 1956 
adjustment date, in lieu of the adjustments for depreciation provided in 
section 1016(a) (2) and (3) of the Internal Revenue Code of 1954 and the 
corresponding provisions of prior revenue laws, the following 
adjustments shall be made:
    (1) For prescribed reserve. For the amount of the reserve prescribed 
by the Commissioner in connection with the changeover.
    (2) For allowable depreciation. For the depreciation allowable under 
the terms and conditions prescribed by the Commissioner in connection 
with the changeover.

This subsection shall not apply in determining adjusted basis for 
purposes of section 437(c) of the Internal Revenue Code of 1939. This 
subsection shall apply only with respect to taxable years beginning on 
or after the changeover date and before the taxpayer's 1956 adjustment 
date.
    (f) Equity invested capital, etc. If an election is made under this 
section, then (notwithstanding the terms and conditions prescribed by 
the Commissioner in connection with the changeover):
    (1) Equity invested capital. In determining equity invested capital 
under sections 458 and 718 of the Internal Revenue Code of 1939, 
accumulated earnings and profits as of the changeover date, and as of 
the beginning of each taxable year thereafter, shall be reduced by the 
depreciation sustained before March 1, 1913, as computed under 
subsection (d)(1)(B); and
    (2) Definition of equity capital. In determining the adjusted basis 
of assets for the purpose of section 437(c) of the Internal Revenue Code 
of 1939 (and in addition to any other adjustments required by such 
Code), the basis shall be reduced by depreciation sustained before March 
1, 1913 (as computed under subsection (d)), together with any 
depreciation allowable under subsection (e)(2) for any period before the 
year for which the excess profits credit is being computed.
    (g) Definitions. For purposes of this section:
    (1) Depreciation. The term ``depreciation'' means exhaustion, wear 
and tear, and obsolescence.
    (2) Changeover. The term ``changeover'' means a change from the 
retirement to the straight line method of computing the allowance of 
deductions for depreciation.
    (3) Changeover date. The term ``changeover date'' means the first 
day of the first taxable year for which the changeover was effective.
    (4) 1956 adjustment date. The term ``1956 adjustment date'' means, 
in the case of any taxpayer, the first day of his first taxable year 
beginning after December 31, 1955.
    (5) Predecessor. The term ``predecessor'' means any person from whom 
property of a kind or class to which this section refers was acquired, 
if the basis of such property is determined by reference to its basis in 
the hands of such person. Where a series of transfers of property has 
occurred and where in each instance the basis of the property was 
determined by reference to its basis in the hands of the prior holder, 
the term includes each such prior holder.
    (6) The term ``Secretary'' means the Secretary of the Treasury or 
his delegate.
    (7) The term ``Commissioner'' means the Commissioner of Internal 
Revenue.



Sec. 1.9001-1  Change from retirement to straight-line method of
computing depreciation.

    (a) In general. The Retirement-Straight Line Adjustment Act of 1958 
(72 Stat. 1669), which is contained in section 94 of the Technical 
Amendments Act of 1958, approved September 2, 1958, provides various 
adjustments to be made by certain railroads which changed from the 
retirement to the straight-line method of computing the allowance of 
deductions for the depreciation of those roadway assets which are 
defined in this section as retirement-straight line property. The 
adjustments are available to all eligible taxpayers who make an 
irrevocable election to have the provisions of the Retirement-Straight 
Line Adjustment Act of 1958 apply. This election shall be made at the 
time and in the manner prescribed by this section. If an election is 
made in accordance with this section, then the provisions of the Act and 
of Sec. Sec. 1.9001 to 1.9001-4, inclusive, shall apply. An election 
made in accordance with this section shall not be considered a change in 
accounting method for purposes of section 481 of the Code.
    (b) Making of election. (1) Subsection (b) of the Act provides that 
any taxpayer who held retirement-straight line property on its 1956 
adjustment

[[Page 813]]

date may elect to have the provisions of the Act apply. The election 
shall be irrevocable and shall apply to all retirement-straight line 
property, including such property for periods when held by predecessors 
of the taxpayer.
    (2) An election may be made in accordance with the provisions of 
this section even though the taxpayer has, at the time of election, 
litigated some or all of the issues covered by the provisions of the Act 
and has received from the courts a determination which is less favorable 
to the taxpayer than the treatment provided by the Act. Once an election 
has been made in accordance with the provisions of this section, the 
taxpayer may not receive the benefit of more favorable treatment, as a 
result of litigation, than that provided by the Act on the issues 
involved.
    (3) The election to have the provisions of the Act apply shall be 
made by filing a statement to that effect, on or before January 11, 
1960, with the district director for the internal revenue district in 
which the taxpayer's income tax return for its first taxable year 
beginning after December 31, 1955, was filed. A copy of this statement 
shall be filed with any amended return, or claim for refund, made under 
the Act.
    (c) Definitions. For purposes of the Act and Sec. Sec. 1.9001 to 
1.9001-4, inclusive:
    (1) The Act. The term the Act means the Retirement-Straight Line 
Adjustment Act of 1958, as contained in section 94 of the Technical 
Amendments Act of 1958 (72 Stat. 1669).
    (2) Commissioner. The term Commissioner means the Commissioner of 
Internal Revenue.
    (3) Retirement-straight line property. The term retirement-straight 
line property means any property of a kind or class with respect to 
which the taxpayer (or a predecessor of the taxpayer) changed, pursuant 
to the terms and conditions prescribed for it by the Commissioner, from 
the retirement to the straight-line method of computing the allowance 
for any taxable year beginning after December 31, 1940, and before 
January 1, 1956, of deductions for depreciation. The term does not 
include any specific property which has always been properly accounted 
for in accordance with the straight-line method of computing the 
depreciation allowances or which, under the terms-letter, was permitted 
or required to be accounted for under the retirement method.
    (4) Depreciation. The term depreciation means exhaustion, wear and 
tear, and obsolescence.
    (5) Predecessor. The term predecessor means any person from whom 
property of a kind or class to which the Act refers was acquired, if the 
basis of such property is determined by reference to its basis in the 
hands of such person. Where a series of transfers of property has 
occurred and where in each instance the basis of the property was 
determined by reference to its basis in the hands of the prior holder, 
the term includes each such prior holder.
    (6) Changeover. The term changeover means a change from the 
retirement to the straight-line method of computing the allowance of 
deductions for depreciation.
    (7) Changeover date. The term changeover date means the first day of 
the first taxable year for which the changeover was effective.
    (8) 1956 adjustment date. The term 1956 adjustment date means, in 
the case of any taxpayer, the first day of its first taxable year 
beginning after December 31, 1955.
    (9) Terms-letter. The term terms-letter means the terms and 
conditions prescribed by the Commissioner in connection with the 
changeover.
    (10) Terms-letter reserve. The term terms-letter reserve means the 
reserve for depreciation prescribed by the Commissioner in connection 
with the changeover.
    (11) Depreciation sustained before March 1, 1913. The term 
depreciation sustained before March 1, 1913 may be construed to mean, to 
the extent that it is impossible to determine the actual amount of such 
depreciation from the books and records, that amount which is obtained 
by (i) deducting the ``cost of reproduction new less depreciation'' from 
the ``cost of reproduction new'', as ascertained as of the valuation 
date by the Interstate Commerce Commission under the provisions of 
section 19a of part I of the Interstate Commerce Act (49 U.S.C. 19a), 
and then (ii) making such retroactive adjustments to

[[Page 814]]

the remainder as are required, in the opinion of the Commissioner of 
Internal Revenue, to properly reflect the depreciation sustained before 
March 1, 1913. For this purpose, any retirement-straight line property 
held on March 1, 1913, and retired on or before the valuation date shall 
be taken into account.



Sec. 1.9001-2  Basis adjustments for taxable years beginning on or
after 1956 adjustment date.

    (a) In general. Subsection (d) of the Act provides the basis 
adjustments required to be made by the taxpayer as of the 1956 
adjustment date in respect of all periods before that date in order to 
determine the adjusted basis of all retirement-straight line property 
held by the taxpayer on that date. This adjusted basis on the 1956 
adjustment date shall be used by the taxpayer for all purposes of the 
Code for any taxable year beginning after December 31, 1955. In order to 
arrive at the adjusted basis on the 1956 adjustment date, the taxpayer 
shall start with the unadjusted basis of all retirement-straight line 
property held on the changeover date by the taxpayer or a predecessor 
and shall, with respect to both the asset and reserve accounts, (1) make 
the adjustments prescribed by this section and subsection (d) of the Act 
and (2) also make those adjustments required, in accordance with the 
method of accounting regularly used, for those additions, retirements, 
and other dispositions of property which occurred on or after the 
changeover date and before the taxpayer's 1956 adjustment date. For an 
illustration of adjustments required in accordance with the method of 
accounting regularly used, see paragraph (e)(3) of this section. The 
adjustments required by subsection (d) of the Act shall be made in lieu 
of the adjustments for depreciation otherwise required by section 
1016(a) (2) and (3) of the Code. The adjustments required by subsection 
(d) of the Act are set forth in paragraphs (b), (c), and (d) of this 
section.
    (b) Adjustment for depreciation sustained before March 1, 1913--(1) 
In general. Subsection (d)(1) of the Act requires an adjustment to be 
made as of the 1956 adjustment date for depreciation sustained before 
March 1, 1913, on all retirement-straight line property held on March 1, 
1913, by the taxpayer or a predecessor for which cost was or is claimed 
as basis and which was either (i) retired before the changeover date by 
the taxpayer or a predecessor or (ii) held on the changeover date by the 
taxpayer or a predecessor. This adjustment for depreciation sustained 
before March 1, 1913, shall be made in accordance with the conditions 
and limitations described in subparagraphs (2) and (3) of this paragraph 
and shall be allocated, in the manner prescribed in subparagraph (4) of 
this paragraph, among all retirement-straight line property held by the 
taxpayer on its 1956 adjustment date. The term ``cost'', when used in 
this paragraph with reference to the basis of property, shall be 
construed to mean the amount paid for the property or, if that amount 
could not be determined, then such other amount as was accepted by the 
Commissioner as ``cost'' for basis purposes.
    (2) Depreciation sustained on property retired before the changeover 
date. Pursuant to subsection (d)(1)(A) of the Act, an adjustment to the 
basis of retirement-straight line property held by the taxpayer on its 
1956 adjustment date shall be made as of that date for depreciation 
sustained before March 1, 1913, on all retirement-straight line property 
held on March 1, 1913, by the taxpayer or a predecessor for which cost 
was claimed as the basis and which was retired before the changeover 
date by the taxpayer or a predecessor, except that:
    (i) The adjustment shall be made only if a deduction was allowed in 
computing net income by reason of the retirement and the deduction so 
allowed was computed on the basis of the cost of the property unadjusted 
for depreciation sustained before March 1, 1913, and
    (ii) In the case of any such property retired during any taxable 
year beginning after December 31, 1929, the adjustment shall not exceed 
that portion of the amount attributable to depreciation sustained before 
March 1, 1913, which resulted, by reason of the deduction so allowed, in 
a reduction of taxes under the Code or under prior income, war-profits 
or excess-profits tax laws.

[[Page 815]]

    (3) Depreciation sustained on property held on the changeover date. 
Pursuant to subsection (d)(1)(B) of the Act, an adjustment to the basis 
of retirement-straight line property held by the taxpayer on its 1956 
adjustment date shall be made as of that date for depreciation sustained 
before March 1, 1913, on all retirement-straight line property held on 
March 1, 1913, by the taxpayer or a predecessor for which cost was or is 
claimed as basis and which was held on the changeover date by the 
taxpayer or a predecessor. This subparagraph shall not apply, however, 
to any such property which (i) was disposed of on or after the 
changeover date by reason of sale, casualty, or abnormal retirement in 
the nature of special obsolescence, and (ii) is property to which 
paragraph (c) of this section and subsection (d)(2) of the Act apply.
    (4) Manner of allocating adjustment. Pursuant to subsection (d)(1) 
of the Act, the amount of the adjustment required under this paragraph 
for depreciation sustained before March 1, 1913, which is attributable 
to a particular kind or class of retirement-straight line property held 
by the taxpayer on its 1956 adjustment date shall be made with respect 
to that kind or class of such property. If the adjustment required under 
this paragraph for depreciation sustained before March 1, 1913, is 
attributable to retirement-straight property of a particular kind or 
class no longer held by the taxpayer on its 1956 adjustment date, then 
the part of the adjustment to be allocated to any retirement-straight 
line property held by the taxpayer on its 1956 adjustment date shall be 
that amount which bears the same ratio to the adjustment as the 
unadjusted basis of the property so held bears to the entire unadjusted 
basis of all retirement-straight line property held by the taxpayer on 
its 1956 adjustment date.
    (c) Adjustment for part of terms-letter reserve applicable to 
property disposed of on or after changeover date and before 1956 
adjustment date. Pursuant to subsection (d)(2) of the Act, an adjustment 
to the basis of retirement-straight line property held by the taxpayer 
on its 1956 adjustment date shall be made as of that date for that part 
of the terms-letter reserve which was applicable to any retirement-
straight line property disposed of by sale, casualty, or abnormal 
retirement in the nature of special obsolescence, but only if the sale 
occurred in, or a deduction by reason of such casualty or abnormal 
retirement was allowed for Federal income-tax purposes for a period on 
or after the changeover date and before the taxpayer's 1956 adjustment 
date. This paragraph shall apply even though, in computing the adjusted 
basis of the property for purposes of determining gain or loss on the 
sale, casualty, or abnormal retirement, the basis of the retirement-
straight line property was not reduced by the part of the terms-letter 
reserve applicable to the property. If necessary, the adjustment 
required by this paragraph shall be allocated, in the manner prescribed 
in paragraph (b)(4) of this section, among all retirement-straight line 
property held by the taxpayer on its 1956 adjustment date.
    (d) Adjustment for depreciation allowable under the terms-letter for 
periods on and after the changeover date and before the 1956 adjustment 
date. Pursuant to subsection (d)(3) of the Act, an adjustment to the 
basis of retirement-straight line property held by the taxpayer on its 
1956 adjustment date shall be made as of that date for the entire amount 
of depreciation allowable under the terms-letter for all periods on and 
after the changeover date and before the taxpayer's 1956 adjustment 
date. This adjustment shall include all such depreciation allowable with 
respect to any retirement-straight line property which was disposed of 
on or after the changeover date and before the 1956 adjustment date.
    (e) Illustration of basis adjustments required for taxable years 
beginning on or after the 1956 adjustment date. The application of this 
section may be illustrated by the following example, which is based upon 
the assumption that multiple asset accounts are used:

    Example. (1) Assume that on its changeover date, January 1, 1943, 
the taxpayer or its predecessor held retirement-straight line property 
with an unadjusted cost basis of $10,000. The terms-letter reserve 
established as of January 1, 1943, with respect to such property was 
$3,000. Depreciation sustained before March 1, 1913, on retirement-
straight

[[Page 816]]

line property held on that date by the taxpayer or its predecessor, for 
which cost was or is claimed as basis, amounts to $800. Of this total 
depreciation sustained before March 1, 1913, $200 is attributable to 
retirement-straight line property retired before January 1, 1943, under 
circumstances requiring the adjustment under paragraph (b)(2) of this 
section, and $600 is attributable to retirement-straight line property 
held on January 1, 1943, by the taxpayer or its predecessor. On December 
31, 1954, retirement-straight line property costing $1,500 was 
permanently retired under circumstances giving rise to an abnormal 
retirement in the nature of special obsolescence. The terms-letter 
reserve applicable to this retired property was $450, of which $120 
represents depreciation sustained before March 1, 1913. On December 31, 
1954, retirement-straight line property costing $1,000 was also 
permanently retired under circumstances giving rise to a normal 
retirement. None of the property retired on December 31, 1954, had any 
market or salvage value on that date. Depreciation allowable under the 
terms-letter on retirement-straight line property for all periods on and 
after January 1, 1943, and before January 1, 1956 (the taxpayer's 1956 
adjustment date), amounts to $2,155, of which $345 is applicable to the 
property retired as an abnormal retirement.
    (2) The reserve for depreciation as of January 1, 1956, contains a 
credit balance of $3,360, determined as follows but without regard to 
the Act:

(i) Credits to reserve:
  Terms-letter reserve as of January 1, 1943................      $3,000
  Depreciation allowable under terms-letter from January 1,        2,155
   1943, to December 31, 1955...............................
                                                 -------------
  Balance...................................................       5,155
(ii) Charges to reserve:
  Part of terms-letter reserve applicable to            $450
   property abnormally retired..................
  Depreciation applicable to property abnormally         345
   retired and allowable from January 1, 1943,
   to December 31, 1954.........................
  Adjustment for normal retirement..............       1,000
                                                 ------------
                                                  ..........      $1,795
                                                             -----------
(iii) Balance as of January 1, 1956.........................       3,360
                                                 =============
 

    (3) The adjusted basis on January 1, 1956, of the retirement-
straight line property held by the taxpayer on that date is $6,010, 
determined as follows and in accordance with this section:

(i) Asset account:
  Unadjusted cost on January 1, 1943........................     $10,000
  Less:
    Adjustment for abnormal retirement..........      $1,500
    Adjustment for normal retirement............       1,000
                                                 ------------
                                                  ..........       2,500
                                                             -----------
  Balance as of January 1, 1956.............................       7,500
                                                 =============
(ii) Credits to reserve for depreciation:
  Depreciation sustained before March 1, 1913, on--
      Property retired before January 1, 1943...............         200
      Property held on January 1, 1943..........        $600
      Less part of such depreciation sustained           120
       on property abnormally retired on
       December 31, 1954........................
                                                 ------------
                                                  ..........         480
  Part of terms-letter reserve applicable to property                450
   abnormally retired on December 31, 1954 (including $120
   depreciation sustained before March 1, 1913).............
  Depreciation allowable under terms-letter from January 1,        2,155
   1943, to December 31, 1955...............................
                                                 -------------
      Total Credits.........................................       3,285
                                                 =============
(iii) Charges to reserve for depreciation:
  Part of terms-letter reserve applicable to property                450
   abnormally retired.......................................
  Depreciation applicable to property abnormally retired and         345
   allowable from January 1, 1943, to December 31, 1954.....
  Adjustment for normal retirement..........................       1,000
                                                 -------------
      Total charges.........................................       1,795
                                                 =============
(iv) Balance in reserve for depreciation:
  Total credits.............................................       3,285
  Total charges.............................................       1,795
                                                 -------------
      Balance as of January 1, 1956.........................       1,490
                                                 =============
(v) Adjusted basis of property:
  Balance in asset account..................................       7,500
  Balance in reserve for depreciation.......................       1,490
                                                 -------------
  Adjusted basis as of January 1, 1956......................       6,010
                                                 =============
 

    (4) The following adjustments to the reserve determined under 
subparagraph (2) of this paragraph may be made in order to arrive at the 
reserve determined under subparagraph (3)(iv) of this paragraph:

(i) Credit balance in reserve, as determined under                $3,360
 subparagraph (2) of this paragraph.........................
(ii) Credit adjustments:
  Depreciation sustained before March 1, 1913,
   on--
    Property retired before January 1, 1943.....        $200
    Property held on January 1, 1943............         480
  Part of terms-letter reserve applicable to             450
   property abnormally retired on December 31,
   1954.........................................
                                                 ============
                                                  ..........       1,130
                                                             -----------
      Balance...............................................       4,490

[[Page 817]]

 
(iii) Debit adjustment:
  Terms-letter reserve as of January 1, 1943................       3,000
                                                 -------------
(iv) Credit Balance in reserve, as determined under                1,490
 subparagraph (3)(iv) of this paragraph.....................
                                                 =============
 

    (5) The $6,010 adjusted basis as of January 1, 1956, of the 
retirement-straight line property held by the taxpayer on that date is 
to be recovered over the estimated remaining useful life of that 
property. The remaining useful life of the property will be reviewed 
regularly, and appropriate adjustments in the rates will be made as 
necessary in order to spread the remaining cost less estimated salvage 
over the estimated remaining useful life of the property. See Sec. 
1.167(a)-1.



Sec. 1.9001-3  Basis adjustments for taxable years between changeover
date and 1956 adjustment date.

    (a) In general. (1) Subsection (e) of the Act provides the 
adjustments required to be made in determining the adjusted basis of any 
retirement-straight line property as of any time on or after the 
changeover date and before the taxpayer's 1956 adjustment date. This 
adjusted basis shall be used for all purposes of the Internal Revenue 
Code of 1939 and the Internal Revenue Code of 1954 for taxable years 
beginning on or after the changeover date and before the taxpayer's 1956 
adjustment date, except as provided in subparagraph (4) of this 
paragraph. The adjustments so required, which are set forth in 
paragraphs (b) and (c) of this section, shall not be used in determining 
the adjusted basis of property for taxable years beginning before the 
changeover date or on or after the taxpayer's 1956 adjustment date.
    (2) In order to arrive at the adjusted basis as of any specific date 
occurring on or after the changeover date and before the 1956 adjustment 
date, the taxpayer shall start with the unadjusted basis of all 
retirement-straight line property held on the changeover date by the 
taxpayer or its predecessor and shall, as of that specific date and with 
respect to both the asset and reserve accounts, (i) make the adjustments 
prescribed by this section and subsection (e) of the Act and (ii) also 
make those adjustments required, in accordance with the method of 
accounting regularly used, for additions, retirements, and other 
dispositions of property. For an illustration of adjustments required in 
accordance with the method of accounting regularly used, see the example 
in paragraph (d) of this section.
    (3) The adjustments required by subsection (e) of the Act shall be 
made in lieu of the adjustments for depreciation otherwise required by 
section 1016(a) (2) and (3) of the Code and by the corresponding 
provisions of prior revenue laws.
    (4) Although this section, and subsection (e) of the Act, shall 
apply in determining the excess-profits tax, they shall not apply in 
determining adjusted basis for the purpose of computing equity capital 
for any day under section 437(c) (relating to the Excess Profits Tax Act 
of 1950) (64 Stat. 1137) of the Internal Revenue Code of 1939. For the 
adjustments to be made in computing equity capital under such section, 
see paragraph (c) of Sec. 1.9001-4.
    (b) Adjustment for terms-letter reserve. Pursuant to subsection 
(e)(1) of the Act, the basis of any retirement-straight line property 
shall be adjusted, as of any specific applicable date occurring on or 
after the changeover date and before the 1956 adjustment date, for the 
amount of the terms-letter reserve applicable to such property.
    (c) Adjustment for depreciation allowable under the terms-letter. 
Pursuant to subsection (e)(2) of the Act, the basis of any retirement-
straight line property shall be adjusted, as of any specific applicable 
date occurring on or after the changeover date and before the 1956 
adjustment date, for depreciation applicable to such property and 
allowable under the terms-letter.
    (d) Illustration of basis adjustments required for taxable years 
beginning on or after the changeover date and before the 1956 adjustment 
date. The application of this section may be illustrated by the 
following example, which is based upon the assumption that multiple 
asset accounts are used:

    Example. (1) The facts are assumed to be the same as those in the 
example under paragraph (e) of Sec. 1.9001-2, except that the adjusted 
basis of retirement-straight line property is determined as of January 
1, 1955, and the depreciation allowable under the terms-letter from the 
changeover date to December 31, 1954, is $2,100.
    (2) The adjusted basis on January 1, 1955, of the retirement-
straight line property held by

[[Page 818]]

the taxpayer on that date is $4,195, determined as follows and in 
accordance with this section:

(i) Asset account:
  Unadjusted cost on January 1, 1943.......................      $10,000
  Less:
    Adjustment for abnormal retirement............   $1,500
    Adjustment for normal retirement..............    1,000
                                                   ---------
                                                                   2,500
                                                   ----------
      Balance as of January 1, 1955........................        7,500
                                                   ==========
(ii) Credits to reserve for depreciation:
  Entire terms-letter reserve as of January 1, 1943........        3,000
  Depreciation allowable under terms-letter from January 1,        2,100
   1943, to December 31, 1954..............................
                                                   ----------
      Total credits........................................        5,100
                                                   ==========
(iii) Charges to reserve for depreciation:
  Part of terms-letter reserve applicable to property                450
   abnormally retired on December 31, 1954.................
  Depreciation applicable to property abnormally retired             345
   and allowable from January 1, 1943, to December 31, 1954
    Adjustment for normal retirement.......................        1,000
                                                   ==========
      Total charges........................................        1,795
                                                   ==========
(iv) Balance in reserve for depreciation:
    Total credits..........................................        5,100
    Total charges..........................................        1,795
                                                   ----------
      Balance as of January 1, 1955........................        3,305
                                                   ==========
(v) Adjusted basis of property:
    Balance in asset account...............................        7,500
    Balance in reserve for depreciation....................        3,305
                                                   ----------
      Adjusted basis as of January 1, 1955.................        4,195
                                                   ==========
 



Sec. 1.9001-4  Adjustments required in computing excess-profits 
credit.

    (a) In general. Subsection (f) of the Act provides adjustments 
required to be made in computing the excess-profits credit for any 
taxable year under the Excess Profits Tax Act of 1940 (54 Stat. 975) or 
under the Excess Profits Tax Act of 1950 (64 Stat. 1137). These 
adjustments are set forth in paragraphs (b) and (c) of this section, and 
they shall apply notwithstanding the terms-letter.
    (b) Equity invested capital. (1) Pursuant to subsection (f)(1) of 
the Act, in determining equity invested capital for any day of any 
taxable year under section 458 (relating to the Excess Profits Tax Act 
of 1950) or section 718 (relating to the Excess Profits Tax Act of 1940) 
of the Internal Revenue Code of 1939, the accumulated earnings and 
profits as of the changeover date, and as of the beginning of each 
taxable year thereafter, shall be reduced by the depreciation sustained 
before March 1, 1913, on all retirement-straight line property held on 
March 1, 1913, by the taxpayer or a predecessor for which cost was or is 
claimed as basis and which was held on the changeover date by the 
taxpayer or a predecessor.
    (2) For the computation of accumulated earnings and profits in 
determining equity invested capital, see 26 CFR (1941 Supp.) 30.718-2, 
as amended by Treasury Decision 5299, approved October 1, 1943, 8 FR 
13451, C.B. 1943, 747 (Regulations 109); 26 CFR (1943 Cum. Supp.) 
35.718-2 (Regulations 112); and 26 CFR (1939) 41.458-4 (Regulations 
130).
    (c) Equity capital. (1) Pursuant to subsection (f)(2) of the Act, in 
determining the adjusted basis of assets for the purpose of computing 
equity capital for any day under section 437(c) (relating to the Excess 
Profits Tax Act of 1950) of the Internal Revenue Code of 1939, the basis 
of the assets which enter into the computation shall also be reduced by:
    (i) Depreciation sustained before March 1, 1913, on all retirement-
straight line property held on March 1, 1913, by the taxpayer or a 
predecessor for which cost was or is claimed as basis and which was:
    (a) Retired before the changeover date by the taxpayer or a 
predecessor, or
    (b) Held on the changeover date by the taxpayer or a predecessor and 
also held as of the beginning of the day for which the equity capital is 
being determined; and
    (ii) All depreciation applicable to the assets which enter into the 
computation and allowable under the terms-letter for all periods on and 
after the changeover date and before the taxable year for which the 
excess-profits credit is being computed.
    (2) The adjustment required to be made by subparagraph (1)(i)(a) of 
this paragraph as of the beginning of the day for which the equity 
capital is being determined shall be made in accordance with the 
conditions and limitation described in paragraph (b)(2) of Sec. 1.9001-
2.

[[Page 819]]

    (3) For the determination of equity capital under section 437(c) of 
the Internal Revenue Code of 1939, see 26 CFR (1939) 40.437-5 
(Regulations 130).

              DEALER RESERVE INCOME ADJUSTMENT ACT OF 1960



Sec. 1.9002  Statutory provisions; Dealer Reserve Income Adjustment
Act of 1960 (74 Stat. 124).

    Section 1. Short title. This Act may be cited as the ``Dealer 
Reserve Income Adjustment Act of 1960''.
    Sec. 2. Persons to whom this Act applies. This Act shall apply to 
any person who, for his most recent taxable year ending on or before 
June 22, 1959:
    (1) Computed, or was required to compute, taxable income under an 
accrual method of accounting.
    (2) Treated any dealer reserve income, which should have been taken 
into account (under the accrual method of accounting) for such taxable 
year, as accruable for a subsequent taxable year, and
    (3) Before September 1, 1960, makes an election under section 3(a) 
or 4(a) of this Act.
    Sec. 3. Election to have section 481 apply--(a) General rule. If:
    (1) For the year of the change (determined under subsection (b)), 
the treatment of dealer reserve income by any person to whom this Act 
applies is changed to a method proper under the accrual method of 
accounting (whether or not such person initiated the change),
    (2) Such person makes an election under this subsection, and
    (3) Such person does not make the election provided by section 4(a),

then, for purposes of section 481 of the Internal Revenue Code of 1954, 
the change described in paragraph (1) shall be treated as a change in 
method of accounting not initiated by the taxpayer.
    (b) Year of change, etc. In applying section 481 of the Internal 
Revenue Code of 1954 for purposes of this section, the ``year of the 
change'' in the case of any person is:
    (1) Except as provided in paragraph (2), the first taxable year 
ending after June 22, 1959, or
    (2) The earliest taxable year (whether the Internal Revenue Code of 
1954 or the Internal Revenue Code of 1939 applies to such year) for 
which:
    (A) On or before June 22, 1959:
    (i) The Secretary of the Treasury or his delegate issued a notice of 
deficiency, or a written notice of a proposed deficiency, with respect 
to dealer reserve income, or
    (ii) Such person filed with the Secretary or his delegate a claim 
for refund or credit with respect to dealer reserve income, and
    (B) The assessment of any deficiency, or the refund or credit of any 
overpayment, whichever is applicable, was not, on June 21, 1959, 
prevented by the operation of any law or rule of law.

For purposes of this section, section 481 of such Code shall be treated 
as applying to any year of the change to which the Internal Revenue Code 
of 1939 applies.
    Sec. 4. Election to have section 481 not apply; payment in 
installments--(a) General rule. If a person to whom this Act applies 
makes an election under this subsection, then for purposes of Chapter 1 
of the Internal Revenue Code of 1954 (and the corresponding provisions 
of prior law) a change in the treatment of dealer reserve income to a 
method proper under the accrual method of accounting shall be treated as 
not a change in method of accounting in respect of which section 481 of 
the Internal Revenue Code of 1954 applies. Any election under this 
subsection shall apply to all taxable years ending on or before June 22, 
1959 (whether the provisions of the Internal Revenue Code of 1954 or the 
corresponding provisions of prior law apply), for which the assessment 
of any deficiency, or for which refund or credit of any overpayment, 
whichever is applicable, was not, on June 21, 1959, prevented by the 
operation of any law or rule of law.
    (b) Election to pay tax in installments--(1) Eligibility. If the net 
increase in tax (as defined in paragraph (2)) which results solely from 
the effect of the election provided by subsection (a) exceeds $2,500, 
then the taxpayer may elect (at the time the election is made under 
subsection (a)) to pay in two or more (but not to exceed 10) equal 
annual installments any portion of such net increase which (on the date 
of such election) is unpaid.
    (2) Net increase in tax defined. For purposes of this section, the 
term ``net increase in tax'' means the amount (if any) by which:
    (A) The sum of the increases in tax (including interest) for all 
taxable years to which the election applies and which is attributable to 
the election, exceeds
    (B) The sum of the decreases in tax (including interest) for all 
taxable years to which the election applies and which is attributable to 
the election.

For purposes of this paragraph, interest for the period before the date 
of the election shall be computed as provided in Chapter 67 of the 
Internal Revenue Code of 1954 (or the corresponding provisions of prior 
revenue laws).
    (c) Due date for installments. If an election is made under 
subsection (b), the first installment shall be paid on or before the 
date prescribed by section 6151(a) of the Internal Revenue Code of 1954 
for payment of the tax for the taxable year in which the election was 
made, and each succeeding installment

[[Page 820]]

shall be paid on or before the date which is one year after the date 
prescribed by this subsection for payment of the preceding installment.
    (d) Effect of subsequent redetermination of tax--(1) 
Redetermination. If:
    (A) The taxpayer makes an election under subsection (b), and
    (B) There is a redetermination of the taxpayer's tax for any taxable 
year to which the election provided by subsection (a) applies,

then the net increase in tax (as defined in subsection (b)(2) shall be 
redetermined.
    (2) Effect of increase. If the redetermination described in 
paragraph (1)(B) results in an increase in the net increase in tax (as 
defined in subsection (b)(2)), the resulting increase shall be prorated 
to all the installments. The part of such resulting increase so prorated 
to any installment the date for payment of which has not arrived shall 
be collected at the same time as, and as a part of, such installment. 
The part of such resulting increase so prorated to any installment the 
date for payment of which has arrived shall be paid upon notice and 
demand from the Secretary of the Treasury or his delegate.
    (3) Effect of decrease. For treatment of a decrease in the net 
increase in tax as the result of a redetermination described in 
paragraph (1)(B), see section 6403 of the Internal Revenue Code of 1954 
(relating to overpayment of installment).
    (e) Suspension of interest--(1) In general. If an election under 
subsection (a) applies and there is a net increase in tax (as defined in 
subsection (b)(2)), no interest shall be imposed on any underpayment 
(and no interest shall be paid on any overpayment) attributable to such 
election for the period beginning on the date of such election and 
ending on the date prescribed by section 6151(a) of the Internal Revenue 
Code of 1954 for payment of the tax for the taxable year in which the 
election was made.
    (2) No interest during installment period. If an election under 
subsection (b) applies, no interest shall be imposed for the period on 
or after the date fixed for payment of the first installment unless 
payment of unpaid installments is accelerated under subsection (f) or 
(g).
    (3) Interest where payment is accelerated. If payment is accelerated 
under subsection (f) or (g), interest determined in accordance with the 
provisions of section 6601 of the Internal Revenue Code of 1954 on the 
entire unpaid tax shall be payable:
    (A) If payment is accelerated under subsection (f), from the date of 
notice and demand provided by such subsection to the date such tax is 
paid, or
    (B) If payment is accelerated under subsection (g), from the date 
fixed for paying the unpaid installment to the date such tax is paid.
    (f) Termination of installment payment privilege. The extension of 
time provided by this section for payment of tax shall cease to apply, 
and any unpaid installments shall be paid upon notice and demand from 
the Secretary of the Treasury or his delegate, if:
    (1) In the case of a taxpayer who is an individual, he dies or 
ceases to engage in a trade or business,
    (2) In the case of a taxpayer who is a partner, the entire interest 
of such partner is transferred or liquidated or the partnership 
terminates, or
    (3) In the case of a taxpayer which is a corporation, the taxpayer 
ceases to engage in a trade or business, unless the unpaid portion of 
the tax payable in installments is required to be taken into account by 
the acquiring corporation under section 5(d).
    (g) Failure to pay installment. If any installment under this 
section is not paid on or before the date fixed for its payment by this 
section (including any extension of time for payment of such 
installment), the unpaid installments shall be paid upon notice and 
demand from the Secretary of the Treasury or his delegate.
    (h) Suspension of running of periods of limitation. The running of 
the periods of limitation provided by section 6502 of the Internal 
Revenue Code of 1954 (or corresponding provision of prior law) for the 
collection of any amount of tax payable in installments under this 
section shall be suspended for the period of any extension of time for 
payment granted under this section.
    Sec. 5. Definitions; special rules--(a) Dealer reserve income. For 
purposes of this Act, the term ``dealer reserve income'' means:
    (1) That part of the consideration derived by any person from the 
sale or other disposition of customers' sales contracts, notes, and 
other evidences of indebtedness (or derived from customers' finance 
charges connected with such sales or other dispositions) which is:
    (A) Attributable to the sale by such person to such customers, in 
the ordinary course of his trade or business, of real property or 
tangible personal property, and
    (B) Held in a reserve account, by the financial institution to which 
such person disposed of such evidences of indebtedness, for the purpose 
of securing obligations of such person or of such customers, or both; 
and
    (2) That part of the consideration:
    (A) Derived by any person from a sale described in paragraph (1)(A) 
in respect of which part or all of the purchase price of the property 
sold is provided by a financial institution to or for the customer to 
whom such property is sold, or
    (B) Derived by such person from finance charges connected with the 
financing of such sale,


[[Page 821]]


which is held in a reserve account by such financial institution for the 
purpose of securing obligations of such person or of such customer, or 
both.
    (b) Financial institution. For purposes of this Act, the term 
``financial institution'' means any person regularly engaged in the 
business of acquiring evidences of indebtedness of the kind described in 
subsection (a)(1), or of financing sales of the kind described in 
subsection (a)(2), or both.
    (c) Other terms; application of other laws. Except where otherwise 
distinctly expressed or manifestly intended, terms used in this Act 
shall have the same meaning as when used in the Internal Revenue Code of 
1954 and all provisions of law shall apply with respect to this Act as 
if this Act were a part of such Code.
    (d) Acquiring corporation. In the case of the acquisition of assets 
of a corporation by another corporation in a distribution or transfer 
described in section 381(a) of the Internal Revenue Code of 1954, the 
acquiring corporation shall, for purposes of this Act, be treated as if 
it were the distributor or transferor corporation.
    (e) Statutes of limitations--(1) Extension of period for assessment 
and refund or credit. For purposes of applying sections 3 and 4 of this 
Act, if the assessment of any deficiency, or the refund or credit of any 
overpayment, for any taxable year was not prevented on June 21, 1959, by 
the operation of any law or rule of law, but would be so prevented prior 
to September 1, 1961, the period within which such assessment, or such 
refund or credit, may be made shall not expire prior to September 1, 
1961. An election by a taxpayer under section 3 or 4 of this Act shall 
be considered as a consent to the application of the provisions of this 
subsection.
    (2) Years closed by closing agreement or compromise. For purposes of 
this Act, if the assessment of any deficiency, or the refund or credit 
of any overpayment, for any taxable year is prevented on the date of an 
election under section 3 or 4 of this Act by the operation of the 
provisions of Chapter 74 of the Internal Revenue Code of 1954 (relating 
to closing agreements and compromises) or by the corresponding 
provisions of the Internal Revenue Code of 1939, such assessment, or 
such refund or credit, shall be considered as having been prevented on 
June 21, 1959.
    (f) Regulations. The Secretary of the Treasury or his delegate shall 
prescribe such regulations as may be necessary to carry out the purposes 
of this Act, including regulations relating to:
    (1) The application of the provisions of this Act in the case of 
partnerships, and
    (2) The manner in which the elections provided by this Act are to be 
made.

[T.D. 6490, 25 FR 8369, Sept. 1, 1960]



Sec. 1.9002-1  Purpose, applicability, and definitions.

    (a) In general. The Dealer Reserve Income Adjustment Act of 1960 (74 
Stat. 124) contains transitional provisions relating to adjustments to 
income resulting from a change in the income tax treatment of dealer 
reserve income. The purpose of the Act is to provide eligible taxpayers 
who elect to have its provisions apply with two alternatives for 
accounting for the adjustments to income resulting from a change to a 
proper method of reporting dealer reserve income. The Act also provides 
certain taxpayers with an election to pay in installments any net 
increase in tax. Eligible taxpayers must make any election under the 
provisions of the Act prior to September 1, 1960. If any election is 
made, then the applicable provisions of the Act and Sec. Sec. 1.9002-1 
to 1.9002-8, inclusive, shall apply.
    (b) Eligibility to elect. In order to be eligible to make any of the 
elections provided by the Act, a taxpayer must have, for his most recent 
taxable year ending on or before June 22, 1959, (1) computed, or been 
required to compute, taxable income under an accrual method of 
accounting, and (2) treated dealer reserve income (or portions thereof) 
which should have been taken into account (under the accrual method of 
accounting) for such most recent taxable year as accruable for a 
subsequent taxable year. Thus, the elections provided by the Act are not 
available to a person who, for his most recent taxable year ending on or 
before June 22, 1959, reported dealer reserve income under a method 
proper under the accrual method of accounting or who was not required to 
compute taxable income under the accrual method of accounting. An 
election may be made even though the taxpayer is litigating his 
liability for income tax based upon his treatment of dealer reserve 
income, whether in The Tax Court of the United States or any other 
court, and an election filed by a taxpayer who is litigating his 
liability for income tax based upon his treatment of dealer reserve 
income does not constitute a waiver of his right to continue pending 
litigation until final judicial determination. He must, however, comply

[[Page 822]]

with the provisions of the Act and the regulations thereunder.
    (c) Definitions. For purposes of the Act and Sec. Sec. 1.9002-1 to 
1.9002-8, inclusive:
    (1) The Act. The term the Act means the Dealer Reserve Income 
Adjustment Act of 1960 (74 Stat. 124).
    (2) Dealer reserve income. The term dealer reserve income means:
    (i) That part of the consideration derived by any person from the 
sale or other disposition of customers' sales contracts, notes, and 
other evidences of indebtedness (or derived from customers' finance 
charges connected with such sales or other dispositions) which is:
    (a) Attributable to the sale by such person to such customers, in 
the ordinary course of his trade or business, of real property or 
tangible personal property, and
    (b) Held in a reserve account, by the financial institution to which 
such person disposed of such evidences of indebtedness, for the purpose 
of securing obligations of such person or of such customers, or both; 
and
    (ii) That part of the consideration:
    (a) Derived by any person from a sale described in subdivision 
(i)(a) of this subparagraph in respect of which part or all of the 
purchase price of the property sold is provided by a financial 
institution to or for the customer to whom such property is sold, or
    (b) Derived by such person from finance charges connected with the 
financing of such sale, which is held in a reserve account by such 
financial institution for the purpose of securing obligations of such 
person or of such customer, or both. Thus, the term includes amounts 
held in a reserve account by a financial institution in transactions in 
which the customer becomes obligated to the institution as well as such 
amounts so held by a financial institution in transactions in which the 
taxpayer is the obligee on the contract, note, or other evidence of 
indebtedness. For purposes of the definition of the term ``dealer 
reserve income'' it is immaterial whether or not the taxpayer guarantees 
the customer's obligation in excess of the reserve retained by the 
financial institution. The term does not include the consideration 
derived from transactions relating to the sale of intangible property 
such as stocks, bonds, copyrights, patents, etc. Further, the term does 
not include consideration derived by the taxpayer from transactions 
relating to the sale of property by a person not the taxpayer or to 
casual sales of property not in the ordinary course of the taxpayer's 
trade or business.
    (3) Financial institution. The term financial institution means any 
person regularly engaged in the business of acquiring evidences of 
indebtedness of the kind described in section 5(a)(1) of the Act, or of 
financing sales of the kind described in section 5(a)(2) of the Act, or 
both. It thus includes banking institutions, finance companies, building 
and loan associations, and other similar type organizations, as well as 
an individual or partnership regularly engaged in the described 
business.
    (4) Taxpayer. The term taxpayer means any person to whom the Act 
applies.
    (5) Other terms. All other terms which are not specifically defined 
shall have the same meaning as when used in the Code except where 
otherwise distinctly expressed or manifestly intended.

[T.D. 6490, 25 FR 8371, Sept. 1, 1960]



Sec. 1.9002-2  Election to have the provisions of section 481 of the 
Internal Revenue Code of 1954 apply.

    (a) In general. Section 3(a) of the Act provides that if the income 
tax treatment of dealer reserve income by the taxpayer is changed 
(whether or not such change is initiated by the taxpayer) to a proper 
method under the accrual method of accounting, then the taxpayer may 
elect to have such change treated as a change in method of accounting 
not initiated by the taxpayer to which the provisions of section 481 of 
the Code apply. This election may be made only when the alternative 
election under section 4(a) of the Act has not been exercised.
    (b) Year of change. Where an election has been made under section 
3(a) of the Act to have section 481 of the Code apply, then for purposes 
of applying section 481 of the Code the year of change shall be 
determined in accordance with the provisions of section 3(b) of the Act. 
Section 3(b) provides that the year of change is the earlier of (1)

[[Page 823]]

the first taxable year ending after June 22, 1959, or (2) the earliest 
taxable year for which, on or before June 22, 1959,
    (i) There was issued a notice of deficiency or written notice of a 
proposed deficiency attributable to the erroneous treatment of dealer 
reserve income, or
    (ii) The taxpayer filed a claim for refund or credit with respect to 
the treatment of such income,


and in respect of which the assessment of any deficiency, or the refund 
or credit of any overpayment, was not prevented on June 21, 1959, by the 
operation of any law or rule of law. The written notice of proposed 
deficiency includes a 15- or 30-day letter issued under established 
procedure or other similar written notification.
    (c) Application to pre-1954 Code years. If the earliest year 
described in paragraph (b) of this section is a year subject to the 
Internal Revenue Code of 1939 in respect of which assessment of any 
deficiency or refund or credit of any overpayment was not prevented on 
June 21, 1959, by the operation of any law or rule of law, section 481 
of the Internal Revenue Code of 1954 shall be treated as applying in the 
same manner it would have applied had it been enacted as part of the 
Internal Revenue Code of 1939.
    (d) Examples. The operation of this section in determining the year 
of change may be illustrated by the following examples:

    Example 1. D, a taxpayer on the calendar year basis who employs the 
accrual method of accounting, voluntarily changed to the proper method 
of accounting for dealer reserve income for the taxable year 1959. A 
statutory notice of deficiency, however, was issued prior to June 23, 
1959, relating to the erroneous treatment of such income for the taxable 
year 1956, which was the earliest taxable year in respect of which 
assessment of a deficiency or credit or refund of an overpayment was not 
prevented on June 21, 1959. Prior to September 1, 1960, D properly 
exercises his election under section 3 of the Act to have the change in 
the treatment of dealer reserve income treated as a change in method of 
accounting not initiated by the taxpayer to which section 481 of the 
Code applies. Under these facts, 1956 is the year of the change for 
purposes of applying section 481. Accordingly, the net amount of any 
adjustment found necessary as a result of the change in the treatment of 
dealer reserve income which is attributable to taxable years subject to 
the 1954 Code shall be taken into account for the year of change in 
accordance with section 481. The net amount of the adjustments 
attributable to pre-1954 Code years is to be disregarded. The income of 
each taxable year succeeding the year of change in respect of which the 
assessment of any deficiency or refund or credit of any overpayment is 
not prevented will be recomputed under the proper method of accounting 
initiated by the change.
    Example 2. Assume the same facts as set forth in example (1), except 
that no notice of a proposed deficiency of any type has been issued, and 
assume further that no claim for refund has been filed. Since there was 
no earlier year open on June 21, 1959, for which the taxpayer either was 
notified of a proposed deficiency attributable to the erroneous 
treatment of dealer reserve income or for which he had filed a claim for 
refund or credit with respect to the treatment of such income, the year 
of change is 1959, the first taxable year ending after June 22, 1959. 
Accordingly, the net amount of any adjustment found necessary as a 
result of the change in the treatment of dealer reserve income which is 
attributable to taxable years subject to the 1954 Code shall be taken 
into account for the year of the change in accordance with section 481. 
The net amount of the adjustments attributable to pre-1954 Code years is 
to be disregarded.
    Example 3. Assume the same facts as set forth in example (1), except 
that a refund claim specifying adjustments relative to dealer reserve 
income was timely filed for the taxable year 1951, which was the 
earliest taxable year for which a refund or credit of an overpayment or 
assessment of a deficiency was not prevented on June 21, 1959. Under 
this factual situation, the year of change for purposes of applying 
section 481 would be 1951. Section 481 would be applied to 1951 and be 
given effect for that year in the same manner as it would have applied 
had it been enacted as a part of the 1939 Code and as if the change to 
the proper method of accounting had not been initiated by the taxpayer. 
Any adjustment with regard to dealer reserve income attributable to pre-
1951 years is disregarded. The income of each taxable year succeeding 
the year of change in respect of which the assessment of any deficiency 
or refund or credit of any overpayment is not prevented will be 
recomputed under the proper method of accounting initiated by the 
change.

[T.D. 6490, 25 FR 8371, Sept. 1, 1960]

[[Page 824]]



Sec. 1.9002-3  Election to have the provisions of section 481 of the
Internal Revenue Code of 1954 not apply.

    Section 4(a) of the Act provides that in the treatment of dealer 
reserve income by the taxpayer is changed to a method proper under the 
accrual method of accounting, then the taxpayer may elect to have such 
change treated as not a change in method of accounting to which the 
provisions of section 481 of the Internal Revenue Code of 1954 apply. 
This election shall apply to all taxable years ending on or before June 
22, 1959, for which the assessment of any deficiency, or for which 
refund or credit of any overpayment, was not prevented on June 21, 1959, 
by the operation of any law or rule of law. This election may be made 
only if the alternative election under section 3(a) of the Act has not 
been exercised. If an election is made under section 4(a) of the Act, 
taxable income (or net income in the case of a taxable year to which the 
Internal Revenue Code of 1939 applies) shall be recomputed under a 
proper method of accounting for dealer reserve income for each taxable 
year to which the election applies, without regard to section 481.

[T.D. 6490, 25 FR 8372, Sept. 1, 1960]



Sec. 1.9002-4  Election to pay net increase in tax in installments.

    (a) Election. If an election is made under section 4(a) of the Act 
and if the net increase in tax determined in accordance with paragraph 
(b) of this section exceeds $2,500, the taxpayer may also make an 
election under section 4(b) of the Act prior to September 1, 1960, to 
pay any portion of such net increase in tax, unpaid on the date of the 
election, in 2 or more, but not to exceed 10, equal annual installments. 
If the taxpayer making the election under section 4(a) of the Act is a 
partnership or a small business corporation electing under Subchapter S, 
Chapter 1 of the Code, the determination as to whether the net increase 
in tax exceeds $2,500 shall be made separately as to each partner or 
shareholder, respectively, with regard to his individual liability. 
Thus, if a partnership makes an election under section 4(a) of the Act, 
and partners A and B had a net increase in tax of $3,000 and $2,000, 
respectively, as a result of dealer reserve income adjustments to 
partnership income, partner A may elect under section 4(b) of the Act to 
pay the net increase in 2 or more, but not exceeding 10, equal annual 
installments to the extent that such tax was unpaid on the date of the 
election. Partner B may not make the election since his net increase in 
tax does not exceed $2,500.
    (b) Net increase in tax. (1) The term ``net increase in tax'' means 
the amount by which the sum of the increases in tax (including interest) 
for all taxable years to which the election under section 4(a) of the 
Act applies and which is attributable to the election exceeds the sum of 
the decreases in tax (including interest) for all taxable years to which 
the election under such section applies and which is attributable to the 
election.
    (2) In determining the net increase in tax, the tax and interest for 
each taxable year to which the election applies is computed by taking 
into account all adjustments necessary to reflect the change to the 
proper treatment of dealer reserve income. If the computation results in 
additional tax for a taxable year, then interest is computed under 
section 6601 of the Code (or corresponding provisions of prior law) on 
such additional tax for the taxable year involved from the last date 
prescribed for payment of the tax for such taxable year to the date the 
election is made. The interest so computed is then added to the 
additional tax determined for such taxable year. The sum of these two 
items (tax plus interest) represents the increase in tax for such 
taxable year. If the computation of the tax after taking into account 
the appropriate dealer reserve income adjustments results in a reduction 
in tax for any taxable year to which the election applies, interest 
under section 6611 of the Code (or corresponding provisions of prior 
law) is computed from the date of the overpayment of the tax for such 
year to the date of the election. The amount of the interest so computed 
is then added to the reduction in tax to determine the total decrease in 
tax for such year. The net increase in tax is then determined by adding 
together the total increases in tax for each year to which the election 
applies and from

[[Page 825]]

the resulting total subtracting the sum of the total decreases in tax 
for each year. If the total increases in tax for all such years do not 
exceed the total decreases in tax, there is no net increase in tax for 
purposes of section 4(b) of the Act. For purposes of determining the net 
increase in tax, net operating losses affecting the computation of tax 
for any prior taxable year not otherwise affected shall be taken into 
account.
    (c) Time for paying installments. If the election under this section 
is made to pay the unpaid portion of the net increase in tax in 
installments, the first installment shall be paid on or before the date 
prescribed by section 6151(a) of the Code for payment of the tax for the 
taxable year in which such election is made. Each succeeding installment 
shall be paid on or before the date which is one year after the date 
prescribed for the payment of the preceding installment.
    (d) Termination of installment privilege--(1) For nonpayment of 
installment. The extension of time provided by section 4(b) of the Act 
for payment of the net increase in tax in installments shall terminate, 
and any unpaid installments shall be paid upon notice and demand from 
the district director if any installment under such section is not paid 
by the taxpayer on or before the date fixed for its payment, including 
any extension of time for payment of any such installment.
    (2) For other reasons. The extension of time provided by section 
4(b) of the Act for payment of the net increase in tax in installments 
shall terminate, and any unpaid installments shall be paid upon notice 
and demand from the district director if:
    (i) In the case of an individual, he dies or ceases to engage in any 
trade or business,
    (ii) In the case of a partner, his entire interest in the 
partnership is transferred or liquidated or the partnership terminates, 
or
    (iii) In the case of a corporation, it ceases to engage in a trade 
or business, unless the unpaid portion of the tax payable in 
installments is required to be taken into account by an acquiring 
corporation under section 5(d) of the Act.


The installment privilege is not terminated under this subparagraph even 
though the taxpayer terminates the trade or business in respect of which 
the dealer reserve income is attributable provided the taxpayer 
continues in a trade or business. Further, the privilege is not 
terminated by a transfer of a part of a partnership interest so long as 
the partner retains any interest in the partnership. Also, the privilege 
is not terminated by a transaction falling within the provisions of 
section 381(a) of the Code if, under section 5(d) of the Act, the 
acquiring corporation is required to take into account the unpaid 
portion of the net increase in tax. In such a case the privilege may be 
continued by the acquiring corporation in the same manner and under the 
same conditions as though it were the distributor or transferor 
corporation.
    (e) Redetermination of tax subsequent to exercise of installment 
election. Section 4(d) of the Act provides that where a taxpayer has 
elected to pay the net increase in tax in installments and thereafter it 
becomes necessary to redetermine the taxpayer's tax for any taxable year 
to which the election provided by section 4(a) of the Act applies, then 
the net increase in tax shall be redetermined. Where the redetermination 
does not involve adjustments affecting the treatment of dealer reserve 
income, then the net increase in tax previously computed will not be 
disturbed. The net increase in tax is limited to the amount of tax 
computed under section 4(b)(2) of the Act as a result of the change in 
treatment accorded dealer reserve income. If the redetermination of tax 
for any taxable year to which the election applies results in an 
addition to the net increase in tax previously computed, then such 
addition shall be prorated to all of the installments whether paid or 
unpaid. The part of the addition, prorated to installments which are not 
yet due, shall be collected at the same time as, and as a part of, such 
installments. The part of the addition prorated to installments, the 
time for payment of which has arrived, shall be paid upon notice and 
demand from the district director. Under section 4(g) of the Act, 
failure to make such payment within 10 days

[[Page 826]]

after issuance of notice and demand will terminate the installment 
privilege. The imposition of interest on the addition to the net 
increase in tax as a result of the redetermination will be determined in 
the same manner as interest on the previously computed net increase in 
tax. Thus, no interest will be imposed on the amount of the addition to 
the net increase in tax prorated to installments not yet due unless the 
installment privilege is terminated under subsection (f) or (g) of 
section 4 of the Act. If a reduction in the net increase in tax results 
from a redetermination of tax for any taxable year to which the election 
applies, the entire amount of such reduction shall, in accordance with 
the provisions of section 6403 of the Code (relating to overpayment of 
installments), be prorated to the installments which are not yet due, 
resulting in a pro rata reduction in each of such installments. Where 
the redetermination does not involve adjustments pertaining to dealer 
reserve income, then any resulting deficiency pertaining to the year to 
which the election applies will be assessed and collected, in accordance 
with the applicable provisions of the Code (or corresponding provisions 
of prior law) without regard to any election made under the Act.
    (f) Periods of limitation. Section 4(h) of the Act provides that 
where there is an extension of time for payment of tax under the 
provisions of section 4(b) of the Act, the running of the periods of 
limitation provided by section 6502 of the Code (or corresponding 
provisions of prior law) for collection of such tax is suspended for the 
period of time for which the extension is granted.

[T.D. 6490, 25 FR 8372, Sept. 1, 1960]



Sec. 1.9002-5  Special rules relating to interest.

    (a) In general. Where an election is made under section 4(a) of the 
Act interest is computed under section 6601 of the Code (or 
corresponding provisions of prior law) on any increase in tax 
attributable to such election for each taxable year involved for the 
period from the last date prescribed for payment of the tax for such 
year (determined without regard to any extensions of time for filing the 
return) through the date preceding the date on which the election is 
made. Where the election under section 4(a) of the Act results in a 
decrease in tax for any year to which the election applies, interest is 
computed in accordance with section 6611 of the Code (or corresponding 
provisions of prior law) from the date of overpayment through the date 
preceding the date on which the election is made. Where there is a net 
increase in tax as a result of the election under section 4(a) of the 
Act, no interest shall be imposed on any underpayment (and no interest 
shall be paid on any overpayment) attributable to the dealer reserve 
income adjustment for any year to which the election applies for the 
period commencing with the date such election is made and ending on the 
date prescribed for filing the return (determined without regard to 
extensions of time) for the taxable year in which the election is made. 
This rule applies regardless of whether the election under section 4(b) 
of the Act is made. If there is no net increase in tax, interest on any 
underpayment or overpayment attributable to the dealer reserve income 
adjustment for any taxable year to which the election applies for the 
period commencing with the date of the election shall be determined in 
accordance with Sec. Sec. 301.6601-1 and 301.6611-1 of this chapter 
(Regulations on Procedure and Administration).
    (b) Installment period--(1) Where payment is not accelerated. If the 
election under section 4(b) of the Act is made to pay the net increase 
in tax in installments, no interest will be imposed on such net increase 
in tax for the period beginning with the due date fixed under section 
4(c) of the Act for the first installment payment and ending with the 
date fixed under such section for the last installment payment unless 
payment of the unpaid installments is accelerated under other provisions 
of the Act. See subsections (f) and (g) of section 4 of the Act.
    (2) Where payment is accelerated. Where payment of the unpaid 
installments is accelerated because of the termination of the 
installment privilege, interest will be computed under section 6601 of 
the Code on the entire unpaid

[[Page 827]]

net increase in tax for the applicable period set forth below:
    (i) In the case of acceleration under section 4(f) of the Act for 
reasons other than nonpayment of an installment, from the date of the 
notice and demand for payment of the unpaid tax to the date of payment; 
or
    (ii) In the case of acceleration under section 4(g) of the Act for 
nonpayment of an installment, from the date fixed for payment of the 
installment to the date of payment.


When payment is accelerated under section 4(f) of the Act, however, no 
interest will be charged where payment of the unpaid installments is 
made within 10 days of issuance of the notice and demand for such 
payment.

[T.D. 6490, 25 FR 8373, Sept. 1, 1960]



Sec. 1.9002-6  Acquiring corporation.

    Section 5(d) of the Act provides that for purposes of such Act in 
the case of the acquisition of the assets of a corporation by another 
corporation in a distribution or transfer described in section 381(a) of 
the Code the acquiring corporation shall be treated as if it were the 
distributor or transferor corporation.

[T.D. 6490, 25 FR 8373, Sept. 1, 1960]



Sec. 1.9002-7  Statute of limitations.

    (a) Extension of period for assessment and refund or credit. Under 
section 5(e) of the Act, if an election is made to have the Act apply, 
and if the assessment of any deficiency, or the refund or credit of any 
overpayment attributable to the election, for any taxable year to which 
the Act applies was not prevented on June 21, 1959, by the operation of 
any law or rule of law (except as provided in paragraph (b) of this 
section, relating to closing agreements and compromises), but would be 
so prevented prior to September 1, 1961, the period within which such 
assessment, or such refund or credit, may be made with respect to such 
taxable year shall not expire prior to September 1, 1961. An election 
under either section 3 or 4 of the Act will be considered to be a 
consent to the extension of the period of limitation for purposes of 
assessment for any year to which the Act applies. Thus, for example, if, 
as the result of an election under section 4(a) of the Act, assessment 
of a deficiency for the taxable year 1955 was not prevented by the 
statute of limitations, a judicial decision that had become final, or 
otherwise, on June 21, 1959, but would (except for section 5(e) of the 
Act) be prevented on a later date, as for instance September 1, 1959, 
then for purposes of applying section 4 of the Act, assessment may be 
made at any time prior to September 1, 1961, with respect to such year 
if the taxpayer made an election under the Act prior to September 1, 
1960. Section 5(e) of the Act will, in no event, operate to shorten the 
period of limitation otherwise applicable with respect to any taxable 
year.
    (b) Years closed by closing agreement or compromise. For purposes of 
the Act, if the assessment of any deficiency or a refund or credit of 
any overpayment for any taxable year was not prevented on June 21, 1959, 
but is prevented on the date of an election under section 3 or 4 of the 
Act by the operation of the provisions of chapter 74 of the Code 
(relating to closing agreements and compromises), assessment, refund, or 
credit will, nevertheless, be considered as being prevented on June 21, 
1959.

[T.D. 6490, 25 FR 8373, Sept. 1, 1960]



Sec. 1.9002-8  Manner of exercising elections.

    (a) By whom election is to be made--(1) In general. Generally, the 
taxpayer to whom the Act applies will exercise the elections provided 
therein. In the case of a partnership or a corporation electing under 
the provisions of subchapter S, chapter 1 of the Code, the election 
shall be exercised by the persons specified in subparagraphs (2) and (3) 
of this paragraph, respectively.
    (2) Partnerships. In the case of a partnership, the election under 
section 3 or 4(a) of the Act shall be exercised by the partnership. If 
an election is made by the partnership under section 4(a) of the Act, 
any election under section 4(b) of the Act to pay the net increase in 
tax in installments shall be made by each partner separately. The 
determination as to whether the net increase in tax resulting from the 
election under section 4(a) of the Act exceeds $2,500 shall be made with 
reference to the increase or decrease in

[[Page 828]]

the tax of each partner attributable to the adjustment to his 
distributive share of the partnership income resulting from the 
election.
    (3) Subchapter S corporations. In the case of an electing small 
business corporation under subchapter S, chapter 1 of the Code, the 
election under section 3 or 4(a) of the Act shall be made by such 
corporation. An election under section 4(b) of the Act to pay the net 
increase in tax in installments shall, to the extent the net increase in 
tax resulting from the election is attributable to adjustments to income 
for taxable years for which the corporation was not an electing small 
business corporation, be made by the corporation. The determination as 
to whether the net increase in tax for such taxable years exceeds $2,500 
shall be made with reference to the increase or decrease in tax of the 
corporation. Any election under section 4(b) of the Act to pay the net 
increase in tax in installments shall, to the extent the increase in tax 
is attributable to years for which the corporation was an electing small 
business corporation, be made by the shareholders separately. The 
determination in such a case as to whether the net increase in tax for 
such taxable years exceeds $2,500 shall be made with reference to the 
increases or decreases in the tax of each shareholder attributable to 
the adjustments to taxable income of the electing small business 
corporation resulting from the election.
    (b) Time and manner of making elections--(1) In general. Any 
election made under the Act shall be made by the taxpayers described in 
paragraph (a) of this section before September 1, 1960, by filing a 
statement with the district director with whom such taxpayer's income 
tax return for the taxable year in which the election is made is 
required to be filed. A copy of the statement of election shall be 
attached to and filed with such taxpayer's income tax return for such 
taxable year.
    (2) Election to have section 481 apply. An election under section 3 
of the Act shall be made in the form of a statement which shall include 
the following:
    (i) A clear indication that an election is being made under section 
3 of the Act;
    (ii) Information sufficient to establish eligibility to make the 
election; and
    (iii) The year of change as defined in section 3(b) of the Act.


An amended income tax return reflecting the increase or decrease in tax 
attributable to the election shall be filed for the year of change 
together with schedules showing how the tax was recomputed under section 
481 of the Code. If income tax returns have been filed for any taxable 
years subsequent to the year of change, amended returns reflecting the 
proper treatment of dealer reserve income for such years shall also be 
filed. In the case of partnerships and electing small business 
corporations under subchapter S, chapter 1 of the Code, amended returns 
shall be filed by the partnership or electing small business 
corporation, as well as by the partners or shareholders, as the case may 
be. Any amended return shall be filed with the office of the district 
director with whom the taxpayer files his income tax return for the 
taxable year in which the election is made and, if practicable, on the 
same date the statement of election is filed, but amended returns shall 
be filed in no event later than November 30, 1960, unless an extension 
of time is granted under section 6081 of the Code. Whenever the amended 
returns do not accompany the statement of election, a copy of the 
statement shall be submitted with the amended returns.
    (3) Election not to have section 481 apply. An election under 
section 4(a) of the Act shall be made in the form of a statement which 
shall include the following:
    (i) A clear indication that an election is being made under section 
4(a) of the Act;
    (ii) Information sufficient to establish eligibility to make the 
election; and
    (iii) The taxable years to which the election applies.


Amended income tax returns reflecting the increase or decrease in tax 
attributable to the election shall be filed for the taxable years to 
which the election applies. If income tax returns have been filed for 
any subsequent taxable years, amended returns reflecting the

[[Page 829]]

proper treatment of dealer reserve income for such years shall also be 
filed. In the case of partnerships and electing small business 
corporations under subchapter S, chapter 1 of the Code, amended returns 
shall be filed by the partnership or electing small business 
corporation, as well as by the partners or shareholders, as the case may 
be. Any amended return shall be filed with the office of the district 
director with whom the taxpayer files his income tax return for the 
taxable year in which the election is made and, if practicable, on the 
same date the statement of election is filed, but amended returns shall 
be filed in no event later than November 30, 1960, unless an extension 
of time is granted under section 6081 of the Code. Whenever the amended 
returns do not accompany the statement of election, a copy of the 
statement shall be submitted with the amended return.
    (4) Election to pay tax in installments. (i) Except as otherwise 
provided in subdivision (ii) of this subparagraph, if the taxpayer 
making the election under section 4(a) of the Act also desires to make 
the election under section 4(b) of the Act to pay the increase in tax in 
installments, then the statement of election shall include the following 
additional information:
    (a) A clear indication that an election is also being made under 
section 4(b) of the Act;
    (b) A summary of the total increases and decreases in tax, together 
with interest thereon, in sufficient detail to establish eligibility to 
make the election; and
    (c) The number of annual installments in which the taxpayer elects 
to pay the net increase in tax.
    (ii) Where a partnership or electing small business corporation 
under subchapter S, chapter 1 of the Code, has made an election under 
section 4(a) of the Act, and any partner or shareholder, as the case may 
be, desires to make an election under section 4(b) of the Act, a 
statement of election shall be filed by such partner or shareholder 
containing the following information:
    (a) A clear indication that an election is being made under section 
4(b) of the Act;
    (b) A summary of the total increases and decreases in tax, together 
with interest thereon, of such partner or shareholder in sufficient 
detail to establish eligibility to make the election;
    (c) The number of annual installments in which the partner or 
shareholder elects to pay the net increase in tax; and
    (d) The office of the district director and the date on which the 
election under section 4(a) of the Act was filed by such partnership or 
corporation.


The statement of election under section 4(b) of the Act shall be 
accompanied by a copy of the statement of election under section 4(a) of 
the Act made by the partnership or electing small business corporation 
under subchapter S, chapter 1 of the Code, as the case may be.
    (c) Effect of election. An election made under section 3 or 4 of the 
Act shall become irrevocable on September 1, 1960, and shall be binding 
on the taxpayer for all taxable years to which it applies.

[T.D. 6490, 25 FR 8373, Sept. 1, 1960]

             PUBLIC DEBT AND TAX RATE EXTENSION ACT OF 1960

    Authority: Sections 1.9003 to 1.9003-5 issued under sec. 302(c), 74 
Stat. 292, as amended; 26 U.S.C. 613 note.



Sec. 1.9003  Statutory provisions; section 4 of the Act of 
September 14, 1960 (Pub. L. 86-781, 74 Stat. 1017).

    Sec. 4. Subsection (c) of section 302 of the Public Debt and Tax 
Rate Extension Act of 1960 (Pub. L. 86-564; 74 Stat. 293) is amended to 
read as follows:
    (c) Effective date--(1) In general. Except as provided in paragraph 
(2), the amendments made by subsections (a) and (b) shall be applicable 
only with respect to taxable years beginning after December 31, 1960.
    (2) Calcium carbonates, etc.--(A) Election for past years. In the 
case of calcium carbonates or other minerals when used in making cement, 
if an election is made by the taxpayer under subparagraph (C):
    (i) The amendments made by subsection (b) shall apply to taxable 
years with respect to which such election is effective, and
    (ii) Provisions having the same effect as the amendments made by 
subsection (b) shall be deemed to be included in the Internal Revenue 
Code of 1939 and shall apply to taxable years with respect to which such

[[Page 830]]

election is effective in lieu of the corresponding provisions of such 
Code.
    (B) Years to which applicable. An election made under subparagraph 
(C) to have the provisions of this paragraph apply shall be effective 
for all taxable years beginning before January 1, 1961, in respect of 
which:
    (i) The assessment of a deficiency,
    (ii) The refund or credit of an overpayment, or
    (iii) The commencement of a suit for recovery of a refund under 
section 7405 of the Internal Revenue Code of 1954,

is not prevented on the date of the enactment of this paragraph by the 
operation of any law or rule of law. Such election shall also be 
effective for any taxable year beginning before January 1, 1961, in 
respect of which an assessment of a deficiency has been made but not 
collected on or before the date of the enactment of this paragraph.
    (C) Time and manner of election. An election to have the provisions 
of this paragraph apply shall be made by the taxpayer on or before the 
60th day after the date of publication in the Federal Register of final 
regulations issued under authority of subparagraph (F), and shall be 
made in such form and manner as the Secretary of the Treasury or his 
delegate shall prescribe by regulations. Such election, if made, may not 
be revoked.
    (D) Statutes of limitation. Notwithstanding any other law, the 
period within which an assessment of a deficiency attributable to the 
application of the amendments made by subsection (b) may be made with 
respect to any taxable year to which such amendments apply under an 
election made under subparagraph (C), and the period within which a 
claim for refund or credit of an overpayment attributable to the 
application of such amendments may be made with respect to any such 
taxable year, shall not expire prior to one year after the last day for 
making an election under subparagraph (C). An election by a taxpayer 
under subparagraph (C) shall be considered as a consent to the 
application of the provisions of this subparagraph.
    (E) Terms; applicability of other laws. Except where otherwise 
distinctly expressed or manifestly intended, terms used in this 
paragraph shall have the same meaning as when used in the Internal 
Revenue Code of 1954 (or corresponding provisions of the Internal 
Revenue Code of 1939) and all provisions of law shall apply with respect 
to this paragraph as if this paragraph were a part of such Code (or 
corresponding provisions of the Internal Revenue Code of 1939).
    (F) Regulations. The Secretary of the Treasury or his delegate shall 
prescribe such regulations as may be necessary to carry out the 
provisions of this paragraph.

[T.D. 6492, 25 FR 8904, Sept. 16, 1960]



Sec. 1.9003-1  Election to have the provisions of section 613(c)
(2) and (4) of the 1954 Code, as amended, apply for past years.

    (a) In general. Section 4 of the Act of September 14, 1960 (Pub. L. 
86-781, 74 Stat. 1017), amended section 302(c) of the Public Debt and 
Tax Rate Extension Act of 1960 to permit certain taxpayers for taxable 
years beginning before January 1, 1961, to apply the provisions of 
section 302(b) of that Act. Section 302(b) of the Act amended section 
613(c) (2) and (4) of the Internal Revenue Code of 1954 to read in part 
as follows:

    Sec. 613. Percentage Depletion. * * *
    (c) Definition of gross income from property. For purposes of this 
section:

                                * * * * *

    (2) Mining. The term ``mining'' includes not merely the extraction 
of the ores or minerals from the ground but also the treatment processes 
considered as mining described in paragraph (4) (and the treatment 
processes necessary or incidental thereto), and so much of the 
transportation of ores or minerals (whether or not by common carrier) 
from the point of extraction from the ground to the plants or mills in 
which such treatment processes are applied thereto as is not in excess 
of 50 miles unless the Secretary or his delegate finds that the physical 
and other requirements are such that the ore or mineral must be 
transported a greater distance to such plants or mills.

                                * * * * *

    (4) Treatment processes considered as mining. The following 
treatment processes where applied by the mine owner or operator shall be 
considered as mining to the extent they are applied to the ore or 
mineral in respect of which he is entitled to a deduction for depletion 
under section 611:

                                * * * * *

    (F) In the case of calcium carbonates and other minerals when used 
in making cement--all processes (other than preheating of the kiln feed) 
applied prior to the introduction of the kiln feed into the kiln, but 
not including any subsequent process;
    (b) Election. Under section 302(c)(2) of the Act, the taxpayer, in 
the case of calcium carbonates or other minerals when used by him in 
making cement, may elect to apply the provisions of section 613(c) (2) 
and (4) of the

[[Page 831]]

1954 Code as amended in lieu of the corresponding provisions of prior 
law. The taxpayer must make the election in accordance with Sec. 
1.9003-4 on or before November 15, 1960, and the election shall become 
irrevocable on November 15, 1960.
    (c) Years to which the election is applicable. If the election 
described in paragraph (b) of this section is made by the taxpayer, the 
provisions of section 613(c) (2) and (4) as amended by section 302(b) of 
the Act apply to all taxable years beginning before January 1, 1961, in 
respect of which:
    (1) The assessment of any deficiency,
    (2) Refund or credit of any overpayment,
    (3) Commencement of a suit for recovery of a refund under section 
7405 of the Internal Revenue Code of 1954,

is not prevented on September 14, 1960, by the operation of any law or 
rule of law. The election also applies to taxable years beginning before 
January 1, 1961, in respect of which an assessment of a deficiency has 
been made but not collected on or before September 14, 1960.

[T.D. 6492, 25 FR 8905, Sept. 16, 1960]



Sec. 1.9003-2  Effect of election.

    (a) In general. If a taxpayer makes the election described in 
paragraph (b) of Sec. 1.9003-1, he shall be deemed to have consented to 
the application of section 302(b) of the Act with respect to all taxable 
years to which the election applies. Thus, subparagraph (F) of section 
613(c)(4) of the Internal Revenue Code of 1954 as amended must be 
applied in determining gross income from mining for the taxable years to 
which the election applies (including years subject to the Internal 
Revenue Code of 1939) whether or not the taxpayer is litigating the 
issue. Further, the election shall apply to all calcium carbonates or 
other minerals mined and used by the taxpayer in making cement.
    (b) Effect on gross income from mining. The election is only 
determinative of what constitutes ``mining'' for purposes of computing 
percentage depletion and has no effect on the method employed in 
determining the amount of gross income from mining. In applying the 
election to the years affected there shall be taken into account the 
effect that any adjustments resulting from the election shall have on 
other items affected thereby, such as charitable contributions, foreign 
tax credit, net operating loss, and the effect that adjustments to any 
such items shall have on other taxable years. The provisions of section 
302(b) of the Act are applicable with respect to taxable years subject 
to the Internal Revenue Code of 1939 for purposes of applying sections 
450 and 453 of that Code.

[T.D. 6492, 25 FR 8905, Sept. 16, 1960]



Sec. 1.9003-3  Statutes of limitation.

    Under section 302(c)(2) of the Act, the period within which the 
assessment of any deficiency or the credit or refund of any overpayment 
attributable to the election may be made shall not expire sooner than 1 
year after November 15, 1960. Thus, if assessment of a deficiency or 
credit or refund of an overpayment, whichever is applicable, is not 
prevented on September 14, 1960, the time for making assessment or 
credit or refund shall not expire for at least 1 year after November 15, 
1960, notwithstanding any other provision of law to the contrary. Even 
though assessment of a deficiency is prevented on September 14, 1960, if 
commencement of a suit for recovery of a refund under section 7405 of 
the Code may be made on such date, then any deficiency resulting from 
the election may be assessed at any time within 1 year after November 
15, 1960. If the taxpayer makes the election he shall be deemed to have 
consented to the application of the provisions of section 302(c)(2) of 
the Act extending the time for assessing a deficiency attributable to 
the election. Section 302(c)(2) of the Act does not shorten the period 
of limitations otherwise applicable. An agreement may be entered into 
under section 6501(c)(4) of the Code and corresponding provisions of 
prior law to extend the period for assessment.

[T.D. 6492, 25 FR 8905, Sept. 16, 1960]



Sec. 1.9003-4  Manner of exercising election.

    (a) By whom election is to be made. Generally, the taxpayer whose 
tax liability is affected by the election shall make the election. In 
the case of a partnership, or a corporation electing under the 
provisions of subchapter S, chapter 1 of the Code, the election shall be 
exercised by the partnership or such corporation, as the case may be.

[[Page 832]]

    (b) Time and manner of making election. The election shall be made 
on or before November 15, 1960, by filing a statement with the district 
director with whom the taxpayer's income tax return for the taxable year 
in which the election is made is required to be filed. The statement 
shall include the following:
    (1) A clear indication that an election is being made under section 
302(c)(2) of the Act, and
    (2) The taxable years to which the election applies.


Amended income tax returns reflecting any increase or decrease in tax 
attributable to the election shall be filed for the taxable years to 
which the election applies. In the case of partnerships and electing 
small business corporations under subchapter S, chapter 1 of the Code, 
amended returns shall be filed by the partnership or electing small 
business corporations, as well as by the partners or shareholders, as 
the case may be. Any amended return shall be filed with the office of 
the district director with whom the taxpayer files his income tax return 
for the taxable year in which the election is made and, if practicable, 
on the same date the statement of election is filed, but amended returns 
shall be filed in no event later than February 28, 1961, unless an 
extension of time is granted under section 6081 of the Code. Whenever 
the amended returns do not accompany the statement of election, a copy 
of the statement shall be submitted with the amended returns. The 
amended returns shall be accompanied by payment of the additional tax 
(together with interest thereon) resulting from the election.

[T.D. 6492, 25 FR 8905, Sept. 16, 1960]



Sec. 1.9003-5  Terms; applicability of other laws.

    All other terms which are not otherwise specifically defined shall 
have the same meaning as when used in the Code (or the corresponding 
provisions of prior law) except where otherwise distinctly expressed or 
manifestly intended to the contrary. Further, all provisions of law 
contained in the Code (or the corresponding provisions of prior law) 
shall apply to the extent that they can apply. Thus, all of the 
provisions of subtitle F of the Code and the corresponding provisions of 
prior law shall apply to the extent they can apply, including the 
provisions of law relating to assessment, collection, credit or refund, 
and limitations. For purposes of this section and Sec. Sec. 1.9003-1 to 
1.9003-4, inclusive, the term ``Act'' means the Public Debt and Tax Rate 
Extension Act of 1960 as amended (74 Stat. 293, 1018).

[T.D. 6492, 25 FR 8905, Sept. 16, 1960]

CERTAIN BRICK AND TILE CLAY, FIRE CLAY, AND SHALE; REGULATIONS UNDER THE 
                        ACT OF SEPTEMBER 26, 1961



Sec. 1.9004  Statutory provisions; the Act of September 26, 1961
(Pub. L. 87-312, 75 Stat. 674).

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled, That (a) Election for 
past years. In the case of brick and tile clay, fire clay, or shale used 
by the mineowner or operator in the manufacture of building or paving 
brick, drainage and roofing tile, sewer pipe, flower pots, and kindred 
products (without regard to the applicable rate of percentage 
depletion), if an election is made under subsection (c), for the purpose 
of applying section 613(c) of the Internal Revenue Code of 1954 (and 
corresponding provision of the Internal Revenue Code of 1939) for each 
of the taxable years with respect to which the election is effective:
    (1) Gross income from the property shall be 50 per centum of the 
amount for which the manufactured products are sold during the taxable 
year except that with respect to such manufactured products, gross 
income from the property shall not exceed an amount equal to $12.50 
multiplied by the number of short tons used in the manufactured products 
sold during the taxable year, and
    (2) For purposes of computing the 50 per centum limitation under 
section 613(a) of the Internal Revenue Code of 1954 (or the 
corresponding provision of the Internal Revenue Code of 1939), the 
taxable income from the property (computed without allowance for 
depletion) shall be 50 per centum of the taxable income from the 
manufactured products sold during the taxable year (computed without 
allowance for depletion).
    (b) Years to which applicable. An election made under subsection (c) 
to have the provisions of this section apply shall be effective for all 
taxable years beginning before January 1, 1961, in respect of which:
    (1) The assessment of a deficiency,

[[Page 833]]

    (2) The refund or credit of an overpayment, or
    (3) The commencement of a suit for recovery of a refund under 
section 7405 of the Internal Revenue Code of 1954, is not prevented on 
the date of the enactment of this Act by the operation of any law or 
rule of law. Such election shall also be effective for any taxable year 
beginning before January 1, 1961, in respect of which an assessment of a 
deficiency has been made but not collected on or before the date of the 
enactment of this Act.
    (c) Time and manner of election. An election to have the provisions 
of this section apply shall be made by the taxpayer on or before the 
sixtieth day after the date of publication in the Federal Register of 
final regulations issued under authority of subsection (f), and shall be 
made in such form and manner as the Secretary of the Treasury or his 
delegate shall prescribe by regulations. Such election, if made, may not 
be revoked.
    (d) Statutes of limitation. Notwithstanding any other law, the 
period within which an assessment of a deficiency attributable to the 
election under subsection (c) may be made with respect to any taxable 
year for which such election is effective, and the period within which a 
claim for refund or credit of an overpayment attributable to the 
election under such subsection may be made with respect to any such 
taxable year, shall not expire prior to one year after the last day for 
making an election under subsection (c). An election by a taxpayer under 
subsection (c) shall be considered as a consent to the application of 
the provisions of this subsection.
    (e) Terms; applicability of other laws. Except where otherwise 
distinctly expressed or manifestly intended, terms used in this section 
shall have the same meaning as when used in the Internal Revenue Code of 
1954 (or corresponding provisions of the Internal Revenue Code of 1939) 
and all provisions of law shall apply with respect to this section as if 
this section were a part of such Code (or corresponding provisions of 
the Internal Revenue Code of 1939).
    (f) Regulations. The Secretary of the Treasury or his delegate shall 
prescribe such regulations as may be necessary to carry out the 
provisions of this section.

(75 Stat. 674; 26 U.S.C. 613 note)

[T.D. 6575, 26 FR 9632, Oct. 12, 1961]



Sec. 1.9004-1  Election relating to the determination of gross income 
from the property for taxable years beginning prior to 1961 in the
case of certain clays and shale.
          

    (a) In general. The Act of September 26, 1961 (Pub. L. 87-312, 75 
Stat. 674), provides that certain taxpayers may elect to apply the 
provisions thereof to all taxable years beginning before January 1, 
1961, with respect to which the election is effective. The Act 
prescribes special rules for the application of section 613 (a) and (c) 
of the Internal Revenue Code of 1954 (and corresponding provisions of 
the Internal Revenue Code of 1939) in the case of shale and certain 
clays used by the mine owner or operator in the manufacture of certain 
clay and shale products.
    (b) Election. The election to apply the provisions of the Act may be 
made only by a mine owner or operator with respect to brick and tile 
clay, fire clay, or shale which he mined and used in the manufacture of 
building or paving brick, drainage and roofing tile, sewer pipe, flower 
pots, and kindred products. The election must be made in accordance with 
Sec. 1.9004-4 on or before December 11, 1961, and the election shall 
become irrevocable on December 11, 1961.
    (c) Years to which the election is applicable. If the election 
described in paragraph (b) of this section is made by the taxpayer, the 
provisions of the Act shall be effective for all taxable years beginning 
before January 1, 1961, in respect of which the:
    (1) Assessment of a deficiency,
    (2) Refund or credit of an overpayment, or
    (3) Commencement of a suit for recovery of a refund under section 
7405 of the Internal Revenue Code of 1954,


is not prevented on September 26, 1961, by the operation of any law or 
rule of law. The election is also effective for any taxable year 
beginning before January 1, 1961, in respect of which an assessment of a 
deficiency has been made but not collected on or before September 26, 
1961.

(75 Stat. 674; 26 U.S.C. 613 note)

[T.D. 6575, 26 FR 9632, Oct. 12, 1961]



Sec. 1.9004-2  Effect of election.

    (a) In general. If a taxpayer makes the election described in 
paragraph (b) of Sec. 1.9004-1, he shall be deemed to have consented to 
the application of the Act with respect to all the clay and shale 
described in that paragraph for all taxable years for which the election 
is effective whether or not the taxpayer is litigating the issue for any 
of such years. Thus, in applying section 613 of the Internal Revenue 
Code of 1954 (and

[[Page 834]]

corresponding provisions of the Internal Revenue Code of 1939) to those 
years:
    (1) The ``gross income from the property'' for purposes of section 
613(c) of the Internal Revenue Code of 1954 (and corresponding 
provisions of the Internal Revenue Code of 1939) shall be 50 percent of 
the amount for which the mineowner or operator sold, during the taxable 
year, the building or paving brick, drainage and roofing tile, sewer 
pipe, flower pots, and kindred products manufactured from the clay and 
shale described in paragraph (b) of Sec. 1.9004-1, but shall not exceed 
an amount equal to $12.50 multiplied by the number of short tons of all 
such clay or shale mined and used by the mineowner or operator in the 
manufacture of the products sold during the taxable year; and
    (2) The ``taxable income from the property'' (computed without 
allowance for depletion) for purposes of section 613(a) of the Internal 
Revenue Code of 1954 (and corresponding provisions of the Internal 
Revenue Code of 1939) shall be 50 percent of the taxable income from the 
manufactured products sold during the taxable year (computed without 
allowance for depletion).
    (b) Effect on depletion rates and other items. The election shall 
have no effect on the applicable rate of percentage depletion for the 
taxable years to which the election is effective. In applying the 
election to the years affected there shall be taken into account the 
effect that any adjustments resulting from the election shall have on 
other items affected thereby, such as charitable contributions, foreign 
tax credit, net operating loss, and the effect that adjustments to any 
such items shall have on other taxable years. The provisions of the Act 
are applicable with respect to taxable years subject to the Internal 
Revenue Code of 1939 for purposes of applying sections 450 and 453 of 
that Code.

(75 Stat. 674; 26 U.S.C. 613 note)

[T.D. 6575, 26 FR 9632, Oct. 12, 1961]



Sec. 1.9004-3  Statutes of limitation.

    The period within which the assessment of any deficiency or the 
credit or refund of any overpayment attributable to the election may be 
made shall not expire sooner than one year after December 11, 1961. 
Thus, if assessment of a deficiency or credit or refund of an 
overpayment, whichever is applicable, is not prevented on September 26, 
1961, the time for making assessment or credit or refund shall not 
expire for at least one year after December 11, 1961, notwithstanding 
any other provision of law to the contrary. Even though assessment of a 
deficiency is prevented on September 26, 1961, if commencement of a suit 
for recovery of a refund under section 7405 of the Internal Revenue Code 
of 1954 may be made on such date, then any deficiency resulting from the 
election may be assessed at any time within 1 year after December 11, 
1961. If a taxpayer makes the election, he shall be deemed to have 
consented to the application of the provisions of the Act extending the 
time for assessing a deficiency attributable to the election. The Act 
does not shorten the periods of limitation otherwise applicable. An 
agreement may be entered into under section 6501(c)(4) of the Internal 
Revenue Code of 1954 and corresponding provisions of prior law to extend 
the period for assessment.

(75 Stat. 674; 26 U.S.C. 613 note)

[T.D. 6575, 26 FR 9632, Oct. 12, 1961]



Sec. 1.9004-4  Manner of exercising election.

    (a) By whom election is to be made. Generally, the taxpayer whose 
tax liability is affected by the election shall make the election. In 
the case of a partnership, or a corporation electing under the 
provisions of subchapter S, chapter 1 of the Internal Revenue Code of 
1954, the election shall be exercised by the partnership or such 
corporation, as the case may be.
    (b) Time and manner of making election. The election shall be made 
on or before December 11, 1961, by filing a statement with the district 
director with whom the taxpayer's income tax return for the taxable year 
in which the election is made is required to be filed. The statement 
shall include the following:
    (1) A clear indication that an election is being made under the Act, 
and

[[Page 835]]

    (2) The taxable years to which the election applies.


Amended income tax returns reflecting any increase or decrease in tax 
attributable to the election shall be filed for the taxable years to 
which the election applies. In the case of partnerships and electing 
small business corporations under subchapter S, chapter 1 of the 
Internal Revenue Code of 1954, amended returns shall be filed by the 
partnership or electing small business corporation, as well as by the 
partners or shareholders, as the case may be. Any amended return shall 
be filed with the office of the district director with whom the taxpayer 
files his income tax return for the taxable year in which the election 
is made and, if practicable, on the same date the statement of election 
is filed, but amended returns shall be filed in no event later than 
March 31, 1962, unless an extension of time is granted under section 
6081 of the Internal Revenue Code of 1954. Whenever the amended returns 
do not accompany the statement of election, a copy of the statement 
shall be submitted with the amended returns. The amended returns shall 
be accompanied by payment of the additional tax (together with interest 
thereon) resulting from the election.

(75 Stat. 674, 26 U.S.C. 613 note)

[T.D. 6575, 26 FR 9633, Oct. 12, 1961]



Sec. 1.9004-5  Terms; applicability of other laws.

    All other terms which are not otherwise specifically defined shall 
have the same meaning as when used in the Internal Revenue Code of 1954 
(or the corresponding provisions of prior law) except where otherwise 
distinctly expressed or manifestly intended to the contrary. Further, 
all provisions of law contained in the Code (or the corresponding 
provisions of prior law) shall apply to the extent that they can apply. 
Thus, all the provisions of subtitle F of the Code (and the 
corresponding provisions of prior law) shall apply to the extent they 
can apply, including the provisions of law relating to assessment, 
collection, credit or refund, and limitations. For purposes of this 
section and Sec. Sec. 1.9004-1 to 1.9004-4, inclusive, the term ``Act'' 
means the Act of September 26, 1961 (Pub. L. 87-312, 75 Stat. 674).

(75 Stat. 674, 26 U.S.C. 613 note)

[T.D. 6575, 26 FR 9633, Oct. 12, 1961]

 QUARTZITE AND CLAY USED IN PRODUCTION OF REFRACTORY PRODUCTS; ELECTION 
                         FOR PRIOR TAXABLE YEARS



Sec. 1.9005  Statutory provisions; section 2 of the Act of
September 26, 1961 (Pub. L. 87-321, 75 Stat. 683).

    Sec. 2. Election for quartzite and clay used in the production of 
refractory products--(a) Election for past years. If an election is made 
under subsection (c), in the case of quartzite and clay used by the mine 
owner or operator in the production of refractory products, for the 
purpose of applying section 613(c) of the Internal Revenue Code of 1954 
(and corresponding provisions of the Internal Revenue Code of 1939) for 
each of the taxable years with respect to which the election is 
effective:
    (1) The term ``ordinary treatment processes'' shall include 
crushing, grinding, and separating the mineral from waste, but shall not 
include any subsequent process; and
    (2) The gross income from mining for each short ton of such 
quartzite or clay used in the production of all refractory products sold 
during the taxable year shall be equal to 87\1/2\ percent of the lesser 
of:
    (A) The average lowest published or advertised price, or
    (B) The average lowest actual selling price, at which, during the 
taxable year, the mine owner or operator offered to sell, or sold, such 
quartzite or clay (in the form and condition of such products after the 
application of only the processes described in paragraph (1) and before 
transportation from the plant in which such processes were applied). For 
purposes of this paragraph, exceptional, unusual, or nominal sales or 
selling prices shall be disregraded. If the mine owner or operator makes 
no sales of, or makes only exceptional, unusual, or nominal sales of, 
such quartzite or clay after application of only the processes described 
in paragraph (1), then in lieu of the price provided for in subparagraph 
(A) or (B) there shall be used the average lowest recognized selling 
price for the taxable year for such quartzite or clay in the marketing 
area of the mine owner or operator published in a trade journal or other 
industry publication.
    (b) Years to which applicable. An election made under subsection (c) 
to have the provisions of this section apply shall be effective on and 
after January 1, 1951, for all taxable years beginning before January 1, 
1961, in respect of which:

[[Page 836]]

    (1) The assessment of a deficiency,
    (2) The refund or credit of an overpayment, or
    (3) The commencement of a suit for recovery of a refund under 
section 7405 of the Internal Revenue Code of 1954,

is not prevented on the date of the enactment of this Act by the 
operation of any law or rule of law. Such election shall also be 
effective on and after January 1, 1951, for any taxable year beginning 
before January 1, 1961, in respect of which an assessment of a 
deficiency has been made but not collected on or before the date of the 
enactment of this Act.
    (c) Time and manner of election. An election to have the provisions 
of this section apply shall be made by the taxpayer on or before the 
60th day after the date of publication in the Federal Register of final 
regulations issued under authority of subsection (f), and shall be made 
in such form and manner as the Secretary of the Treasury or his delegate 
shall prescribe by regulations. Such election, if made, may not be 
revoked.
    (d) Statutes of limitations. Notwithstanding any other law, the 
period within which an assessment of a deficiency attributable to the 
election under subsection (c) may be made with respect to any taxable 
year for which such election is effective, and the period within which a 
claim for refund or credit of an overpayment attributable to the 
election under such subsection may be made with respect to any such 
taxable year, shall not expire prior to one year after the last day for 
making an election under subsection (c). An election by a taxpayer under 
subsection (c) shall be considered as a consent to the application of 
the provisions of this subsection.
    (e) Terms; applicability of other laws. Except where otherwise 
distinctly expressed or manifestly intended, terms used in this section 
shall have the same meaning as when used in the Internal Revenue Code of 
1954 (or corresponding provisions of the Internal Revenue Code of 1939) 
and all provisions of law shall apply with respect to this section as if 
this section were a part of such Code (or corresponding provisions of 
the Internal Revenue Code of 1939).
    (f) Regulations. The Secretary of the Treasury or his delegate shall 
prescribe such regulations as may be necessary to carry out the 
provisions of this section.

(Sec. 2(f), 75 Stat. 683; 26 U.S.C. 613 note)

[T.D. 6583, 26 FR 12077, Dec. 16, 1961]



Sec. 1.9005-1  Election relating to the determination of gross income
from the property for taxable years beginning prior to 1961 in the 
case of clay and quartzite used in making refractory products.
          

    (a) In general. Section 2 of the Act of September 26, 1961 (Pub. L. 
87-321, 75 Stat. 683), provides that certain taxpayers may elect to 
apply the provisions of such section to all taxable years beginning 
before January 1, 1961, with respect to which the election is effective. 
Section 2 of the Act prescribes special rules for the application of 
section 613(c) of the Internal Revenue Code of 1954 (and corresponding 
provisions of the Internal Revenue Code of 1939) in the case of 
quartzite and clay used by the mine owner or operator in the production 
of refractory products.
    (b) Election. The election to apply the provisions of section 2 of 
the Act may be made only in the case of quartzite and clay used in the 
production of products generally recognized as refractory products by 
the refractories industry. Examples of such products are clay firebrick, 
silica brick, and refractory bonding mortars. The election may be made 
only by a taxpayer who both mined the clay or quartzite and used it in 
the production of refractory products. The election must be made in 
accordance with Sec. 1.9005-4 on or before February 14, 1962, and the 
election shall become irrevocable on that date.
    (c) Years to which the election is applicable. If the election 
described in paragraph (b) of this section is made by the taxpayer, the 
provisions of section 2 of the Act shall be effective on and after 
January 1, 1951, for all taxable years beginning before January 1, 1961, 
in respect of which the:
    (1) Assessment of a deficiency,
    (2) Refund or credit of an overpayment, or
    (3) Commencement of a suit for recovery of a refund under section 
7405 of the Internal Revenue Code of 1954,


was not prevented on September 26, 1961, by the operation of any law or 
rule of law. The election is also effective on and after January 1, 
1951, for any taxable year beginning before January 1, 1961, in respect 
of which an assessment of a deficiency has been made

[[Page 837]]

but not collected on or before September 26, 1961.

(Sec. 2(f), 76 Stat. 683, 26 U.S.C. 613 note)

[T.D. 6583, 26 FR 12078, Dec. 16, 1961]



Sec. 1.9005-2  Effect of election.

    (a) In general. If a taxpayer makes the election described in 
paragraph (b) of Sec. 1.9005-1, he shall be deemed to have consented to 
the application of section 2 of the Act with respect to all the clay and 
quartzite described in that paragraph for all taxable years for which 
the election is effective whether or not the taxpayer is litigating the 
issue for any of such years. Thus, in applying section 613(c) of the 
Internal Revenue Code of 1954 (and corresponding provisions of the 
Internal Revenue Code of 1939) to those years:
    (1) The term ``ordinary treatment processes'' shall include 
crushing, grinding, and separating the mineral from waste, but shall not 
include any subsequent process; and
    (2) The gross income from mining for each short ton of quartzite or 
clay mined by the taxpayer and used by him in the production of all 
refractory products sold during the taxable year shall be equal to 87\1/
2\ percent of the lesser of:
    (i) The average lowest published or advertised price, or
    (ii) The average lowest actual selling price at which the mine owner 
or operator offered to sell or sold any such quartzite or clay during 
the taxable year.
    (b) Rules for applying paragraph (a) of this section. (1) The price 
described in paragraph (a)(2) of this section and any price described in 
this paragraph shall be determined with reference to quartzite or clay 
in the form and condition of such products after the application of only 
the processes described in paragraph (a)(1) of this section and before 
transportation from the plant in which such processes were applied.
    (2) If quartzite and clay were mined and used by the taxpayer in the 
production of refractory products, a separate price shall be used with 
respect to each mineral.
    (3) There shall be used for each mineral the lowest price at which 
it was sold or offered for sale by the taxpayer during the taxable year. 
Thus, only one price shall be used with respect to each mineral 
regardless of variations in type or grade.
    (4) For purposes of this paragraph, exceptional, unusual, or nominal 
sales of quartzite or clay shall be disregarded. Thus, for example, if 
the taxpayer made an accommodation sale during the taxable year at other 
than the regular price, such sale is to be disregarded.
    (5) If the taxpayer made no sales during the taxable year of 
quartzite or clay in the form and condition described in subparagraph 
(1) of this paragraph, or if his sales were exceptional, unusual, or 
nominal, there shall be used the lowest recognized selling price for the 
taxpayer's marketing area for quartzite or clay (of the same grade and 
type as that used by him) which was published for the taxable year in a 
trade journal or other industry publication.
    (6) If subparagraph (5) of this paragraph does not apply for the 
reason that there is no recognized selling price published in a trade 
journal or other industry publication for the taxpayer's marketing area, 
there shall be used the lowest price at which quartzite or clay 
comparable to that used by the taxpayer was sold or offered for sale 
during the taxable year in that area by other producers similarly 
circumstanced as the taxpayer or, if appropriate, the lowest price paid 
by the taxpayer for purchased quartzite or clay.
    (7) If the lowest selling price otherwise applicable under the 
preceding provisions of this paragraph fluctuated during the taxable 
year, the two or more lowest selling prices shall be averaged according 
to the number of days during the taxable year that each such price was 
in effect.
    (c) The provisions of paragraphs (a) and (b) of this section may be 
illustrated by the following examples:

    Example 1. (i) Facts. Taxpayer A, a calendar year taxpayer, mined 
quartzite and clay and used them in the production of recognized 
refractory products. During the taxable year, the lowest price for which 
A sold clay after the application of crushing and grinding was $13.75 
per short ton. He also sold some ground clay of a different type at 
$20.00 per

[[Page 838]]

short ton. A sold quartzite after the application of crushing and 
grinding for various prices, depending upon type, ranging from $14.00 
per short ton to $20.00 per short ton. During the taxable year, the 
prices for the various types of ground clay and quartzite did not 
change. None of the sales by A of ground clay or quartzite were 
exceptional, unusual, or nominal.
    (ii) Determination of gross income from mining. If A makes the 
election described in paragraph (b) of Sec. 1.9005-1, the gross income 
from mining per short ton of clay mined by A and used in the production 
of refractory products sold during the taxable year is $12.03 (87\1/2\ 
percent of $13.75), and the gross income from mining per short ton of 
quartzite mined by A and used in the production of refractory products 
sold during the taxable year is $12.25 (87\1/2\ percent of $14.00). To 
determine his gross income from mining, A must compute the sum of:
    (a) $12.03 multiplied by the number of short tons of clay which were 
mined by A (whether or not during the taxable year) and which were used 
by A in the production of refractory products (refractory bonding 
mortar, fire brick, etc.) sold during the taxable year; plus
    (b) $12.25 multiplied by the number of short tons of quartzite which 
were mined by A (whether or not during the taxable year) and which were 
used by A in the production of refractory products sold during the 
taxable year.
    Example 2. Assume the same facts as in example (1) except that on 
October 1 of the taxable year A's lowest price for clay after the 
application of crushing and grinding increased to $14.40 per short ton. 
In this case, the average lowest price for which A sold ground clay 
during the taxable year must be determined by taking into account the 
price adjustment of October 1. Under these circumstances, the average 
lowest price for the ground clay would be $13.91, that is $13.75 x 273/
365 plus $14.40 x 92/365.

    (d) Effect on depletion rates and other items. The election shall 
have no effect on the applicable rate of percentage depletion for the 
taxable years for which the election is effective. In applying the 
election to the years affected there shall be taken into account the 
effect that any adjustments resulting from the election shall have on 
other items affected thereby, such as charitable contributions, foreign 
tax credit, net operating loss, and the effect that adjustments to any 
such items shall have on other taxable years. The provisions of section 
2 of the Act are applicable with respect to taxable years subject to the 
Internal Revenue Code of 1939 for purposes of applying sections 450 and 
453 of that Code. The election shall have no effect on the determination 
of the treatment processes which are to be considered as mining or on 
the determination of gross income from mining for any taxable year 
beginning after December 31, 1960.

(Sec. 2(f), 75 Stat. 683; 26 U.S.C. 613 note)

[T.D. 6583, 26 FR 12078, Dec. 16, 1961]



Sec. 1.9005-3  Statutes of limitation.

    Notwithstanding any provision of law to the contrary, the period 
within which the assessment of any deficiency attributable to the 
election may be made, or within which the credit or refund of any 
overpayment attributable to the election may be made, shall not expire 
sooner than one year after the last day for making the election. Thus, 
if assessment of a deficiency or credit or refund of an overpayment, 
whichever is applicable, was not prevented on September 26, 1961, the 
time for making assessment or credit or refund shall not expire for at 
least one year after the last day for making the election. Even though 
assessment of a deficiency was prevented on September 26, 1961, if 
commencement of a suit for recovery of a refund under section 7405 of 
the Internal Revenue Code of 1954 may have been made on such date, then 
any deficiency resulting from the election may be assessed at any time 
within one year after the last day for making the election. If a 
taxpayer makes the election, he shall be deemed to have consented to the 
application of the provisions of section 2 of the Act extending the time 
for assessing a deficiency attributable to the election. Section 2 of 
the Act does not shorten the period of limitations otherwise applicable. 
An agreement may be entered into under section 6501(c)(4) of the 
Internal Revenue Code of 1954 and corresponding provisions of prior law 
to extend the period for assessment.

(Sec. 2(f), 75 Stat. 683; 26 U.S.C. 613 note)

[T.D. 6583, 26 FR 12079, Dec. 16, 1961]



Sec. 1.9005-4  Manner of exercising election.

    (a) By whom election is to be made. Generally, the taxpayer whose 
tax liability is affected by the election shall

[[Page 839]]

make the election. In the case of a partnership, or a corporation 
electing under the provisions of subchapter S, chapter 1 of the Internal 
Revenue Code of 1954, the election shall be exercised by the partnership 
or such corporation, as the case may be.
    (b) Time and manner of making election. The election shall be made 
on or before February 14, 1962, by filing a statement with the district 
director with whom the taxpayer's income tax return for the taxable year 
in which the election is made is required to be filed. The statement 
shall include the following:
    (1) A clear indication that an election is being made under section 
2 of the Act, and
    (2) The taxable years to which the election applies.


Amended income tax returns reflecting any increase or decrease in tax 
attributable to the election shall be filed for the taxable years to 
which the election applies. In the case of partnerships and electing 
small business corporations under subchapter S, chapter 1 of the 
Internal Revenue Code of 1954, amended returns shall be filed by the 
partnership or electing small business corporation, as well as by the 
partners or shareholders, as the case may be. Any amended return shall 
be filed with the office of the district director with whom the taxpayer 
files his income tax return for the taxable year in which the election 
is made, and, if practicable, on the same date the statement of election 
is filed, but amended returns shall be filed in no event later than May 
31, 1962, unless an extension of time is granted under section 6081 of 
the Internal Revenue Code of 1954. Whenever the amended returns do not 
accompany the statement of election, a copy of the statement shall be 
submitted with the amended returns. The amended returns shall be 
accompanied by payment of the additional tax (together with interest 
thereon) resulting from the election.

(Sec. 2(f), 75 Stat. 683; 26 U.S.C. 613 note)

[T.D. 6583, 26 FR 12079, Dec. 16, 1961]



Sec. 1.9005-5  Terms; applicability of other laws.

    All other terms which are not otherwise specifically defined shall 
have the same meaning as when used in the Internal Revenue Code of 1954 
(or the corresponding provisions of prior law) except where otherwise 
distinctly expressed or manifestly intended to the contrary. Further, 
all provisions of law contained in the Code (or the corresponding 
provisions of prior law) shall apply to the extent that they can apply. 
Thus, all the provisions of subtitle F of the Code (and the 
corresponding provisions of prior law) shall apply to the extent they 
can apply, including the provisions of law relating to assessment, 
collection, credit or refund, and limitations. For purposes of this 
section and Sec. Sec. 1.9005-1 to 1.9005-4, inclusive, the term ``Act'' 
means the Act of September 26, 1961 (Pub. L. 87-321, 75 Stat. 683).

(Sec. 2(f), 75 Stat. 683; 26 U.S.C. 613 note)

[T.D. 6583, 26 FR 12079, Dec. 16, 1961]

                         Tax Reform Act of 1969



Sec. 1.9006  Statutory provisions; Tax Reform Act of 1969.

    Section 946 of the Tax Reform Act of 1969 (83 Stat. 729) provides as 
follows:

    Sec. 946. Interest and penalties in case of certain taxable years--
(a) Interest on underpayment. Notwithstanding section 6601 of the 
Internal Revenue Code of 1954, in the case of any taxable year ending 
before the date of the enactment of this Act, no interest on any 
underpayment of tax, to the extent such underpayment is attributable to 
the amendments made by this Act, shall be assessed or collected for any 
period before the 90th day after such date.
    (b) Declarations of estimated tax. In the case of a taxable year 
beginning before the date of the enactment of this Act, if any taxpayer 
is required to make a declaration or amended declaration of estimated 
tax, or to pay any amount or additional amount of estimated tax, by 
reason of the amendments made by this Act, such amount or additional 
amount shall be paid ratably on or before each of the remaining 
installment dates for the taxable year beginning with the first 
installment date on or after the 30th day after such date of enactment. 
With respect to any declaration or payment of estimated tax before such 
first installment date, sections 6015, 6154, 6654, and 6655 of the 
Internal Revenue Code of 1954 shall be applied without regard to the

[[Page 840]]

amendments made by this Act. For purposes of this subsection, the term 
``installment date'' means any date on which, under section 6153 or 6154 
of such Code (whichever is applicable), an installment payment of 
estimated tax is required to be made by the taxpayer.

[T.D. 7088, 36 FR 3052, Feb. 17, 1971]



Sec. 1.9006-1  Interest and penalties in case of certain taxable
years.

    (a) Interest on underpayment. The Internal Revenue Code of 1954 was 
amended in many important respects by the Tax Reform Act of 1969. 
Certain of these amendments affect taxable years ending prior to 
December 30, 1969 (the date of enactment of the Act) and thereby may 
cause underpayments of tax by a number of taxpayers for those years. 
Under section 6601(a) of the Code, interest at the rate of 6 percent per 
annum is imposed upon the amount of any such underpayment. The effect of 
section 946(a) of the Act is to prevent the assessment or collection of 
interest on an underpayment of tax for any taxable year ending before 
December 30, 1969, if such underpayment is attributable to any amendment 
made by such Act, for the period from the due date for payment until 
March 30, 1970. Thus, the taxpayer is afforded an interest-free period 
of 90 days from the date of enactment of such Act within which to 
account for the changes in the law affecting him and to remit the amount 
of such underpayment. If, on or after March 30, 1970, the amount of any 
underpayment (or portion thereof) attributable to an amendment made by 
the Act remains unpaid, then, as of such date, such underpayment (or 
portion thereof) shall be subject to interest as provided by section 
6601 of the Code, to be computed from such date. However, if a 
corporation or farmers' cooperative elects to pay its final tax in two 
installments under section 6152 of the Code and if the second 
installment is due after March 30, 1970, then, in order to escape the 
imposition of interest under section 6601, such corporation or 
cooperative need pay only one-half of the additional tax arising from an 
amendment made by the Act before March 30, 1970, with the remaining one-
half payable as part of the second installment on the regular due date 
for that installment. In the case of an underpayment of tax which is 
only partly attributable to an amendment made by the Act, section 946(a) 
of such Act shall apply only to the extent that such underpayment is so 
attributable.
    (b) Declarations and payments of estimated tax. (1) In the case of a 
taxable year beginning before December 30, 1969, section 946(b) of the 
Tax Reform Act of 1969 provides transitional rules with respect to the 
payment of estimated tax and, in the case of an individual, the filing 
of a declaration of estimated tax. Under such section 946(b) in the case 
of such a year, if any taxpayer is required to make a declaration or 
amended declaration of estimated tax, or to pay any amount or additional 
amount of estimated tax, by reason of the amendments made by the Act, 
such amount or additional amount shall be paid ratably on or before each 
of the remaining installment dates for the taxable year beginning with 
the first installment date on or after February 15, 1970. For purposes 
of section 946(b) of such Act and this section, the term ``installment 
date'' means any date on which, under section 6153 or 6154 of the Code 
(whichever is applicable), an installment payment of estimated tax is 
required to be made by the taxpayer.
    (2) With respect to any declaration or payment of estimated tax 
before February 15, 1970, sections 6015, 6153, 6154, 6654, and 6655 of 
the Code shall be applied without regard to the amendments made by such 
Act. Therefore, any underpayment which occurs solely by reason of the 
amendments made by such Act shall not be treated as an underpayment in 
the case of installment dates before February 15, 1970. Similarly, in 
the case of a taxpayer all of whose installment dates occur prior to 
February 15, 1970, no payment of estimated tax need be made to reflect 
the amendments made by such Act.
    (3) The following example illustrates the application of the 
provisions of subparagraphs (1) and (2) of this paragraph:

    Example. A, a fiscal year taxpayer with a taxable year from July 1, 
1969, through June 30, 1970, had, without regard to the enactment of the 
Tax Reform Act of 1969, a total tax liability, which would have been 
shown on his return, of $500. A is not a farmer or

[[Page 841]]

fisherman described in section 6037(b). A's tax liability is increased 
by $20 to $520, attributable to an amendment made by such Act. A makes 
an installment payment of estimated tax of $90 on each of the following 
four installment dates: October 15, 1969; December 15, 1969; March 15, 
1970; and July 15, 1970. Assume that A is unaffected by the exceptions 
provided in section 6654(d). Therefore, A is underpaid by $10 on both 
October 15 and December 15, and by $18 on both March 15 and July 15. 
Such underpayments are computed as follows:

(a) October 15 and December 15 installment dates:
  (1) Tax without regard to Tax Reform Act of 1969...............   $500
  (2) 80% of item (1)............................................    400
  (3) Minimum payment to avoid underpayment, determined without
   regard to Act:
    October 15, 1969 (25% of item (2))...........................    100
    December 15, 1969 (25% of item (2))..........................    100
  (4) Actual payment:
  October 15, 1969...............................................     90
  December 15, 1969..............................................     90
  (5) Amount of underpayment:
    October 15, 1969 ($100-$90)..................................     10
    December 15, 1969 ($100-$90).................................     10
(b) March 15 and July 15 installment dates:
  (1) Tax with regard to Act.....................................    520
  (2) 80% of item (1)............................................    416
  (3) Less total of minimum payments to avoid underpayment,          200
   determined without regard to Act for October 15, 1969 and
   December 15, 1969 ($100 + $100)...............................
                                                                  ------
  (4) Difference of items (2) and (3)............................    216
  (5) Minimum payment to avoid underpayment, determined with
   regard to Act:
    March 15 (50% of $216).......................................    108
    July 15 (50% of $216)........................................    108
  (6) Actual payment:
    March 15.....................................................     90
    July 15......................................................     90
  (7) Amount of underpayment:
    March 15 ($108-$90)..........................................     18
    July 15 ($108-$90)...........................................     18
 

    (c) Cross references. (1) Taxpayers affected by the following 
sections, among others, of the Tax Reform Act of 1969 may be subject to 
the provisions of section 946 (a) or (b) (whichever is applicable) of 
such Act:
    (i) Act section 201(a), which adds section 170(f)(2) to the Code and 
which applies to gifts made after July 31, 1969.
    (ii) Act section 201(c), which repeals section 673(b) of the Code 
and which applies to transfers in trust made after April 22, 1969.
    (iii) Act section 212(c), which amends section 1031 of the Code and 
which applies to taxable years to which the 1954 Code applies.
    (iv) Act section 332, which amends section 677 of the Code and which 
applies to property transferred in trust after October 9, 1969.
    (v) Act section 411(a), which adds section 279 to the Code and which 
applies to interest paid or incurred on an indebtedness incurred after 
October 9, 1969.
    (vi) Act sections 412 (a) and (b), which adds section 453(b)(3) to 
the Code and which apply to sales or other dispositions occurring after 
May 27, 1969, which are not made pursuant to a contract entered into on 
or before that date.
    (vii) Act section 413, which amends sections 1232(a), 1232(b)(2), 
and 6049 of the Code and which applies to bonds and other evidences of 
indebtedness issued after May 27, 1969.
    (viii) Act section 414, which adds section 249 to the Code and which 
applies to convertible bonds or other convertible evidences of 
indebtedness repurchased after April 22, 1969.
    (ix) Act section 421(a), which amends section 305 of the Code and 
which applies to distributions made after January 10, 1969.
    (x) Act sections 516 (a) and (d), which add section 1001(e) to the 
Code and which apply to sales of life estates made after October 9, 
1969.
    (xi) Act section 601, which amends section 103 of the Code and which 
applies to obligations issued after October 9, 1969.
    (xii) Act section 703 which amends sections 46(b) and 47(a) of the 
Code and which applies to section 38 property built or acquired after 
April 18, 1969.
    (xiii) Act section 905, which adds section 311(d) to the Code and 
which applies to distributions made after November 30, 1969.
    (2) In addition to the references in subparagraph (1) of this 
paragraph, section 946(b) of the Tax Reform Act of 1969 may apply to 
taxpayers affected by the following sections, among others, of such Act:
    (i) Act section 201(a), which adds section 170(e) to the Code and 
which applies to contributions paid after December 31, 1969.
    (ii) Act sections 501 (a) and (b), which amend section 613 of the 
Code and which apply to taxable years beginning after October 9, 1969.
    (iii) Act sections 516 (c) and (d) which add section 1253 to the 
Code and which

[[Page 842]]

apply to transfers after December 31, 1969.
    (iv) Act section 701(a), which amends section 51 of the Code and 
which applies to taxable years ending after December 31, 1969, and 
beginning before July 1, 1970.

[T.D. 7088, 36 FR 3053, Feb. 17, 1971]

                        MISCELLANEOUS PROVISIONS



Sec. 1.9101-1  Permission to submit information required by certain 
returns and statements on magnetic tape.

    In any case where the use of a Form 1087 or 1099 is required by the 
regulations under this part for the purpose of making a return or 
reporting information, such requirement may be satisfied by submitting 
the information required by such form on magnetic tape or by other 
media, provided that the prior consent of the Commissioner or other 
authorized officer or employee of the Internal Revenue Service has been 
obtained. Applications for such consent must be filed in accordance with 
procedures established by the Internal Revenue Service. In any case 
where the use of Form W-2 is required for the purpose of making a return 
or reporting information, such requirement may be satisfied by 
submitting the information required by such form on magnetic tape or 
other approved media, provided that the prior consent of the 
Commissioner of Social Security (or other authorized officer or employee 
thereof) has been obtained.

[T.D. 6883, 31 FR 6589, May 3, 1966, as amended by T.D. 7580, 43 FR 
60159, Dec. 26, 1978]



Sec. 1.9200-1  Deduction for motor carrier operating authority.

    (a) In general. Section 266 of the Economic Recovery Tax Act of 1981 
(Pub. L. 97-34, 95 Stat. 265) provides that, for purposes of chapter 1 
of the Internal Revenue Code of 1954, an ordinary deduction shall be 
allowed in computing the taxable income of all taxpayers who either held 
one or more motor carrier operating authorities on July 1, 1980, or 
later acquired a motor carrier operating authority pursuant to a binding 
contract in effect on July 1, 1980. The deduction for each motor carrier 
operating authority is to be allowed ratably over a 60-month period and 
is equal to the adjusted basis of the motor carrier operating authority 
on July 1, 1980. Except as provided in this section, no deduction is 
allowable for any diminution in value of any motor carrier operating 
authority caused by administrative or legislative actions to decrease 
restrictions on entry into the interstate motor carrier business.
    (b) Person entitled to claim deduction. In general, the deduction 
provided by this section for a particular motor carrier operating 
authority may be claimed only by the taxpayer which held the authority 
on July 1, 1980. However, if another person acquired the motor carrier 
operating authority after July 1, 1980, pursuant to a binding contract 
in effect on that date, the deduction for such authority may be claimed 
only by the acquirer and may not be claimed by the taxpayer which held 
the authority on July 1, 1980. A taxpayer, otherwise entitled to claim a 
deduction under this section, who sells a motor carrier operating 
authority after July 1, 1980 may not claim an amortization deduction for 
such authority for any month which begins after the date of such sale. 
In addition, acquisition of a motor carrier operating authority after 
July 1, 1980, if not pursuant to a binding contract in effect on July 1, 
1980, will not entitle the acquirer to a deduction under this section, 
unless the operating authority is acquired pursuant to a transaction to 
which section 381 applies.
    (c) Allowance of deduction--(1) Determination of period for 
deduction--(i) General rule. Except as provided in paragraph (c)(1)(ii) 
of this section, the 60-month period for taking the deduction provided 
by this section for a particular motor carrier operating authority 
begins with the month of July 1980, or, if later, the month in which the 
motor carrier operating authority was acquired pursuant to a binding 
contract in effect on July 1, 1980.
    (ii) Election. In lieu of beginning the 60-month period as provided 
in paragraph (c)(1)(i) of this section, the taxpayer may elect to begin 
the 60-month period with the first month of the taxpayer's first taxable 
year beginning after July 1, 1980. This election, if made, shall apply 
to the deduction for all motor carrier operating authorities

[[Page 843]]

either held by the taxpayer on July 1, 1980, or later acquired by the 
taxpayer by the end of the first month of the first taxable year 
beginning after July 1, 1980, pursuant to a binding contract in effect 
on July 1, 1980. Any such election will not apply to the determination 
of the period for amortizing the bases of authorities acquired by the 
taxpayer after the end of the first month of the first taxable year 
beginning after July 1, 1980.
    (2) Amount of monthly deduction. In the case of each motor carrier 
operating authority for which the taxpayer is entitled (under paragraph 
(b) of this section) to claim a deduction, the deduction for each month 
during the 60-month period relating to the motor carrier operating 
authority is equal to the adjusted basis (determined under paragraph (e) 
of this section) of the motor carrier operating authority divided by 60.
    (d) Definition of motor carrier-operating authority. For purposes of 
Sec. 1.9200-2 and this section, the term ``motor carrier operating 
authority'' means a certificate or permit held by a motor common carrier 
or motor contract carrier of property and issued pursuant to the Revised 
Interstate Commerce Act, 49 U.S.C. 10921-10933 (Supp. III 1979). The 
terms ``motor common carrier'' and ``motor contract carrier'' shall be 
defined as in 49 U.S.C. 10102 (Supp. III 1979) and do not include 
persons meeting the definition of freight forwarder contained in 49 
U.S.C. 10102 (Supp. III 1979).
    (e) Adjusted basis of motor carrier operating authority--(1) In 
general. Except as provided in paragraph (e)(2) of this section, the 
adjusted basis of a motor carrier operating authority for which a 
deduction is allowed under this section is the adjusted basis of the 
motor carrier operating authority as determined under sections 1012 and 
1016 in the hands of the taxpayer who is entitled to claim the deduction 
under paragraph (b) of this section.
    (2) Special rule in case of certain stock acquisitions--(i) Election 
by holder. A corporation entitled to claim a deduction under paragraph 
(b) of this section for a motor carrier operating authority may elect to 
allocate a portion of the cost basis of a qualified acquiring party in 
the stock of an acquired corporation, to the basis of the authority. A 
qualified acquiring party is a corporation (or a noncorporate person or 
group of noncorporate persons described in paragraph (e)(2)(ii) of this 
section) that after June 21, 1952, and on or before July 1, 1980 (or 
after July 1, 1980 under a binding contract in effect on such date) 
acquired by purchase, within the meaning of section 334(b)(3) and during 
a period of not more than 12 months, 80 percent or more of the stock (as 
described in section 334(b)(2)(B)) of a corporation (the acquired 
corporation) which held the authority directly or indirectly on the date 
which is the end of the period of 12 months or less within which such 80 
percent of the acquired corporation's stock was purchased. The election 
to allocate basis in an acquired corporation's stock to the basis in an 
authority may be made only if 80 percent of all classes of the acquired 
corporation's stock (other than nonvoting stock which is limited and 
preferred as to dividends) was acquired by purchase (within the meaning 
of section 334(b)(3)) during a period of not more than 12 months, as 
described in section 334(b)(2)(B). If the qualified acquiring party is a 
corporation, the taxpayer holding the authority on July 1, 1980, may 
elect the basis allocation of this paragraph only if it is a member of 
the affiliated group (as defined in section 1504(a)) of which the 
qualified acquiring party is a member. If there is more than one 
acquisition of stock that might permit an election to allocate basis 
under this paragraph (e)(2)(i), the taxpayer may elect to allocate to 
the authority only the basis in the acquired corporation's stock held by 
the qualified acquiring party which became a qualified acquiring party 
as a result of the last of such acquisitions.
    (ii) Certain noncorporate persons treated as qualified parties. For 
purposes of paragraphs (e)(2) (i) through (vi) of this section, the term 
``qualified acquiring party'' shall include a noncorporate person or 
group of noncorporate persons which, after June 21, 1952 and on or 
before July 1, 1980, acquired in one purchase, stock in a corporation 
(the acquired corporation) which at the

[[Page 844]]

time of acquisition held, directly or indirectly, a motor carrier 
operating authority. In order to be treated as a qualified acquiring 
party under this paragraph, a noncorporate person or group of 
noncorporate persons must have held stock constituting control (within 
the meaning of section 368(c)) of the acquired corporation on July 1, 
1980. A group of noncorporate persons consists of two or more 
noncorporate persons who, acting together on the same date, made the 
required purchase of stock in the acquired corporation.
    (iii) Portion of stock basis allocable to basis of authority when 
stock of direct holder of authority is acquired. If the qualified 
acquiring party acquired the stock of a corporation directly holding the 
authority, the portion of the stock basis allocable to the basis of the 
authority is the amount that would have been properly allocable under 
section 334(b)(2) if the qualified acquiring party were a corporation 
that had received the authority in a distribution of all the acquired 
corporation's assets in a complete liquidation of the acquired 
corporation immediately after the acquisition of the acquired 
corporation's stock. If the acquired corporation's stock was acquired on 
more than one date, the date on which the liquidation is deemed to have 
occurred shall be the date which is the date of the last acquisition by 
purchase of stock of the acquired corporation within the 12-month period 
described in section 334(b)(2)(B).
    (iv) Portion of stock basis allocable to basis of authority when 
stock of indirect holder of authority is acquired. If the qualified 
acquiring party acquired the stock of a corporation indirectly holding 
the authority (such as by owning all of the stock of a subsidiary that 
directly holds the authority), a portion of the qualified acquiring 
party's cost basis in the stock of the acquired corporation may be 
allocated to the basis in the operating authority. The portion allocable 
is the amount that would have been properly allocable under section 
334(b)(2) if, immediately before the liquidation of the acquired 
corporation on the date of the last acquisition by purchase of stock of 
the acquired corporation within the 12-month period described in section 
334(b)(2)(B), the authority had been transferred in such a way (such as 
by liquidating the subsidiary that directly holds the authority) that 
the qualified acquiring party would have received direct ownership of 
the authority upon the liquidation of the acquired corporation 
immediately after the acquisition.
    (v) Other assets to be accounted for. For purposes of paragraphs 
(e)(2) (iii) or (iv) of this section, in determining the portion of 
stock basis properly allocable to the operating authority under section 
334(b)(2), the portion of the qualified acquiring party's basis in the 
acquired corporation's stock that would have been allocable following 
the liquidation to other assets of the acquired corporation, including 
intangible assets such as goodwill and going concern value, must be 
taken into account.
    (vi) Adjustments to basis in acquired corporation's stock and other 
assets. If a taxpayer makes the election provided by paragraph (e)(2)(i) 
of this section, the qualified acquiring party's basis in the stock of 
the acquired corporation shall be decreased, effective as of July 1, 
1980, by the amount determined by the following formula:
[GRAPHIC] [TIFF OMITTED] TR25SE06.013


In addition, if the aggregate basis of the assets of the acquired 
corporation other than the authority as of July 1, 1980 (reduced by the 
liabilities secured by such assets) exceeds the qualified acquiring 
party's basis in the stock of

[[Page 845]]

the acquired corporation remaining after application of the preceding 
sentence, then the bases of such assets shall be reduced proportionately 
so that their aggregate basis as of such date (minus secured 
liabilities) is equal to such remaining stock basis. If the acquired 
corporation held the authority indirectly, appropriate basis reductions 
shall be made to reflect the transfers deemed to have occurred under 
paragraph (e)(iv) of this section.
    (vii) Pre-TEFRA law applies. References made in this section to 
section 334 of the Code relate to such section as it existed before 
amendment by the Tax Equity and Fiscal Responsibility Act of 1982.
    (f) Adjustment to basis of motor carrier operating authority. A 
taxpayer's basis in a motor carrier operating authority must be reduced 
by the amount of any amortization deductions allowable to the taxpayer 
under this section.
    (g) Examples. The principles of this section may be illustrated by 
the following examples:

    Example 1. (i) Corporation X acquired all the stock of corporation Y 
for $130,000 in 1970. Y's assets at the time of acquisition consisted of 
a motor carrier operating authority valued at $180,000 in which it has a 
basis of $60,000, trucks with a fair market value of $70,000 and an 
aggregate basis of $30,000, and goodwill valued at $30,000. Y has 
$50,000 of liabilities secured by the trucks and $100,000 of unsecured 
liabilities. Both X and Y use a June 30 fiscal year for tax purposes.
    (ii) Y is the only taxpayer eligible to claim a deduction under 
Sec. 1.9200-1(b). If X sold its Y stock to Z in October 1980 (other 
than pursuant to a binding contract in effect on July 1, 1980), Y would 
continue to be the only taxpayer eligible to claim the deduction. 
However, if Y sold the operating authority to W in February 1981, 
neither Y nor W would be eligible to claim the monthly deduction for the 
remainder of the 60-month period. Also, Y would realize gain or loss on 
the sale after reducing its basis in the authority by any amortization 
claimed for the period prior to the sale.
    (iii) Y must begin the 60-month period in July 1980 unless it elects 
under paragraph (c)(1)(ii) of this section to begin the 60-month period 
with the first month of the first taxable year beginning after July 1, 
1980, which in Y's case would be July 1981.
    (iv) Y's allowable monthly deduction is equal to its adjusted basis 
in the operating authority of $60,000, divided by 60, or $1,000. 
However, Y may elect under Sec. 1.9200-1(e)(2) to allocate to its basis 
in the authority a portion of X's basis in Y stock, since X is a 
qualified acquiring party under paragraph (e)(2)(i) of this section and 
Y is a member of an affiliated group of which X is a member. Assuming Y 
makes the election, Y may allocate to the basis of the authority the 
amount of X's basis in Y stock that would have been allocable under 
section 334(b)(2) if X had received the authority in a distribution of 
all of Y's assets in a complete liquidation of Y immediately after X 
acquired Y's stock.


Therefore, for purposes of the allocation, X's $130,000 cost basis in Y 
stock is deemed to be increased by Y's $100,000 of unsecured liabilities 
to $230,000. Of the $230,000 deemed basis, $180,000 is allocated to the 
authority, $30,000 to goodwill, and $20,000 to the trucks. Y's allowable 
monthly amortization deduction would be $180,000 divided by 60, or 
$3,000. X's $130,000 cost basis in its Y stock must be decreased to 
$62,174 as provided in paragraph (e)(2)(vi) of this section. Y's $30,000 
aggregate basis in its trucks remains unchanged.
    Example 2. Assume the same facts as in Example (1), except that Y's 
aggregate basis in the trucks is $120,000. If Y makes the election under 
Sec. 1.9200-1(e)(2), the same allocation as in Example (1) would occur. 
However, in addition to the decrease in X's basis in its Y stock to 
$62,174, the $120,000 aggregate basis in the trucks must be reduced to 
$112,174 (so that the $112,174 basis minus secured liabilities of 
$50,000 is equal to X's $62,174 remaining stock basis).
    Example 3. Assume the same facts as in Example (1), except that X 
pays a negotiated purchase price of $120,000 for the Y stock, in order 
to take into account an anticipated tax liability of $10,000, relating 
to potential section 1245 recapture. If Y makes the election under Sec. 
1.9200-1(e)(2), then for purposes of allocating X's basis in Y stock, 
X's cost basis is deemed to be increased by Y's $100,000 of unsecured 
liabilities as well as the $10,000 of potential tax liability resulting 
from section 1245 recapture, to $230,000. The $10,000 of potential 
recapture tax is treated as a general liability and the deemed basis is 
allocated among Y's assets as in Example (1). In order to take into 
account the potential recapture tax liability, such amount must be based 
on the same fair market values that are used to determine the amount of 
the stock basis allocable to the operating authority.

(Sec. 266, Economic Recovery Tax Act of 1981 (Pub. L. 97-34; 95 Stat. 
265); sec. 517, Highway Revenue Act of 1982 (Pub. L. 97-424; 96 Stat. 
2097); and sec. 7805, Internal Revenue Code of 1954 (68A Stat. 917; 26 
U.S.C. 7805)

[T.D. 7947, 49 FR 8247, Mar. 6, 1984; 49 FR 12244, Mar. 29, 1984]

[[Page 846]]



Sec. 1.9200-2  Manner of taking deduction.

    (a) In general. The deduction provided by Sec. 1.9200-1 shall be 
taken by multiplying the amount of the monthly deduction determined 
under Sec. 1.9200-1 (c)(2) for each motor carrier operating authority 
by the number of months in the taxable year for which the deduction is 
allowable, and entering the resulting amount at the appropriate place on 
the taxpayer's return for each year in which the deduction is properly 
claimed. Additionally, any taxpayer who has claimed the deduction 
provided by Sec. 1.9200-1 must (unless it has already filed a statement 
containing the required information) attach a statement to the next 
income tax return of the taxpayer which has a filing due date on or 
after June 4, 1984. The statement shall provide, in addition to the 
taxpayer's name, address, and taxpayer identification number, the 
following information for each motor carrier operating authority for 
which a deduction was claimed:
    (1) The taxable year of the taxpayer for which the deduction was 
first claimed;
    (2) Whether the taxpayer's deduction was determined using the 
adjusted basis of the authority under section 1012 or an allocated stock 
basis under Sec. 1.9200-1(e)(2); and
    (3) If an allocation of stock basis has been made under Sec. 
1.9200-1(e)(2), the calculations made in determining the amount of basis 
to be allocated to the authority.
    (b) Filing and amendment of returns. A taxpayer who has filed its 
return for the taxable year that includes July 1, 1980, claiming the 
deduction allowed under Sec. 1.9200-1, may amend its return for such 
year in order to elect under Sec. 1.9200-1(c)(1)(ii) to begin the 60-
month period in the subsequent taxable year. A taxpayer eligible to take 
the deduction under Sec. 1.9200-1 who has filed its returns for both 
the taxable year that includes July 1, 1980, and the following taxable 
year without claiming the deduction, may claim the deduction by filing 
amended returns or claims for refund for the taxable year in which the 
taxpayer elects to begin the 60-month period, and for subsequent taxable 
years. If a taxpayer first claims the deduction on an amended return 
under the preceding sentence, the statement required by paragraph (a) of 
this section must be attached to such amended return.
    (c) Deduction taken for operating authority other than under Sec. 
1.9200-1. If a deduction other than the deduction allowed under Sec. 
1.9200-1 was taken in any taxable year for the reduction in value of a 
motor carrier operating authority caused by administrative or 
legislative actions to decrease restrictions on entry into the 
interstate motor carrier business, the taxpayer should file an amended 
return for such taxable year which computes taxable income without 
regard to such deduction.

(Approved by the Office of Management and Budget under control number 
1545-0767)

(Sec. 266, Economic Recovery Tax Act of 1981 (Pub. L. 97-34; 95 Stat. 
265); sec. 517, Highway Revenue Act of 1982 (Pub. L. 97-424; 96 Stat. 
2097); and sec. 7805, Internal Revenue Code of 1954 (68A Stat. 917; 26 
U.S.C. 7805)

[T.D. 7947, 49 FR 8249, Mar. 6, 1984]



Sec. 1.9300-1  Reduction in taxable income for housing displaced 
individuals.

    (a) In general. For a taxable year beginning in the applicable 
taxable year (as defined in paragraph (f)(1) of this section), a 
taxpayer who is a natural person may reduce taxable income by $500 for 
each displaced individual (as defined in paragraph (f)(2) of this 
section) to whom the taxpayer provides housing free of charge in, or on 
the site of, the taxpayer's principal residence for a period of at least 
60 consecutive days. A taxpayer may claim the reduction in taxable 
income for any applicable taxable year in which a consecutive 60-day 
period ends. A taxpayer may not claim the reduction in taxable income 
unless the taxpayer includes the taxpayer identification number of the 
displaced individual on the taxpayer's income tax return.
    (b) Provision of housing--(1) Principal residence. For purposes of 
this section, the term principal residence has the same meaning as in 
section 121 and the associated regulations. See Sec. 1.121-1(b)(1) and 
(b)(2).
    (2) Legal interest required. A taxpayer is treated as providing 
housing for purposes of this section only if the taxpayer is an owner or 
lessee (including a

[[Page 847]]

co-owner or co-lessee) of the principal residence.
    (3) Compensation for providing housing. No reduction in taxable 
income is allowed under this section to a taxpayer who receives rent or 
any reimbursement or compensation (whether in cash, services, or 
property) from any source for providing housing to the displaced 
individual. For this purpose, lodging, utilities, and other similar 
items are treated as housing, but telephone calls, food, clothing, 
transportation, and other similar items are not treated as housing.
    (c) Limitations--(1) Dollar limitation--(i) In general. The 
reduction in taxable income under paragraph (a) of this section may not 
exceed the maximum dollar limitation, and must be reduced by the total 
amount of all reductions under this section for all prior taxable years 
(except as provided in paragraph (c)(5) of this section). The maximum 
dollar limitation is--
    (A) $2,000 in the case of an unmarried individual; or
    (B) $2,000 in the case of a husband and wife, whether the husband 
and wife file a joint income tax return or separate income tax returns; 
married taxpayers filing separate income tax returns may allocate this 
amount in $500 increments between their respective returns, provided 
that each spouse is otherwise eligible to claim that reduction in 
taxable income.
    (ii) Married individuals with separate principal residences. The 
limitation in paragraph (c)(1)(i)(B) of this section applies whether or 
not the married individuals occupy the same principal residence. A 
person is treated as married for purposes of this section if the 
individual is treated as married under section 7703.
    (2) Spouse or dependent of the taxpayer. No reduction of taxable 
income is allowed for a displaced individual who is the spouse or a 
dependent of the taxpayer.
    (3) One reduction per displaced individual. Except as provided in 
paragraph (c)(5) of this section, a taxpayer may not reduce taxable 
income under paragraph (a) of this section for a displaced individual 
for whom the taxpayer or any taxpayer residing in the same principal 
residence has reduced taxable income under this section for any prior 
taxable year.
    (4) Taxpayers occupying the same principal residence. Except as 
provided in paragraph (c)(5) of this section, for all taxable years, 
only one taxpayer occupying the same principal residence may reduce 
taxable income for a particular displaced individual.
    (5) Limitations applied separately to each disaster. The limitations 
of this paragraph (c) apply separately to each disaster area. Thus, a 
taxpayer may reduce taxable income by $2,000 for providing housing to 
Midwestern disaster displaced individuals even though the taxpayer 
reduced taxable income for providing housing to one or more Hurricane 
Katrina displaced individuals. For this purpose, all areas within the 
Midwestern disaster area are treated as one disaster area.
    (d) Substantiation. A taxpayer claiming a reduction of taxable 
income under this section must maintain records sufficient to show 
entitlement to the reduction as provided in forms, instructions, 
publications or other guidance published by the IRS.
    (e) The Commissioner may apply this section in additional guidance 
of general applicability, see Sec. 601.601(d)(2) of this chapter, to 
other disaster areas to which Congress extends relief under section 302 
of the Katrina Emergency Tax Relief Act of 2005.
    (f) In general. The following definitions apply for all purposes of 
this section.
    (1) Applicable taxable year. The term applicable taxable year 
means--
    (i) A taxable year beginning in 2005 or 2006, in the case of housing 
provided to a Hurricane Katrina displaced individual (as defined in 
paragraph (f)(2)(ii) of this section); and
    (ii) A taxable year beginning in 2008 or 2009, in the case of 
housing provided to a Midwestern disaster displaced individual (as 
defined in paragraph (f)(2)(iii) of this section).
    (2) Displaced individual--(i) Scope. The term displaced individual 
means a Hurricane Katrina displaced individual as defined in paragraph 
(f)(2)(ii) of this section and a Midwestern disaster displaced 
individual as defined in paragraph (f)(2)(iii) of this section.

[[Page 848]]

    (ii) Hurricane Katrina displaced individual. The term Hurricane 
Katrina displaced individual means any natural person (other than the 
spouse or a dependent of the taxpayer) if the following requirements are 
met--
    (A) The person's principal place of abode on August 28, 2005, was in 
the Hurricane Katrina disaster area (as defined in paragraph (f)(4)(ii) 
of this section);
    (B) The person was displaced from that abode; and
    (C) If the abode was located outside the Hurricane Katrina core 
disaster area (as defined in paragraph (f)(5)(ii) of this section)--
    (1) The abode was damaged by Hurricane Katrina; or
    (2) The person was evacuated from that abode by reason of Hurricane 
Katrina.
    (iii) Midwestern disaster displaced individual. The term Midwestern 
disaster displaced individual means any natural person (other than the 
spouse or a dependent of the taxpayer) if the following requirements are 
met--
    (A) The person's principal place of abode on the Midwestern disaster 
date (as defined in paragraph (f)(3) of this section), was in any 
Midwestern disaster area (as defined in paragraph (f)(4)(iii) of this 
section);
    (B) The person was displaced from that abode; and
    (C) If the abode was located outside the Midwestern core disaster 
area (as defined in paragraph (f)(5)(iii) of this section)--
    (1) The abode was damaged by any Midwestern disaster; or
    (2) The person was evacuated from that abode by reason of any 
Midwestern disaster.
    (3) Midwestern disaster date. The term Midwestern disaster date 
means--
    (i) In Arkansas, May 2 through May 12, 2008;
    (ii) In Illinois, June 1 through July 22, 2008;
    (iii) In Indiana, May 30 through June 27, 2008;
    (iv) In Iowa, May 25 through August 13, 2008;
    (v) In Kansas, May 22 through June 16, 2008;
    (vi) In Michigan, June 6 through June 13, 2008;
    (vii) In Minnesota, June 6 through June 12, 2008;
    (viii) In Missouri, May 10 through May 11, 2008, and June 1 through 
August 13, 2008;
    (ix) In Nebraska, April 23 through April 26, 2008, May 22 through 
June 24, 2008, and June 27, 2008; or
    (x) In Wisconsin, June 5 through July 25, 2008.
    (4) Disaster area--(i) Scope. The term disaster area means the 
Hurricane Katrina disaster area as defined in paragraph (f)(4)(ii) of 
this section and the Midwestern disaster area as defined in paragraph 
(f)(4)(iii) of this section.
    (ii) Hurricane Katrina disaster area. The term Hurricane Katrina 
disaster area means the states of Alabama, Florida, Louisiana, and 
Mississippi.
    (iii) Midwestern disaster area. The term Midwestern disaster area 
means an area for which the President declared a major disaster on or 
after May 20, 2008, and before August 1, 2008, under section 401 of the 
Robert T. Stafford Disaster Relief and Emergency Assistance Act (42 
U.S.C. 5170) (Stafford Act) by reason of severe storms, tornados, or 
flooding occurring in any of the states of Arkansas, Illinois, Indiana, 
Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, and Wisconsin.
    (5) Core disaster area--(i) Scope. The term core disaster area means 
the Hurricane Katrina core disaster area as defined in paragraph 
(f)(5)(ii) of this section and the Midwestern core disaster area as 
defined in paragraph (f)(5)(iii) of this section.
    (ii) Hurricane Katrina core disaster area. The term Hurricane 
Katrina core disaster area means the portion of the Hurricane Katrina 
disaster area designated by the President to warrant individual or 
individual and public assistance from the federal government under the 
Stafford Act.
    (iii) Midwestern core disaster area. The term Midwestern core 
disaster area means the portion of the Midwestern disaster area 
designated by the President to warrant individual or individual and 
public assistance from the federal government under the Stafford Act for 
damages attributable to the severe storms, tornados, or flooding in the 
Midwestern disaster area.

[[Page 849]]

    (g) Examples. The provisions of this section are illustrated by the 
following examples. In each example, a taxpayer provides housing within 
the meaning of paragraph (b) of this section in, or on the site of, the 
taxpayer's principal residence for a period of at least 60 consecutive 
days (the 60th day being in the applicable taxable year) for each 
displaced individual, none of whom is a spouse or dependent of the 
taxpayer. The examples are as follows:

    Example 1. Taxpayer A provides housing to N, a Hurricane Katrina 
displaced individual, from September 1, 2005, until March 10, 2006. 
Under paragraphs (a) and (c)(3) of this section, A may reduce A's 
taxable income by $500 on A's income tax return for calendar year 2005 
or 2006 (but not both) for providing housing to N.
    Example 2. The facts are the same as in Example 1, except that A and 
A's unmarried roommate B are co-lessees of their principal residence. 
Both A and B provide housing to N. Under paragraphs (a) and (c)(4) of 
this section, either A or B, but not both, may reduce taxable income by 
$500 for 2005 or 2006 for providing housing to N. If A or B reduces 
taxable income for 2005 for providing housing to N, neither A nor B may 
reduce taxable income for 2006 for providing housing to N.
    Example 3. The facts are the same as in Example 2, except that in 
2009 A and B provide housing to N, who in 2009 is a Midwestern disaster 
displaced individual. Under paragraph (c)(5) of this section, the 
limitation of paragraph (c)(4) of this section applies separately to 
each disaster. Therefore, either A or B may reduce taxable income by 
$500 for 2009 for providing housing to N.
    Example 4. During 2008, unmarried roommates and co-lessees C and D 
provide housing to eight Midwestern disaster displaced individuals. 
Under paragraphs (a) and (c)(1)(i)(A) of this section, C may reduce 
taxable income by $2,000 on C's 2008 income tax return for providing 
housing to any four of these displaced individuals and D may reduce 
taxable income by $2,000 on D's 2008 income tax return for providing 
housing to the other four displaced individuals.
    Example 5. (i) In 2008, a married couple, H and W, provide housing 
to a Midwestern disaster displaced individual, O. H and W file their 
2008 income tax return as married filing jointly. Under paragraphs (a) 
and (c)(4) of this section, H and W may reduce taxable income by $500 on 
their 2008 income tax return for providing housing to O.
    (ii) In 2009, H and W provide housing to O and to another Midwestern 
disaster displaced individual, P. H and W file their 2009 income tax 
returns as married filing separately. Because H and W reduced their 2008 
taxable income for providing housing to O, under paragraph (c)(3) of 
this section, neither H nor W may reduce taxable income on their 2009 
income tax returns for providing housing to O. Under paragraphs (a) and 
(c)(4) of this section, either H or W but not both, may reduce taxable 
income by $500 on his or her 2009 income tax return for providing 
housing to P.
    Example 6. The facts are the same as in Example 5, except that in 
2009 H and W provide housing to five Midwestern disaster displaced 
individuals in addition to O. H and W together may reduce taxable income 
on their 2009 income tax returns by a total of $2,000 for the Midwestern 
disaster displaced individuals (other than O). Under paragraph 
(c)(1)(i)(B) of this section, H and W may allocate the $2,000 in 
increments of $500 between their separate returns. For example, either 
one may reduce taxable income by $500 and the other may reduce taxable 
income by $1,500, or H and W each may reduce taxable income by $1,000.
    (h) Effective/applicability date. This section applies for taxable 
years ending after December 11, 2006.

[T.D. 9474, 74 FR 66049, Dec. 14, 2009]

[[Page 851]]



                              FINDING AIDS




  --------------------------------------------------------------------

  A list of CFR titles, subtitles, chapters, subchapters and parts and 
an alphabetical list of agencies publishing in the CFR are included in 
the CFR Index and Finding Aids volume of the Code of Federal Regulations 
which is published separately and revised annually.


  Table of CFR Titles and Chapters
  Alphabetical List of Agencies Appearing in the CFR
  Table of OMB Control Numbers
  List of CFR Sections Affected

[[Page 853]]



                    Table of CFR Titles and Chapters




                      (Revised as of April 1, 2020)

                      Title 1--General Provisions

         I  Administrative Committee of the Federal Register 
                (Parts 1--49)
        II  Office of the Federal Register (Parts 50--299)
       III  Administrative Conference of the United States (Parts 
                300--399)
        IV  Miscellaneous Agencies (Parts 400--599)
        VI  National Capital Planning Commission (Parts 600--699)

                    Title 2--Grants and Agreements

            Subtitle A--Office of Management and Budget Guidance 
                for Grants and Agreements
         I  Office of Management and Budget Governmentwide 
                Guidance for Grants and Agreements (Parts 2--199)
        II  Office of Management and Budget Guidance (Parts 200--
                299)
            Subtitle B--Federal Agency Regulations for Grants and 
                Agreements
       III  Department of Health and Human Services (Parts 300--
                399)
        IV  Department of Agriculture (Parts 400--499)
        VI  Department of State (Parts 600--699)
       VII  Agency for International Development (Parts 700--799)
      VIII  Department of Veterans Affairs (Parts 800--899)
        IX  Department of Energy (Parts 900--999)
         X  Department of the Treasury (Parts 1000--1099)
        XI  Department of Defense (Parts 1100--1199)
       XII  Department of Transportation (Parts 1200--1299)
      XIII  Department of Commerce (Parts 1300--1399)
       XIV  Department of the Interior (Parts 1400--1499)
        XV  Environmental Protection Agency (Parts 1500--1599)
     XVIII  National Aeronautics and Space Administration (Parts 
                1800--1899)
        XX  United States Nuclear Regulatory Commission (Parts 
                2000--2099)
      XXII  Corporation for National and Community Service (Parts 
                2200--2299)
     XXIII  Social Security Administration (Parts 2300--2399)
      XXIV  Department of Housing and Urban Development (Parts 
                2400--2499)
       XXV  National Science Foundation (Parts 2500--2599)
      XXVI  National Archives and Records Administration (Parts 
                2600--2699)

[[Page 854]]

     XXVII  Small Business Administration (Parts 2700--2799)
    XXVIII  Department of Justice (Parts 2800--2899)
      XXIX  Department of Labor (Parts 2900--2999)
       XXX  Department of Homeland Security (Parts 3000--3099)
      XXXI  Institute of Museum and Library Services (Parts 3100--
                3199)
     XXXII  National Endowment for the Arts (Parts 3200--3299)
    XXXIII  National Endowment for the Humanities (Parts 3300--
                3399)
     XXXIV  Department of Education (Parts 3400--3499)
      XXXV  Export-Import Bank of the United States (Parts 3500--
                3599)
     XXXVI  Office of National Drug Control Policy, Executive 
                Office of the President (Parts 3600--3699)
    XXXVII  Peace Corps (Parts 3700--3799)
     LVIII  Election Assistance Commission (Parts 5800--5899)
       LIX  Gulf Coast Ecosystem Restoration Council (Parts 5900--
                5999)

                        Title 3--The President

         I  Executive Office of the President (Parts 100--199)

                           Title 4--Accounts

         I  Government Accountability Office (Parts 1--199)

                   Title 5--Administrative Personnel

         I  Office of Personnel Management (Parts 1--1199)
        II  Merit Systems Protection Board (Parts 1200--1299)
       III  Office of Management and Budget (Parts 1300--1399)
        IV  Office of Personnel Management and Office of the 
                Director of National Intelligence (Parts 1400--
                1499)
         V  The International Organizations Employees Loyalty 
                Board (Parts 1500--1599)
        VI  Federal Retirement Thrift Investment Board (Parts 
                1600--1699)
      VIII  Office of Special Counsel (Parts 1800--1899)
        IX  Appalachian Regional Commission (Parts 1900--1999)
        XI  Armed Forces Retirement Home (Parts 2100--2199)
       XIV  Federal Labor Relations Authority, General Counsel of 
                the Federal Labor Relations Authority and Federal 
                Service Impasses Panel (Parts 2400--2499)
       XVI  Office of Government Ethics (Parts 2600--2699)
       XXI  Department of the Treasury (Parts 3100--3199)
      XXII  Federal Deposit Insurance Corporation (Parts 3200--
                3299)
     XXIII  Department of Energy (Parts 3300--3399)
      XXIV  Federal Energy Regulatory Commission (Parts 3400--
                3499)
       XXV  Department of the Interior (Parts 3500--3599)
      XXVI  Department of Defense (Parts 3600--3699)

[[Page 855]]

    XXVIII  Department of Justice (Parts 3800--3899)
      XXIX  Federal Communications Commission (Parts 3900--3999)
       XXX  Farm Credit System Insurance Corporation (Parts 4000--
                4099)
      XXXI  Farm Credit Administration (Parts 4100--4199)
    XXXIII  U.S. International Development Finance Corporation 
                (Parts 4300--4399)
     XXXIV  Securities and Exchange Commission (Parts 4400--4499)
      XXXV  Office of Personnel Management (Parts 4500--4599)
     XXXVI  Department of Homeland Security (Parts 4600--4699)
    XXXVII  Federal Election Commission (Parts 4700--4799)
        XL  Interstate Commerce Commission (Parts 5000--5099)
       XLI  Commodity Futures Trading Commission (Parts 5100--
                5199)
      XLII  Department of Labor (Parts 5200--5299)
     XLIII  National Science Foundation (Parts 5300--5399)
       XLV  Department of Health and Human Services (Parts 5500--
                5599)
      XLVI  Postal Rate Commission (Parts 5600--5699)
     XLVII  Federal Trade Commission (Parts 5700--5799)
    XLVIII  Nuclear Regulatory Commission (Parts 5800--5899)
      XLIX  Federal Labor Relations Authority (Parts 5900--5999)
         L  Department of Transportation (Parts 6000--6099)
       LII  Export-Import Bank of the United States (Parts 6200--
                6299)
      LIII  Department of Education (Parts 6300--6399)
       LIV  Environmental Protection Agency (Parts 6400--6499)
        LV  National Endowment for the Arts (Parts 6500--6599)
       LVI  National Endowment for the Humanities (Parts 6600--
                6699)
      LVII  General Services Administration (Parts 6700--6799)
     LVIII  Board of Governors of the Federal Reserve System 
                (Parts 6800--6899)
       LIX  National Aeronautics and Space Administration (Parts 
                6900--6999)
        LX  United States Postal Service (Parts 7000--7099)
       LXI  National Labor Relations Board (Parts 7100--7199)
      LXII  Equal Employment Opportunity Commission (Parts 7200--
                7299)
     LXIII  Inter-American Foundation (Parts 7300--7399)
      LXIV  Merit Systems Protection Board (Parts 7400--7499)
       LXV  Department of Housing and Urban Development (Parts 
                7500--7599)
      LXVI  National Archives and Records Administration (Parts 
                7600--7699)
     LXVII  Institute of Museum and Library Services (Parts 7700--
                7799)
    LXVIII  Commission on Civil Rights (Parts 7800--7899)
      LXIX  Tennessee Valley Authority (Parts 7900--7999)
       LXX  Court Services and Offender Supervision Agency for the 
                District of Columbia (Parts 8000--8099)
      LXXI  Consumer Product Safety Commission (Parts 8100--8199)
    LXXIII  Department of Agriculture (Parts 8300--8399)

[[Page 856]]

     LXXIV  Federal Mine Safety and Health Review Commission 
                (Parts 8400--8499)
     LXXVI  Federal Retirement Thrift Investment Board (Parts 
                8600--8699)
    LXXVII  Office of Management and Budget (Parts 8700--8799)
      LXXX  Federal Housing Finance Agency (Parts 9000--9099)
   LXXXIII  Special Inspector General for Afghanistan 
                Reconstruction (Parts 9300--9399)
    LXXXIV  Bureau of Consumer Financial Protection (Parts 9400--
                9499)
    LXXXVI  National Credit Union Administration (Parts 9600--
                9699)
     XCVII  Department of Homeland Security Human Resources 
                Management System (Department of Homeland 
                Security--Office of Personnel Management) (Parts 
                9700--9799)
    XCVIII  Council of the Inspectors General on Integrity and 
                Efficiency (Parts 9800--9899)
      XCIX  Military Compensation and Retirement Modernization 
                Commission (Parts 9900--9999)
         C  National Council on Disability (Parts 10000--10049)
        CI  National Mediation Board (Part 10101)

                      Title 6--Domestic Security

         I  Department of Homeland Security, Office of the 
                Secretary (Parts 1--199)
         X  Privacy and Civil Liberties Oversight Board (Parts 
                1000--1099)

                         Title 7--Agriculture

            Subtitle A--Office of the Secretary of Agriculture 
                (Parts 0--26)
            Subtitle B--Regulations of the Department of 
                Agriculture
         I  Agricultural Marketing Service (Standards, 
                Inspections, Marketing Practices), Department of 
                Agriculture (Parts 27--209)
        II  Food and Nutrition Service, Department of Agriculture 
                (Parts 210--299)
       III  Animal and Plant Health Inspection Service, Department 
                of Agriculture (Parts 300--399)
        IV  Federal Crop Insurance Corporation, Department of 
                Agriculture (Parts 400--499)
         V  Agricultural Research Service, Department of 
                Agriculture (Parts 500--599)
        VI  Natural Resources Conservation Service, Department of 
                Agriculture (Parts 600--699)
       VII  Farm Service Agency, Department of Agriculture (Parts 
                700--799)
      VIII  Agricultural Marketing Service (Federal Grain 
                Inspection Service, Fair Trade Practices Program), 
                Department of Agriculture (Parts 800--899)

[[Page 857]]

        IX  Agricultural Marketing Service (Marketing Agreements 
                and Orders; Fruits, Vegetables, Nuts), Department 
                of Agriculture (Parts 900--999)
         X  Agricultural Marketing Service (Marketing Agreements 
                and Orders; Milk), Department of Agriculture 
                (Parts 1000--1199)
        XI  Agricultural Marketing Service (Marketing Agreements 
                and Orders; Miscellaneous Commodities), Department 
                of Agriculture (Parts 1200--1299)
       XIV  Commodity Credit Corporation, Department of 
                Agriculture (Parts 1400--1499)
        XV  Foreign Agricultural Service, Department of 
                Agriculture (Parts 1500--1599)
       XVI  [Reserved]
      XVII  Rural Utilities Service, Department of Agriculture 
                (Parts 1700--1799)
     XVIII  Rural Housing Service, Rural Business-Cooperative 
                Service, Rural Utilities Service, and Farm Service 
                Agency, Department of Agriculture (Parts 1800--
                2099)
        XX  [Reserved]
       XXV  Office of Advocacy and Outreach, Department of 
                Agriculture (Parts 2500--2599)
      XXVI  Office of Inspector General, Department of Agriculture 
                (Parts 2600--2699)
     XXVII  Office of Information Resources Management, Department 
                of Agriculture (Parts 2700--2799)
    XXVIII  Office of Operations, Department of Agriculture (Parts 
                2800--2899)
      XXIX  Office of Energy Policy and New Uses, Department of 
                Agriculture (Parts 2900--2999)
       XXX  Office of the Chief Financial Officer, Department of 
                Agriculture (Parts 3000--3099)
      XXXI  Office of Environmental Quality, Department of 
                Agriculture (Parts 3100--3199)
     XXXII  Office of Procurement and Property Management, 
                Department of Agriculture (Parts 3200--3299)
    XXXIII  Office of Transportation, Department of Agriculture 
                (Parts 3300--3399)
     XXXIV  National Institute of Food and Agriculture (Parts 
                3400--3499)
      XXXV  Rural Housing Service, Department of Agriculture 
                (Parts 3500--3599)
     XXXVI  National Agricultural Statistics Service, Department 
                of Agriculture (Parts 3600--3699)
    XXXVII  Economic Research Service, Department of Agriculture 
                (Parts 3700--3799)
   XXXVIII  World Agricultural Outlook Board, Department of 
                Agriculture (Parts 3800--3899)
       XLI  [Reserved]
      XLII  Rural Business-Cooperative Service and Rural Utilities 
                Service, Department of Agriculture (Parts 4200--
                4299)

[[Page 858]]

                    Title 8--Aliens and Nationality

         I  Department of Homeland Security (Parts 1--499)
         V  Executive Office for Immigration Review, Department of 
                Justice (Parts 1000--1399)

                 Title 9--Animals and Animal Products

         I  Animal and Plant Health Inspection Service, Department 
                of Agriculture (Parts 1--199)
        II  Agricultural Marketing Service (Federal Grain 
                Inspection Service, Fair Trade Practices Program), 
                Department of Agriculture (Parts 200--299)
       III  Food Safety and Inspection Service, Department of 
                Agriculture (Parts 300--599)

                           Title 10--Energy

         I  Nuclear Regulatory Commission (Parts 0--199)
        II  Department of Energy (Parts 200--699)
       III  Department of Energy (Parts 700--999)
         X  Department of Energy (General Provisions) (Parts 
                1000--1099)
      XIII  Nuclear Waste Technical Review Board (Parts 1300--
                1399)
      XVII  Defense Nuclear Facilities Safety Board (Parts 1700--
                1799)
     XVIII  Northeast Interstate Low-Level Radioactive Waste 
                Commission (Parts 1800--1899)

                      Title 11--Federal Elections

         I  Federal Election Commission (Parts 1--9099)
        II  Election Assistance Commission (Parts 9400--9499)

                      Title 12--Banks and Banking

         I  Comptroller of the Currency, Department of the 
                Treasury (Parts 1--199)
        II  Federal Reserve System (Parts 200--299)
       III  Federal Deposit Insurance Corporation (Parts 300--399)
        IV  Export-Import Bank of the United States (Parts 400--
                499)
         V  (Parts 500--599) [Reserved]
        VI  Farm Credit Administration (Parts 600--699)
       VII  National Credit Union Administration (Parts 700--799)
      VIII  Federal Financing Bank (Parts 800--899)
        IX  Federal Housing Finance Board (Parts 900--999)
         X  Bureau of Consumer Financial Protection (Parts 1000--
                1099)
        XI  Federal Financial Institutions Examination Council 
                (Parts 1100--1199)
       XII  Federal Housing Finance Agency (Parts 1200--1299)
      XIII  Financial Stability Oversight Council (Parts 1300--
                1399)

[[Page 859]]

       XIV  Farm Credit System Insurance Corporation (Parts 1400--
                1499)
        XV  Department of the Treasury (Parts 1500--1599)
       XVI  Office of Financial Research (Parts 1600--1699)
      XVII  Office of Federal Housing Enterprise Oversight, 
                Department of Housing and Urban Development (Parts 
                1700--1799)
     XVIII  Community Development Financial Institutions Fund, 
                Department of the Treasury (Parts 1800--1899)

               Title 13--Business Credit and Assistance

         I  Small Business Administration (Parts 1--199)
       III  Economic Development Administration, Department of 
                Commerce (Parts 300--399)
        IV  Emergency Steel Guarantee Loan Board (Parts 400--499)
         V  Emergency Oil and Gas Guaranteed Loan Board (Parts 
                500--599)

                    Title 14--Aeronautics and Space

         I  Federal Aviation Administration, Department of 
                Transportation (Parts 1--199)
        II  Office of the Secretary, Department of Transportation 
                (Aviation Proceedings) (Parts 200--399)
       III  Commercial Space Transportation, Federal Aviation 
                Administration, Department of Transportation 
                (Parts 400--1199)
         V  National Aeronautics and Space Administration (Parts 
                1200--1299)
        VI  Air Transportation System Stabilization (Parts 1300--
                1399)

                 Title 15--Commerce and Foreign Trade

            Subtitle A--Office of the Secretary of Commerce (Parts 
                0--29)
            Subtitle B--Regulations Relating to Commerce and 
                Foreign Trade
         I  Bureau of the Census, Department of Commerce (Parts 
                30--199)
        II  National Institute of Standards and Technology, 
                Department of Commerce (Parts 200--299)
       III  International Trade Administration, Department of 
                Commerce (Parts 300--399)
        IV  Foreign-Trade Zones Board, Department of Commerce 
                (Parts 400--499)
       VII  Bureau of Industry and Security, Department of 
                Commerce (Parts 700--799)
      VIII  Bureau of Economic Analysis, Department of Commerce 
                (Parts 800--899)
        IX  National Oceanic and Atmospheric Administration, 
                Department of Commerce (Parts 900--999)
        XI  National Technical Information Service, Department of 
                Commerce (Parts 1100--1199)

[[Page 860]]

      XIII  East-West Foreign Trade Board (Parts 1300--1399)
       XIV  Minority Business Development Agency (Parts 1400--
                1499)
            Subtitle C--Regulations Relating to Foreign Trade 
                Agreements
        XX  Office of the United States Trade Representative 
                (Parts 2000--2099)
            Subtitle D--Regulations Relating to Telecommunications 
                and Information
     XXIII  National Telecommunications and Information 
                Administration, Department of Commerce (Parts 
                2300--2399) [Reserved]

                    Title 16--Commercial Practices

         I  Federal Trade Commission (Parts 0--999)
        II  Consumer Product Safety Commission (Parts 1000--1799)

             Title 17--Commodity and Securities Exchanges

         I  Commodity Futures Trading Commission (Parts 1--199)
        II  Securities and Exchange Commission (Parts 200--399)
        IV  Department of the Treasury (Parts 400--499)

          Title 18--Conservation of Power and Water Resources

         I  Federal Energy Regulatory Commission, Department of 
                Energy (Parts 1--399)
       III  Delaware River Basin Commission (Parts 400--499)
        VI  Water Resources Council (Parts 700--799)
      VIII  Susquehanna River Basin Commission (Parts 800--899)
      XIII  Tennessee Valley Authority (Parts 1300--1399)

                       Title 19--Customs Duties

         I  U.S. Customs and Border Protection, Department of 
                Homeland Security; Department of the Treasury 
                (Parts 0--199)
        II  United States International Trade Commission (Parts 
                200--299)
       III  International Trade Administration, Department of 
                Commerce (Parts 300--399)
        IV  U.S. Immigration and Customs Enforcement, Department 
                of Homeland Security (Parts 400--599) [Reserved]

                     Title 20--Employees' Benefits

         I  Office of Workers' Compensation Programs, Department 
                of Labor (Parts 1--199)
        II  Railroad Retirement Board (Parts 200--399)
       III  Social Security Administration (Parts 400--499)

[[Page 861]]

        IV  Employees' Compensation Appeals Board, Department of 
                Labor (Parts 500--599)
         V  Employment and Training Administration, Department of 
                Labor (Parts 600--699)
        VI  Office of Workers' Compensation Programs, Department 
                of Labor (Parts 700--799)
       VII  Benefits Review Board, Department of Labor (Parts 
                800--899)
      VIII  Joint Board for the Enrollment of Actuaries (Parts 
                900--999)
        IX  Office of the Assistant Secretary for Veterans' 
                Employment and Training Service, Department of 
                Labor (Parts 1000--1099)

                       Title 21--Food and Drugs

         I  Food and Drug Administration, Department of Health and 
                Human Services (Parts 1--1299)
        II  Drug Enforcement Administration, Department of Justice 
                (Parts 1300--1399)
       III  Office of National Drug Control Policy (Parts 1400--
                1499)

                      Title 22--Foreign Relations

         I  Department of State (Parts 1--199)
        II  Agency for International Development (Parts 200--299)
       III  Peace Corps (Parts 300--399)
        IV  International Joint Commission, United States and 
                Canada (Parts 400--499)
         V  Broadcasting Board of Governors (Parts 500--599)
       VII  Overseas Private Investment Corporation (Parts 700--
                799)
        IX  Foreign Service Grievance Board (Parts 900--999)
         X  Inter-American Foundation (Parts 1000--1099)
        XI  International Boundary and Water Commission, United 
                States and Mexico, United States Section (Parts 
                1100--1199)
       XII  United States International Development Cooperation 
                Agency (Parts 1200--1299)
      XIII  Millennium Challenge Corporation (Parts 1300--1399)
       XIV  Foreign Service Labor Relations Board; Federal Labor 
                Relations Authority; General Counsel of the 
                Federal Labor Relations Authority; and the Foreign 
                Service Impasse Disputes Panel (Parts 1400--1499)
        XV  African Development Foundation (Parts 1500--1599)
       XVI  Japan-United States Friendship Commission (Parts 
                1600--1699)
      XVII  United States Institute of Peace (Parts 1700--1799)

                          Title 23--Highways

         I  Federal Highway Administration, Department of 
                Transportation (Parts 1--999)

[[Page 862]]

        II  National Highway Traffic Safety Administration and 
                Federal Highway Administration, Department of 
                Transportation (Parts 1200--1299)
       III  National Highway Traffic Safety Administration, 
                Department of Transportation (Parts 1300--1399)

                Title 24--Housing and Urban Development

            Subtitle A--Office of the Secretary, Department of 
                Housing and Urban Development (Parts 0--99)
            Subtitle B--Regulations Relating to Housing and Urban 
                Development
         I  Office of Assistant Secretary for Equal Opportunity, 
                Department of Housing and Urban Development (Parts 
                100--199)
        II  Office of Assistant Secretary for Housing-Federal 
                Housing Commissioner, Department of Housing and 
                Urban Development (Parts 200--299)
       III  Government National Mortgage Association, Department 
                of Housing and Urban Development (Parts 300--399)
        IV  Office of Housing and Office of Multifamily Housing 
                Assistance Restructuring, Department of Housing 
                and Urban Development (Parts 400--499)
         V  Office of Assistant Secretary for Community Planning 
                and Development, Department of Housing and Urban 
                Development (Parts 500--599)
        VI  Office of Assistant Secretary for Community Planning 
                and Development, Department of Housing and Urban 
                Development (Parts 600--699) [Reserved]
       VII  Office of the Secretary, Department of Housing and 
                Urban Development (Housing Assistance Programs and 
                Public and Indian Housing Programs) (Parts 700--
                799)
      VIII  Office of the Assistant Secretary for Housing--Federal 
                Housing Commissioner, Department of Housing and 
                Urban Development (Section 8 Housing Assistance 
                Programs, Section 202 Direct Loan Program, Section 
                202 Supportive Housing for the Elderly Program and 
                Section 811 Supportive Housing for Persons With 
                Disabilities Program) (Parts 800--899)
        IX  Office of Assistant Secretary for Public and Indian 
                Housing, Department of Housing and Urban 
                Development (Parts 900--1699)
       XII  Office of Inspector General, Department of Housing and 
                Urban Development (Parts 2000--2099)
        XV  Emergency Mortgage Insurance and Loan Programs, 
                Department of Housing and Urban Development (Parts 
                2700--2799) [Reserved]
        XX  Office of Assistant Secretary for Housing--Federal 
                Housing Commissioner, Department of Housing and 
                Urban Development (Parts 3200--3899)
      XXIV  Board of Directors of the HOPE for Homeowners Program 
                (Parts 4000--4099) [Reserved]
       XXV  Neighborhood Reinvestment Corporation (Parts 4100--
                4199)

[[Page 863]]

                           Title 25--Indians

         I  Bureau of Indian Affairs, Department of the Interior 
                (Parts 1--299)
        II  Indian Arts and Crafts Board, Department of the 
                Interior (Parts 300--399)
       III  National Indian Gaming Commission, Department of the 
                Interior (Parts 500--599)
        IV  Office of Navajo and Hopi Indian Relocation (Parts 
                700--899)
         V  Bureau of Indian Affairs, Department of the Interior, 
                and Indian Health Service, Department of Health 
                and Human Services (Part 900--999)
        VI  Office of the Assistant Secretary, Indian Affairs, 
                Department of the Interior (Parts 1000--1199)
       VII  Office of the Special Trustee for American Indians, 
                Department of the Interior (Parts 1200--1299)

                      Title 26--Internal Revenue

         I  Internal Revenue Service, Department of the Treasury 
                (Parts 1--End)

           Title 27--Alcohol, Tobacco Products and Firearms

         I  Alcohol and Tobacco Tax and Trade Bureau, Department 
                of the Treasury (Parts 1--399)
        II  Bureau of Alcohol, Tobacco, Firearms, and Explosives, 
                Department of Justice (Parts 400--699)

                   Title 28--Judicial Administration

         I  Department of Justice (Parts 0--299)
       III  Federal Prison Industries, Inc., Department of Justice 
                (Parts 300--399)
         V  Bureau of Prisons, Department of Justice (Parts 500--
                599)
        VI  Offices of Independent Counsel, Department of Justice 
                (Parts 600--699)
       VII  Office of Independent Counsel (Parts 700--799)
      VIII  Court Services and Offender Supervision Agency for the 
                District of Columbia (Parts 800--899)
        IX  National Crime Prevention and Privacy Compact Council 
                (Parts 900--999)
        XI  Department of Justice and Department of State (Parts 
                1100--1199)

                            Title 29--Labor

            Subtitle A--Office of the Secretary of Labor (Parts 
                0--99)
            Subtitle B--Regulations Relating to Labor
         I  National Labor Relations Board (Parts 100--199)

[[Page 864]]

        II  Office of Labor-Management Standards, Department of 
                Labor (Parts 200--299)
       III  National Railroad Adjustment Board (Parts 300--399)
        IV  Office of Labor-Management Standards, Department of 
                Labor (Parts 400--499)
         V  Wage and Hour Division, Department of Labor (Parts 
                500--899)
        IX  Construction Industry Collective Bargaining Commission 
                (Parts 900--999)
         X  National Mediation Board (Parts 1200--1299)
       XII  Federal Mediation and Conciliation Service (Parts 
                1400--1499)
       XIV  Equal Employment Opportunity Commission (Parts 1600--
                1699)
      XVII  Occupational Safety and Health Administration, 
                Department of Labor (Parts 1900--1999)
        XX  Occupational Safety and Health Review Commission 
                (Parts 2200--2499)
       XXV  Employee Benefits Security Administration, Department 
                of Labor (Parts 2500--2599)
     XXVII  Federal Mine Safety and Health Review Commission 
                (Parts 2700--2799)
        XL  Pension Benefit Guaranty Corporation (Parts 4000--
                4999)

                      Title 30--Mineral Resources

         I  Mine Safety and Health Administration, Department of 
                Labor (Parts 1--199)
        II  Bureau of Safety and Environmental Enforcement, 
                Department of the Interior (Parts 200--299)
        IV  Geological Survey, Department of the Interior (Parts 
                400--499)
         V  Bureau of Ocean Energy Management, Department of the 
                Interior (Parts 500--599)
       VII  Office of Surface Mining Reclamation and Enforcement, 
                Department of the Interior (Parts 700--999)
       XII  Office of Natural Resources Revenue, Department of the 
                Interior (Parts 1200--1299)

                 Title 31--Money and Finance: Treasury

            Subtitle A--Office of the Secretary of the Treasury 
                (Parts 0--50)
            Subtitle B--Regulations Relating to Money and Finance
         I  Monetary Offices, Department of the Treasury (Parts 
                51--199)
        II  Fiscal Service, Department of the Treasury (Parts 
                200--399)
        IV  Secret Service, Department of the Treasury (Parts 
                400--499)
         V  Office of Foreign Assets Control, Department of the 
                Treasury (Parts 500--599)
        VI  Bureau of Engraving and Printing, Department of the 
                Treasury (Parts 600--699)
       VII  Federal Law Enforcement Training Center, Department of 
                the Treasury (Parts 700--799)

[[Page 865]]

      VIII  Office of Investment Security, Department of the 
                Treasury (Parts 800--899)
        IX  Federal Claims Collection Standards (Department of the 
                Treasury--Department of Justice) (Parts 900--999)
         X  Financial Crimes Enforcement Network, Department of 
                the Treasury (Parts 1000--1099)

                      Title 32--National Defense

            Subtitle A--Department of Defense
         I  Office of the Secretary of Defense (Parts 1--399)
         V  Department of the Army (Parts 400--699)
        VI  Department of the Navy (Parts 700--799)
       VII  Department of the Air Force (Parts 800--1099)
            Subtitle B--Other Regulations Relating to National 
                Defense
       XII  Department of Defense, Defense Logistics Agency (Parts 
                1200--1299)
       XVI  Selective Service System (Parts 1600--1699)
      XVII  Office of the Director of National Intelligence (Parts 
                1700--1799)
     XVIII  National Counterintelligence Center (Parts 1800--1899)
       XIX  Central Intelligence Agency (Parts 1900--1999)
        XX  Information Security Oversight Office, National 
                Archives and Records Administration (Parts 2000--
                2099)
       XXI  National Security Council (Parts 2100--2199)
      XXIV  Office of Science and Technology Policy (Parts 2400--
                2499)
     XXVII  Office for Micronesian Status Negotiations (Parts 
                2700--2799)
    XXVIII  Office of the Vice President of the United States 
                (Parts 2800--2899)

               Title 33--Navigation and Navigable Waters

         I  Coast Guard, Department of Homeland Security (Parts 
                1--199)
        II  Corps of Engineers, Department of the Army, Department 
                of Defense (Parts 200--399)
        IV  Saint Lawrence Seaway Development Corporation, 
                Department of Transportation (Parts 400--499)

                          Title 34--Education

            Subtitle A--Office of the Secretary, Department of 
                Education (Parts 1--99)
            Subtitle B--Regulations of the Offices of the 
                Department of Education
         I  Office for Civil Rights, Department of Education 
                (Parts 100--199)
        II  Office of Elementary and Secondary Education, 
                Department of Education (Parts 200--299)

[[Page 866]]

       III  Office of Special Education and Rehabilitative 
                Services, Department of Education (Parts 300--399)
        IV  Office of Career, Technical and Adult Education, 
                Department of Education (Parts 400--499)
         V  Office of Bilingual Education and Minority Languages 
                Affairs, Department of Education (Parts 500--599) 
                [Reserved]
        VI  Office of Postsecondary Education, Department of 
                Education (Parts 600--699)
       VII  Office of Educational Research and Improvement, 
                Department of Education (Parts 700--799) 
                [Reserved]
            Subtitle C--Regulations Relating to Education
        XI  (Parts 1100--1199) [Reserved]
       XII  National Council on Disability (Parts 1200--1299)

                          Title 35 [Reserved]

             Title 36--Parks, Forests, and Public Property

         I  National Park Service, Department of the Interior 
                (Parts 1--199)
        II  Forest Service, Department of Agriculture (Parts 200--
                299)
       III  Corps of Engineers, Department of the Army (Parts 
                300--399)
        IV  American Battle Monuments Commission (Parts 400--499)
         V  Smithsonian Institution (Parts 500--599)
        VI  [Reserved]
       VII  Library of Congress (Parts 700--799)
      VIII  Advisory Council on Historic Preservation (Parts 800--
                899)
        IX  Pennsylvania Avenue Development Corporation (Parts 
                900--999)
         X  Presidio Trust (Parts 1000--1099)
        XI  Architectural and Transportation Barriers Compliance 
                Board (Parts 1100--1199)
       XII  National Archives and Records Administration (Parts 
                1200--1299)
        XV  Oklahoma City National Memorial Trust (Parts 1500--
                1599)
       XVI  Morris K. Udall Scholarship and Excellence in National 
                Environmental Policy Foundation (Parts 1600--1699)

             Title 37--Patents, Trademarks, and Copyrights

         I  United States Patent and Trademark Office, Department 
                of Commerce (Parts 1--199)
        II  U.S. Copyright Office, Library of Congress (Parts 
                200--299)
       III  Copyright Royalty Board, Library of Congress (Parts 
                300--399)
        IV  National Institute of Standards and Technology, 
                Department of Commerce (Parts 400--599)

[[Page 867]]

           Title 38--Pensions, Bonuses, and Veterans' Relief

         I  Department of Veterans Affairs (Parts 0--199)
        II  Armed Forces Retirement Home (Parts 200--299)

                       Title 39--Postal Service

         I  United States Postal Service (Parts 1--999)
       III  Postal Regulatory Commission (Parts 3000--3099)

                  Title 40--Protection of Environment

         I  Environmental Protection Agency (Parts 1--1099)
        IV  Environmental Protection Agency and Department of 
                Justice (Parts 1400--1499)
         V  Council on Environmental Quality (Parts 1500--1599)
        VI  Chemical Safety and Hazard Investigation Board (Parts 
                1600--1699)
       VII  Environmental Protection Agency and Department of 
                Defense; Uniform National Discharge Standards for 
                Vessels of the Armed Forces (Parts 1700--1799)
      VIII  Gulf Coast Ecosystem Restoration Council (Parts 1800--
                1899)

          Title 41--Public Contracts and Property Management

            Subtitle A--Federal Procurement Regulations System 
                [Note]
            Subtitle B--Other Provisions Relating to Public 
                Contracts
        50  Public Contracts, Department of Labor (Parts 50-1--50-
                999)
        51  Committee for Purchase From People Who Are Blind or 
                Severely Disabled (Parts 51-1--51-99)
        60  Office of Federal Contract Compliance Programs, Equal 
                Employment Opportunity, Department of Labor (Parts 
                60-1--60-999)
        61  Office of the Assistant Secretary for Veterans' 
                Employment and Training Service, Department of 
                Labor (Parts 61-1--61-999)
   62--100  [Reserved]
            Subtitle C--Federal Property Management Regulations 
                System
       101  Federal Property Management Regulations (Parts 101-1--
                101-99)
       102  Federal Management Regulation (Parts 102-1--102-299)
  103--104  [Reserved]
       105  General Services Administration (Parts 105-1--105-999)
       109  Department of Energy Property Management Regulations 
                (Parts 109-1--109-99)
       114  Department of the Interior (Parts 114-1--114-99)
       115  Environmental Protection Agency (Parts 115-1--115-99)
       128  Department of Justice (Parts 128-1--128-99)
  129--200  [Reserved]
            Subtitle D--Other Provisions Relating to Property 
                Management [Reserved]

[[Page 868]]

            Subtitle E--Federal Information Resources Management 
                Regulations System [Reserved]
            Subtitle F--Federal Travel Regulation System
       300  General (Parts 300-1--300-99)
       301  Temporary Duty (TDY) Travel Allowances (Parts 301-1--
                301-99)
       302  Relocation Allowances (Parts 302-1--302-99)
       303  Payment of Expenses Connected with the Death of 
                Certain Employees (Part 303-1--303-99)
       304  Payment of Travel Expenses from a Non-Federal Source 
                (Parts 304-1--304-99)

                        Title 42--Public Health

         I  Public Health Service, Department of Health and Human 
                Services (Parts 1--199)
        IV  Centers for Medicare & Medicaid Services, Department 
                of Health and Human Services (Parts 400--699)
         V  Office of Inspector General-Health Care, Department of 
                Health and Human Services (Parts 1000--1099)

                   Title 43--Public Lands: Interior

            Subtitle A--Office of the Secretary of the Interior 
                (Parts 1--199)
            Subtitle B--Regulations Relating to Public Lands
         I  Bureau of Reclamation, Department of the Interior 
                (Parts 400--999)
        II  Bureau of Land Management, Department of the Interior 
                (Parts 1000--9999)
       III  Utah Reclamation Mitigation and Conservation 
                Commission (Parts 10000--10099)

             Title 44--Emergency Management and Assistance

         I  Federal Emergency Management Agency, Department of 
                Homeland Security (Parts 0--399)
        IV  Department of Commerce and Department of 
                Transportation (Parts 400--499)

                       Title 45--Public Welfare

            Subtitle A--Department of Health and Human Services 
                (Parts 1--199)
            Subtitle B--Regulations Relating to Public Welfare
        II  Office of Family Assistance (Assistance Programs), 
                Administration for Children and Families, 
                Department of Health and Human Services (Parts 
                200--299)

[[Page 869]]

       III  Office of Child Support Enforcement (Child Support 
                Enforcement Program), Administration for Children 
                and Families, Department of Health and Human 
                Services (Parts 300--399)
        IV  Office of Refugee Resettlement, Administration for 
                Children and Families, Department of Health and 
                Human Services (Parts 400--499)
         V  Foreign Claims Settlement Commission of the United 
                States, Department of Justice (Parts 500--599)
        VI  National Science Foundation (Parts 600--699)
       VII  Commission on Civil Rights (Parts 700--799)
      VIII  Office of Personnel Management (Parts 800--899)
        IX  Denali Commission (Parts 900--999)
         X  Office of Community Services, Administration for 
                Children and Families, Department of Health and 
                Human Services (Parts 1000--1099)
        XI  National Foundation on the Arts and the Humanities 
                (Parts 1100--1199)
       XII  Corporation for National and Community Service (Parts 
                1200--1299)
      XIII  Administration for Children and Families, Department 
                of Health and Human Services (Parts 1300--1399)
       XVI  Legal Services Corporation (Parts 1600--1699)
      XVII  National Commission on Libraries and Information 
                Science (Parts 1700--1799)
     XVIII  Harry S. Truman Scholarship Foundation (Parts 1800--
                1899)
       XXI  Commission of Fine Arts (Parts 2100--2199)
     XXIII  Arctic Research Commission (Parts 2300--2399)
      XXIV  James Madison Memorial Fellowship Foundation (Parts 
                2400--2499)
       XXV  Corporation for National and Community Service (Parts 
                2500--2599)

                          Title 46--Shipping

         I  Coast Guard, Department of Homeland Security (Parts 
                1--199)
        II  Maritime Administration, Department of Transportation 
                (Parts 200--399)
       III  Coast Guard (Great Lakes Pilotage), Department of 
                Homeland Security (Parts 400--499)
        IV  Federal Maritime Commission (Parts 500--599)

                      Title 47--Telecommunication

         I  Federal Communications Commission (Parts 0--199)
        II  Office of Science and Technology Policy and National 
                Security Council (Parts 200--299)
       III  National Telecommunications and Information 
                Administration, Department of Commerce (Parts 
                300--399)

[[Page 870]]

        IV  National Telecommunications and Information 
                Administration, Department of Commerce, and 
                National Highway Traffic Safety Administration, 
                Department of Transportation (Parts 400--499)
         V  The First Responder Network Authority (Parts 500--599)

           Title 48--Federal Acquisition Regulations System

         1  Federal Acquisition Regulation (Parts 1--99)
         2  Defense Acquisition Regulations System, Department of 
                Defense (Parts 200--299)
         3  Department of Health and Human Services (Parts 300--
                399)
         4  Department of Agriculture (Parts 400--499)
         5  General Services Administration (Parts 500--599)
         6  Department of State (Parts 600--699)
         7  Agency for International Development (Parts 700--799)
         8  Department of Veterans Affairs (Parts 800--899)
         9  Department of Energy (Parts 900--999)
        10  Department of the Treasury (Parts 1000--1099)
        12  Department of Transportation (Parts 1200--1299)
        13  Department of Commerce (Parts 1300--1399)
        14  Department of the Interior (Parts 1400--1499)
        15  Environmental Protection Agency (Parts 1500--1599)
        16  Office of Personnel Management, Federal Employees 
                Health Benefits Acquisition Regulation (Parts 
                1600--1699)
        17  Office of Personnel Management (Parts 1700--1799)
        18  National Aeronautics and Space Administration (Parts 
                1800--1899)
        19  Broadcasting Board of Governors (Parts 1900--1999)
        20  Nuclear Regulatory Commission (Parts 2000--2099)
        21  Office of Personnel Management, Federal Employees 
                Group Life Insurance Federal Acquisition 
                Regulation (Parts 2100--2199)
        23  Social Security Administration (Parts 2300--2399)
        24  Department of Housing and Urban Development (Parts 
                2400--2499)
        25  National Science Foundation (Parts 2500--2599)
        28  Department of Justice (Parts 2800--2899)
        29  Department of Labor (Parts 2900--2999)
        30  Department of Homeland Security, Homeland Security 
                Acquisition Regulation (HSAR) (Parts 3000--3099)
        34  Department of Education Acquisition Regulation (Parts 
                3400--3499)
        51  Department of the Army Acquisition Regulations (Parts 
                5100--5199) [Reserved]
        52  Department of the Navy Acquisition Regulations (Parts 
                5200--5299)
        53  Department of the Air Force Federal Acquisition 
                Regulation Supplement (Parts 5300--5399) 
                [Reserved]

[[Page 871]]

        54  Defense Logistics Agency, Department of Defense (Parts 
                5400--5499)
        57  African Development Foundation (Parts 5700--5799)
        61  Civilian Board of Contract Appeals, General Services 
                Administration (Parts 6100--6199)
        99  Cost Accounting Standards Board, Office of Federal 
                Procurement Policy, Office of Management and 
                Budget (Parts 9900--9999)

                       Title 49--Transportation

            Subtitle A--Office of the Secretary of Transportation 
                (Parts 1--99)
            Subtitle B--Other Regulations Relating to 
                Transportation
         I  Pipeline and Hazardous Materials Safety 
                Administration, Department of Transportation 
                (Parts 100--199)
        II  Federal Railroad Administration, Department of 
                Transportation (Parts 200--299)
       III  Federal Motor Carrier Safety Administration, 
                Department of Transportation (Parts 300--399)
        IV  Coast Guard, Department of Homeland Security (Parts 
                400--499)
         V  National Highway Traffic Safety Administration, 
                Department of Transportation (Parts 500--599)
        VI  Federal Transit Administration, Department of 
                Transportation (Parts 600--699)
       VII  National Railroad Passenger Corporation (AMTRAK) 
                (Parts 700--799)
      VIII  National Transportation Safety Board (Parts 800--999)
         X  Surface Transportation Board (Parts 1000--1399)
        XI  Research and Innovative Technology Administration, 
                Department of Transportation (Parts 1400--1499) 
                [Reserved]
       XII  Transportation Security Administration, Department of 
                Homeland Security (Parts 1500--1699)

                   Title 50--Wildlife and Fisheries

         I  United States Fish and Wildlife Service, Department of 
                the Interior (Parts 1--199)
        II  National Marine Fisheries Service, National Oceanic 
                and Atmospheric Administration, Department of 
                Commerce (Parts 200--299)
       III  International Fishing and Related Activities (Parts 
                300--399)
        IV  Joint Regulations (United States Fish and Wildlife 
                Service, Department of the Interior and National 
                Marine Fisheries Service, National Oceanic and 
                Atmospheric Administration, Department of 
                Commerce); Endangered Species Committee 
                Regulations (Parts 400--499)
         V  Marine Mammal Commission (Parts 500--599)

[[Page 872]]

        VI  Fishery Conservation and Management, National Oceanic 
                and Atmospheric Administration, Department of 
                Commerce (Parts 600--699)

[[Page 873]]





           Alphabetical List of Agencies Appearing in the CFR




                      (Revised as of April 1, 2020)

                                                  CFR Title, Subtitle or 
                     Agency                               Chapter

Administrative Conference of the United States    1, III
Advisory Council on Historic Preservation         36, VIII
Advocacy and Outreach, Office of                  7, XXV
Afghanistan Reconstruction, Special Inspector     5, LXXXIII
     General for
African Development Foundation                    22, XV
  Federal Acquisition Regulation                  48, 57
Agency for International Development              2, VII; 22, II
  Federal Acquisition Regulation                  48, 7
Agricultural Marketing Service                    7, I, VIII, IX, X, XI; 9, 
                                                  II
Agricultural Research Service                     7, V
Agriculture, Department of                        2, IV; 5, LXXIII
  Advocacy and Outreach, Office of                7, XXV
  Agricultural Marketing Service                  7, I, VIII, IX, X, XI; 9, 
                                                  II
  Agricultural Research Service                   7, V
  Animal and Plant Health Inspection Service      7, III; 9, I
  Chief Financial Officer, Office of              7, XXX
  Commodity Credit Corporation                    7, XIV
  Economic Research Service                       7, XXXVII
  Energy Policy and New Uses, Office of           2, IX; 7, XXIX
  Environmental Quality, Office of                7, XXXI
  Farm Service Agency                             7, VII, XVIII
  Federal Acquisition Regulation                  48, 4
  Federal Crop Insurance Corporation              7, IV
  Food and Nutrition Service                      7, II
  Food Safety and Inspection Service              9, III
  Foreign Agricultural Service                    7, XV
  Forest Service                                  36, II
  Information Resources Management, Office of     7, XXVII
  Inspector General, Office of                    7, XXVI
  National Agricultural Library                   7, XLI
  National Agricultural Statistics Service        7, XXXVI
  National Institute of Food and Agriculture      7, XXXIV
  Natural Resources Conservation Service          7, VI
  Operations, Office of                           7, XXVIII
  Procurement and Property Management, Office of  7, XXXII
  Rural Business-Cooperative Service              7, XVIII, XLII
  Rural Development Administration                7, XLII
  Rural Housing Service                           7, XVIII, XXXV
  Rural Utilities Service                         7, XVII, XVIII, XLII
  Secretary of Agriculture, Office of             7, Subtitle A
  Transportation, Office of                       7, XXXIII
  World Agricultural Outlook Board                7, XXXVIII
Air Force, Department of                          32, VII
  Federal Acquisition Regulation Supplement       48, 53
Air Transportation Stabilization Board            14, VI
Alcohol and Tobacco Tax and Trade Bureau          27, I
Alcohol, Tobacco, Firearms, and Explosives,       27, II
     Bureau of
AMTRAK                                            49, VII
American Battle Monuments Commission              36, IV
American Indians, Office of the Special Trustee   25, VII
Animal and Plant Health Inspection Service        7, III; 9, I
Appalachian Regional Commission                   5, IX
Architectural and Transportation Barriers         36, XI
   Compliance Board
[[Page 874]]

Arctic Research Commission                        45, XXIII
Armed Forces Retirement Home                      5, XI; 38, II
Army, Department of                               32, V
  Engineers, Corps of                             33, II; 36, III
  Federal Acquisition Regulation                  48, 51
Bilingual Education and Minority Languages        34, V
     Affairs, Office of
Blind or Severely Disabled, Committee for         41, 51
     Purchase from People Who Are
Broadcasting Board of Governors                   22, V
  Federal Acquisition Regulation                  48, 19
Career, Technical, and Adult Education, Office    34, IV
     of
Census Bureau                                     15, I
Centers for Medicare & Medicaid Services          42, IV
Central Intelligence Agency                       32, XIX
Chemical Safety and Hazard Investigation Board    40, VI
Chief Financial Officer, Office of                7, XXX
Child Support Enforcement, Office of              45, III
Children and Families, Administration for         45, II, III, IV, X, XIII
Civil Rights, Commission on                       5, LXVIII; 45, VII
Civil Rights, Office for                          34, I
Council of the Inspectors General on Integrity    5, XCVIII
     and Efficiency
Court Services and Offender Supervision Agency    5, LXX
     for the District of Columbia
Coast Guard                                       33, I; 46, I; 49, IV
Coast Guard (Great Lakes Pilotage)                46, III
Commerce, Department of                           2, XIII; 44, IV; 50, VI
  Census Bureau                                   15, I
  Economic Analysis, Bureau of                    15, VIII
  Economic Development Administration             13, III
  Emergency Management and Assistance             44, IV
  Federal Acquisition Regulation                  48, 13
  Foreign-Trade Zones Board                       15, IV
  Industry and Security, Bureau of                15, VII
  International Trade Administration              15, III; 19, III
  National Institute of Standards and Technology  15, II; 37, IV
  National Marine Fisheries Service               50, II, IV
  National Oceanic and Atmospheric                15, IX; 50, II, III, IV, 
       Administration                             VI
  National Technical Information Service          15, XI
  National Telecommunications and Information     15, XXIII; 47, III, IV
       Administration
  National Weather Service                        15, IX
  Patent and Trademark Office, United States      37, I
  Secretary of Commerce, Office of                15, Subtitle A
Commercial Space Transportation                   14, III
Commodity Credit Corporation                      7, XIV
Commodity Futures Trading Commission              5, XLI; 17, I
Community Planning and Development, Office of     24, V, VI
     Assistant Secretary for
Community Services, Office of                     45, X
Comptroller of the Currency                       12, I
Construction Industry Collective Bargaining       29, IX
     Commission
Consumer Financial Protection Bureau              5, LXXXIV; 12, X
Consumer Product Safety Commission                5, LXXI; 16, II
Copyright Royalty Board                           37, III
Corporation for National and Community Service    2, XXII; 45, XII, XXV
Cost Accounting Standards Board                   48, 99
Council on Environmental Quality                  40, V
Court Services and Offender Supervision Agency    5, LXX; 28, VIII
     for the District of Columbia
Customs and Border Protection                     19, I
Defense Contract Audit Agency                     32, I
Defense, Department of                            2, XI; 5, XXVI; 32, 
                                                  Subtitle A; 40, VII
  Advanced Research Projects Agency               32, I
  Air Force Department                            32, VII
  Army Department                                 32, V; 33, II; 36, III; 
                                                  48, 51

[[Page 875]]

  Defense Acquisition Regulations System          48, 2
  Defense Intelligence Agency                     32, I
  Defense Logistics Agency                        32, I, XII; 48, 54
  Engineers, Corps of                             33, II; 36, III
  National Imagery and Mapping Agency             32, I
  Navy, Department of                             32, VI; 48, 52
  Secretary of Defense, Office of                 2, XI; 32, I
Defense Contract Audit Agency                     32, I
Defense Intelligence Agency                       32, I
Defense Logistics Agency                          32, XII; 48, 54
Defense Nuclear Facilities Safety Board           10, XVII
Delaware River Basin Commission                   18, III
Denali Commission                                 45, IX
Disability, National Council on                   5, C; 34, XII
District of Columbia, Court Services and          5, LXX; 28, VIII
     Offender Supervision Agency for the
Drug Enforcement Administration                   21, II
East-West Foreign Trade Board                     15, XIII
Economic Analysis, Bureau of                      15, VIII
Economic Development Administration               13, III
Economic Research Service                         7, XXXVII
Education, Department of                          2, XXXIV; 5, LIII
  Bilingual Education and Minority Languages      34, V
       Affairs, Office of
  Career, Technical, and Adult Education, Office  34, IV
       of
  Civil Rights, Office for                        34, I
  Educational Research and Improvement, Office    34, VII
       of
  Elementary and Secondary Education, Office of   34, II
  Federal Acquisition Regulation                  48, 34
  Postsecondary Education, Office of              34, VI
  Secretary of Education, Office of               34, Subtitle A
  Special Education and Rehabilitative Services,  34, III
       Office of
Educational Research and Improvement, Office of   34, VII
Election Assistance Commission                    2, LVIII; 11, II
Elementary and Secondary Education, Office of     34, II
Emergency Oil and Gas Guaranteed Loan Board       13, V
Emergency Steel Guarantee Loan Board              13, IV
Employee Benefits Security Administration         29, XXV
Employees' Compensation Appeals Board             20, IV
Employees Loyalty Board                           5, V
Employment and Training Administration            20, V
Employment Policy, National Commission for        1, IV
Employment Standards Administration               20, VI
Endangered Species Committee                      50, IV
Energy, Department of                             2, IX; 5, XXIII; 10, II, 
                                                  III, X
  Federal Acquisition Regulation                  48, 9
  Federal Energy Regulatory Commission            5, XXIV; 18, I
  Property Management Regulations                 41, 109
Energy, Office of                                 7, XXIX
Engineers, Corps of                               33, II; 36, III
Engraving and Printing, Bureau of                 31, VI
Environmental Protection Agency                   2, XV; 5, LIV; 40, I, IV, 
                                                  VII
  Federal Acquisition Regulation                  48, 15
  Property Management Regulations                 41, 115
Environmental Quality, Office of                  7, XXXI
Equal Employment Opportunity Commission           5, LXII; 29, XIV
Equal Opportunity, Office of Assistant Secretary  24, I
     for
Executive Office of the President                 3, I
  Environmental Quality, Council on               40, V
  Management and Budget, Office of                2, Subtitle A; 5, III, 
                                                  LXXVII; 14, VI; 48, 99
  National Drug Control Policy, Office of         2, XXXVI; 21, III
  National Security Council                       32, XXI; 47, II
  Presidential Documents                          3
  Science and Technology Policy, Office of        32, XXIV; 47, II

[[Page 876]]

  Trade Representative, Office of the United      15, XX
       States
Export-Import Bank of the United States           2, XXXV; 5, LII; 12, IV
Family Assistance, Office of                      45, II
Farm Credit Administration                        5, XXXI; 12, VI
Farm Credit System Insurance Corporation          5, XXX; 12, XIV
Farm Service Agency                               7, VII, XVIII
Federal Acquisition Regulation                    48, 1
Federal Aviation Administration                   14, I
  Commercial Space Transportation                 14, III
Federal Claims Collection Standards               31, IX
Federal Communications Commission                 5, XXIX; 47, I
Federal Contract Compliance Programs, Office of   41, 60
Federal Crop Insurance Corporation                7, IV
Federal Deposit Insurance Corporation             5, XXII; 12, III
Federal Election Commission                       5, XXXVII; 11, I
Federal Emergency Management Agency               44, I
Federal Employees Group Life Insurance Federal    48, 21
     Acquisition Regulation
Federal Employees Health Benefits Acquisition     48, 16
     Regulation
Federal Energy Regulatory Commission              5, XXIV; 18, I
Federal Financial Institutions Examination        12, XI
     Council
Federal Financing Bank                            12, VIII
Federal Highway Administration                    23, I, II
Federal Home Loan Mortgage Corporation            1, IV
Federal Housing Enterprise Oversight Office       12, XVII
Federal Housing Finance Agency                    5, LXXX; 12, XII
Federal Housing Finance Board                     12, IX
Federal Labor Relations Authority                 5, XIV, XLIX; 22, XIV
Federal Law Enforcement Training Center           31, VII
Federal Management Regulation                     41, 102
Federal Maritime Commission                       46, IV
Federal Mediation and Conciliation Service        29, XII
Federal Mine Safety and Health Review Commission  5, LXXIV; 29, XXVII
Federal Motor Carrier Safety Administration       49, III
Federal Prison Industries, Inc.                   28, III
Federal Procurement Policy Office                 48, 99
Federal Property Management Regulations           41, 101
Federal Railroad Administration                   49, II
Federal Register, Administrative Committee of     1, I
Federal Register, Office of                       1, II
Federal Reserve System                            12, II
  Board of Governors                              5, LVIII
Federal Retirement Thrift Investment Board        5, VI, LXXVI
Federal Service Impasses Panel                    5, XIV
Federal Trade Commission                          5, XLVII; 16, I
Federal Transit Administration                    49, VI
Federal Travel Regulation System                  41, Subtitle F
Financial Crimes Enforcement Network              31, X
Financial Research Office                         12, XVI
Financial Stability Oversight Council             12, XIII
Fine Arts, Commission of                          45, XXI
Fiscal Service                                    31, II
Fish and Wildlife Service, United States          50, I, IV
Food and Drug Administration                      21, I
Food and Nutrition Service                        7, II
Food Safety and Inspection Service                9, III
Foreign Agricultural Service                      7, XV
Foreign Assets Control, Office of                 31, V
Foreign Claims Settlement Commission of the       45, V
     United States
Foreign Service Grievance Board                   22, IX
Foreign Service Impasse Disputes Panel            22, XIV
Foreign Service Labor Relations Board             22, XIV
Foreign-Trade Zones Board                         15, IV
Forest Service                                    36, II
General Services Administration                   5, LVII; 41, 105
  Contract Appeals, Board of                      48, 61
  Federal Acquisition Regulation                  48, 5

[[Page 877]]

  Federal Management Regulation                   41, 102
  Federal Property Management Regulations         41, 101
  Federal Travel Regulation System                41, Subtitle F
  General                                         41, 300
  Payment From a Non-Federal Source for Travel    41, 304
       Expenses
  Payment of Expenses Connected With the Death    41, 303
       of Certain Employees
  Relocation Allowances                           41, 302
  Temporary Duty (TDY) Travel Allowances          41, 301
Geological Survey                                 30, IV
Government Accountability Office                  4, I
Government Ethics, Office of                      5, XVI
Government National Mortgage Association          24, III
Grain Inspection, Packers and Stockyards          7, VIII; 9, II
     Administration
Gulf Coast Ecosystem Restoration Council          2, LIX; 40, VIII
Harry S. Truman Scholarship Foundation            45, XVIII
Health and Human Services, Department of          2, III; 5, XLV; 45, 
                                                  Subtitle A
  Centers for Medicare & Medicaid Services        42, IV
  Child Support Enforcement, Office of            45, III
  Children and Families, Administration for       45, II, III, IV, X, XIII
  Community Services, Office of                   45, X
  Family Assistance, Office of                    45, II
  Federal Acquisition Regulation                  48, 3
  Food and Drug Administration                    21, I
  Indian Health Service                           25, V
  Inspector General (Health Care), Office of      42, V
  Public Health Service                           42, I
  Refugee Resettlement, Office of                 45, IV
Homeland Security, Department of                  2, XXX; 5, XXXVI; 6, I; 8, 
                                                  I
  Coast Guard                                     33, I; 46, I; 49, IV
  Coast Guard (Great Lakes Pilotage)              46, III
  Customs and Border Protection                   19, I
  Federal Emergency Management Agency             44, I
  Human Resources Management and Labor Relations  5, XCVII
       Systems
  Immigration and Customs Enforcement Bureau      19, IV
  Transportation Security Administration          49, XII
HOPE for Homeowners Program, Board of Directors   24, XXIV
     of
Housing and Urban Development, Department of      2, XXIV; 5, LXV; 24, 
                                                  Subtitle B
  Community Planning and Development, Office of   24, V, VI
       Assistant Secretary for
  Equal Opportunity, Office of Assistant          24, I
       Secretary for
  Federal Acquisition Regulation                  48, 24
  Federal Housing Enterprise Oversight, Office    12, XVII
       of
  Government National Mortgage Association        24, III
  Housing--Federal Housing Commissioner, Office   24, II, VIII, X, XX
       of Assistant Secretary for
  Housing, Office of, and Multifamily Housing     24, IV
       Assistance Restructuring, Office of
  Inspector General, Office of                    24, XII
  Public and Indian Housing, Office of Assistant  24, IX
       Secretary for
  Secretary, Office of                            24, Subtitle A, VII
Housing--Federal Housing Commissioner, Office of  24, II, VIII, X, XX
     Assistant Secretary for
Housing, Office of, and Multifamily Housing       24, IV
     Assistance Restructuring, Office of
Immigration and Customs Enforcement Bureau        19, IV
Immigration Review, Executive Office for          8, V
Independent Counsel, Office of                    28, VII
Independent Counsel, Offices of                   28, VI
Indian Affairs, Bureau of                         25, I, V
Indian Affairs, Office of the Assistant           25, VI
     Secretary
Indian Arts and Crafts Board                      25, II
Indian Health Service                             25, V

[[Page 878]]

Industry and Security, Bureau of                  15, VII
Information Resources Management, Office of       7, XXVII
Information Security Oversight Office, National   32, XX
     Archives and Records Administration
Inspector General
  Agriculture Department                          7, XXVI
  Health and Human Services Department            42, V
  Housing and Urban Development Department        24, XII, XV
Institute of Peace, United States                 22, XVII
Inter-American Foundation                         5, LXIII; 22, X
Interior, Department of                           2, XIV
  American Indians, Office of the Special         25, VII
       Trustee
  Endangered Species Committee                    50, IV
  Federal Acquisition Regulation                  48, 14
  Federal Property Management Regulations System  41, 114
  Fish and Wildlife Service, United States        50, I, IV
  Geological Survey                               30, IV
  Indian Affairs, Bureau of                       25, I, V
  Indian Affairs, Office of the Assistant         25, VI
       Secretary
  Indian Arts and Crafts Board                    25, II
  Land Management, Bureau of                      43, II
  National Indian Gaming Commission               25, III
  National Park Service                           36, I
  Natural Resource Revenue, Office of             30, XII
  Ocean Energy Management, Bureau of              30, V
  Reclamation, Bureau of                          43, I
  Safety and Enforcement Bureau, Bureau of        30, II
  Secretary of the Interior, Office of            2, XIV; 43, Subtitle A
  Surface Mining Reclamation and Enforcement,     30, VII
       Office of
Internal Revenue Service                          26, I
International Boundary and Water Commission,      22, XI
     United States and Mexico, United States 
     Section
International Development, United States Agency   22, II
     for
  Federal Acquisition Regulation                  48, 7
International Development Cooperation Agency,     22, XII
     United States
International Development Finance Corporation,    5, XXXIII; 22, VII
     U.S.
International Joint Commission, United States     22, IV
     and Canada
International Organizations Employees Loyalty     5, V
     Board
International Trade Administration                15, III; 19, III
International Trade Commission, United States     19, II
Interstate Commerce Commission                    5, XL
Investment Security, Office of                    31, VIII
James Madison Memorial Fellowship Foundation      45, XXIV
Japan-United States Friendship Commission         22, XVI
Joint Board for the Enrollment of Actuaries       20, VIII
Justice, Department of                            2, XXVIII; 5, XXVIII; 28, 
                                                  I, XI; 40, IV
  Alcohol, Tobacco, Firearms, and Explosives,     27, II
       Bureau of
  Drug Enforcement Administration                 21, II
  Federal Acquisition Regulation                  48, 28
  Federal Claims Collection Standards             31, IX
  Federal Prison Industries, Inc.                 28, III
  Foreign Claims Settlement Commission of the     45, V
       United States
  Immigration Review, Executive Office for        8, V
  Independent Counsel, Offices of                 28, VI
  Prisons, Bureau of                              28, V
  Property Management Regulations                 41, 128
Labor, Department of                              2, XXIX; 5, XLII
  Employee Benefits Security Administration       29, XXV
  Employees' Compensation Appeals Board           20, IV
  Employment and Training Administration          20, V
  Employment Standards Administration             20, VI
  Federal Acquisition Regulation                  48, 29
  Federal Contract Compliance Programs, Office    41, 60
       of
  Federal Procurement Regulations System          41, 50

[[Page 879]]

  Labor-Management Standards, Office of           29, II, IV
  Mine Safety and Health Administration           30, I
  Occupational Safety and Health Administration   29, XVII
  Public Contracts                                41, 50
  Secretary of Labor, Office of                   29, Subtitle A
  Veterans' Employment and Training Service,      41, 61; 20, IX
       Office of the Assistant Secretary for
  Wage and Hour Division                          29, V
  Workers' Compensation Programs, Office of       20, I, VII
Labor-Management Standards, Office of             29, II, IV
Land Management, Bureau of                        43, II
Legal Services Corporation                        45, XVI
Libraries and Information Science, National       45, XVII
     Commission on
Library of Congress                               36, VII
  Copyright Royalty Board                         37, III
  U.S. Copyright Office                           37, II
Management and Budget, Office of                  5, III, LXXVII; 14, VI; 
                                                  48, 99
Marine Mammal Commission                          50, V
Maritime Administration                           46, II
Merit Systems Protection Board                    5, II, LXIV
Micronesian Status Negotiations, Office for       32, XXVII
Military Compensation and Retirement              5, XCIX
     Modernization Commission
Millennium Challenge Corporation                  22, XIII
Mine Safety and Health Administration             30, I
Minority Business Development Agency              15, XIV
Miscellaneous Agencies                            1, IV
Monetary Offices                                  31, I
Morris K. Udall Scholarship and Excellence in     36, XVI
     National Environmental Policy Foundation
Museum and Library Services, Institute of         2, XXXI
National Aeronautics and Space Administration     2, XVIII; 5, LIX; 14, V
  Federal Acquisition Regulation                  48, 18
National Agricultural Library                     7, XLI
National Agricultural Statistics Service          7, XXXVI
National and Community Service, Corporation for   2, XXII; 45, XII, XXV
National Archives and Records Administration      2, XXVI; 5, LXVI; 36, XII
  Information Security Oversight Office           32, XX
National Capital Planning Commission              1, IV, VI
National Counterintelligence Center               32, XVIII
National Credit Union Administration              5, LXXXVI; 12, VII
National Crime Prevention and Privacy Compact     28, IX
     Council
National Drug Control Policy, Office of           2, XXXVI; 21, III
National Endowment for the Arts                   2, XXXII
National Endowment for the Humanities             2, XXXIII
National Foundation on the Arts and the           45, XI
     Humanities
National Geospatial-Intelligence Agency           32, I
National Highway Traffic Safety Administration    23, II, III; 47, VI; 49, V
National Imagery and Mapping Agency               32, I
National Indian Gaming Commission                 25, III
National Institute of Food and Agriculture        7, XXXIV
National Institute of Standards and Technology    15, II; 37, IV
National Intelligence, Office of Director of      5, IV; 32, XVII
National Labor Relations Board                    5, LXI; 29, I
National Marine Fisheries Service                 50, II, IV
National Mediation Board                          5, CI; 29, X
National Oceanic and Atmospheric Administration   15, IX; 50, II, III, IV, 
                                                  VI
National Park Service                             36, I
National Railroad Adjustment Board                29, III
National Railroad Passenger Corporation (AMTRAK)  49, VII
National Science Foundation                       2, XXV; 5, XLIII; 45, VI
  Federal Acquisition Regulation                  48, 25
National Security Council                         32, XXI
National Security Council and Office of Science   47, II
   and Technology Policy
[[Page 880]]

National Technical Information Service            15, XI
National Telecommunications and Information       15, XXIII; 47, III, IV, V
     Administration
National Transportation Safety Board              49, VIII
Natural Resources Conservation Service            7, VI
Natural Resource Revenue, Office of               30, XII
Navajo and Hopi Indian Relocation, Office of      25, IV
Navy, Department of                               32, VI
  Federal Acquisition Regulation                  48, 52
Neighborhood Reinvestment Corporation             24, XXV
Northeast Interstate Low-Level Radioactive Waste  10, XVIII
     Commission
Nuclear Regulatory Commission                     2, XX; 5, XLVIII; 10, I
  Federal Acquisition Regulation                  48, 20
Occupational Safety and Health Administration     29, XVII
Occupational Safety and Health Review Commission  29, XX
Ocean Energy Management, Bureau of                30, V
Oklahoma City National Memorial Trust             36, XV
Operations Office                                 7, XXVIII
Patent and Trademark Office, United States        37, I
Payment From a Non-Federal Source for Travel      41, 304
     Expenses
Payment of Expenses Connected With the Death of   41, 303
     Certain Employees
Peace Corps                                       2, XXXVII; 22, III
Pennsylvania Avenue Development Corporation       36, IX
Pension Benefit Guaranty Corporation              29, XL
Personnel Management, Office of                   5, I, IV, XXXV; 45, VIII
  Human Resources Management and Labor Relations  5, XCVII
       Systems, Department of Homeland Security
  Federal Acquisition Regulation                  48, 17
  Federal Employees Group Life Insurance Federal  48, 21
       Acquisition Regulation
  Federal Employees Health Benefits Acquisition   48, 16
       Regulation
Pipeline and Hazardous Materials Safety           49, I
     Administration
Postal Regulatory Commission                      5, XLVI; 39, III
Postal Service, United States                     5, LX; 39, I
Postsecondary Education, Office of                34, VI
President's Commission on White House             1, IV
     Fellowships
Presidential Documents                            3
Presidio Trust                                    36, X
Prisons, Bureau of                                28, V
Privacy and Civil Liberties Oversight Board       6, X
Procurement and Property Management, Office of    7, XXXII
Public Contracts, Department of Labor             41, 50
Public and Indian Housing, Office of Assistant    24, IX
     Secretary for
Public Health Service                             42, I
Railroad Retirement Board                         20, II
Reclamation, Bureau of                            43, I
Refugee Resettlement, Office of                   45, IV
Relocation Allowances                             41, 302
Research and Innovative Technology                49, XI
     Administration
Rural Business-Cooperative Service                7, XVIII, XLII
Rural Development Administration                  7, XLII
Rural Housing Service                             7, XVIII, XXXV
Rural Utilities Service                           7, XVII, XVIII, XLII
Safety and Environmental Enforcement, Bureau of   30, II
Saint Lawrence Seaway Development Corporation     33, IV
Science and Technology Policy, Office of          32, XXIV
Science and Technology Policy, Office of, and     47, II
     National Security Council
Secret Service                                    31, IV
Securities and Exchange Commission                5, XXXIV; 17, II
Selective Service System                          32, XVI
Small Business Administration                     2, XXVII; 13, I
Smithsonian Institution                           36, V
Social Security Administration                    2, XXIII; 20, III; 48, 23
Soldiers' and Airmen's Home, United States        5, XI

[[Page 881]]

Special Counsel, Office of                        5, VIII
Special Education and Rehabilitative Services,    34, III
     Office of
State, Department of                              2, VI; 22, I; 28, XI
  Federal Acquisition Regulation                  48, 6
Surface Mining Reclamation and Enforcement,       30, VII
     Office of
Surface Transportation Board                      49, X
Susquehanna River Basin Commission                18, VIII
Tennessee Valley Authority                        5, LXIX; 18, XIII
Trade Representative, United States, Office of    15, XX
Transportation, Department of                     2, XII; 5, L
  Commercial Space Transportation                 14, III
  Emergency Management and Assistance             44, IV
  Federal Acquisition Regulation                  48, 12
  Federal Aviation Administration                 14, I
  Federal Highway Administration                  23, I, II
  Federal Motor Carrier Safety Administration     49, III
  Federal Railroad Administration                 49, II
  Federal Transit Administration                  49, VI
  Maritime Administration                         46, II
  National Highway Traffic Safety Administration  23, II, III; 47, IV; 49, V
  Pipeline and Hazardous Materials Safety         49, I
       Administration
  Saint Lawrence Seaway Development Corporation   33, IV
  Secretary of Transportation, Office of          14, II; 49, Subtitle A
  Transportation Statistics Bureau                49, XI
Transportation, Office of                         7, XXXIII
Transportation Security Administration            49, XII
Transportation Statistics Bureau                  49, XI
Travel Allowances, Temporary Duty (TDY)           41, 301
Treasury, Department of the                       2, X; 5, XXI; 12, XV; 17, 
                                                  IV; 31, IX
  Alcohol and Tobacco Tax and Trade Bureau        27, I
  Community Development Financial Institutions    12, XVIII
       Fund
  Comptroller of the Currency                     12, I
  Customs and Border Protection                   19, I
  Engraving and Printing, Bureau of               31, VI
  Federal Acquisition Regulation                  48, 10
  Federal Claims Collection Standards             31, IX
  Federal Law Enforcement Training Center         31, VII
  Financial Crimes Enforcement Network            31, X
  Fiscal Service                                  31, II
  Foreign Assets Control, Office of               31, V
  Internal Revenue Service                        26, I
  Investment Security, Office of                  31, VIII
  Monetary Offices                                31, I
  Secret Service                                  31, IV
  Secretary of the Treasury, Office of            31, Subtitle A
Truman, Harry S. Scholarship Foundation           45, XVIII
United States and Canada, International Joint     22, IV
     Commission
United States and Mexico, International Boundary  22, XI
     and Water Commission, United States Section
U.S. Copyright Office                             37, II
Utah Reclamation Mitigation and Conservation      43, III
     Commission
Veterans Affairs, Department of                   2, VIII; 38, I
  Federal Acquisition Regulation                  48, 8
Veterans' Employment and Training Service,        41, 61; 20, IX
     Office of the Assistant Secretary for
Vice President of the United States, Office of    32, XXVIII
Wage and Hour Division                            29, V
Water Resources Council                           18, VI
Workers' Compensation Programs, Office of         20, I, VII
World Agricultural Outlook Board                  7, XXXVIII

[[Page 883]]







                      Table of OMB Control Numbers



The OMB control numbers for chapter I of title 26 were consolidated into 
Sec. Sec.  601.9000 and 602.101 at 50 FR 10221, Mar. 14, 1985. At 61 FR 
58008, Nov. 12, 1996, Sec.  601.9000 was removed. Section 602.101 is 
reprinted below for the convenience of the user.



PART 602_OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT--Table of Contents





Sec.  602.101  OMB Control numbers.

    (a) Purpose. This part collects and displays the control numbers 
assigned to collections of information in Internal Revenue Service 
regulations by the Office of Management and Budget (OMB) under the 
Paperwork Reduction Act of 1980. The Internal Revenue Service intends 
that this part comply with the requirements of Sec. Sec.  1320.7(f), 
1320.12, 1320.13, and 1320.14 of 5 CFR part 1320 (OMB regulations 
implementing the Paperwork Reduction Act), for the display of control 
numbers assigned by OMB to collections of information in Internal 
Revenue Service regulations. This part does not display control numbers 
assigned by the Office of Management and Budget to collections of 
information of the Bureau of Alcohol, Tobacco, and Firearms.
    (b) Display.

------------------------------------------------------------------------
                                                             Current OMB
     CFR part or section where identified and described      control No.
------------------------------------------------------------------------
1.1(h)-1(e)................................................    1545-1654
1.25-1T....................................................    1545-0922
                                                               1545-0930
1.25-2T....................................................    1545-0922
                                                               1545-0930
1.25-3T....................................................    1545-0922
                                                               1545-0930
1.25-4T....................................................    1545-0922
1.25-5T....................................................    1545-0922
1.25-6T....................................................    1545-0922
1.25-7T....................................................    1545-0922
1.25-8T....................................................    1545-0922
1.25A-1....................................................    1545-1630
1.28-1.....................................................    1545-0619
1.31-2.....................................................    1545-0074
1.32-2.....................................................    1545-0074
1.32-3.....................................................    1545-1575
1.36B-5....................................................    1545-2232
1.37-1.....................................................    1545-0074
1.37-3.....................................................    1545-0074
1.41-2.....................................................    1545-0619
1.41-3.....................................................    1545-0619
1.41-4A....................................................    1545-0074
1.41-4 (b) and (c).........................................    1545-0074
1.41-8(b)..................................................    1545-1625
1.41-8(d)..................................................    1545-0732
1.41-9.....................................................    1545-0619
1.42-1T....................................................    1545-0984
                                                               1545-0988
1.42-5.....................................................    1545-1357
1.42-6.....................................................    1545-1102
1.42-8.....................................................    1545-1102
1.42-10....................................................    1545-1102
1.42-13....................................................    1545-1357
1.42-14....................................................    1545-1423
1.42-17....................................................    1545-1357
1.42-18....................................................    1545-2088
1.43-3(a)(3)...............................................    1545-1292
1.43-3(b)(3)...............................................    1545-1292
1.44B-1....................................................    1545-0219
1.45D-1....................................................    1545-1765
1.45G-1....................................................    1545-2031
1.46-1.....................................................    1545-0123
                                                               1545-0155
1.46-3.....................................................    1545-0155
1.46-4.....................................................    1545-0155
1.46-5.....................................................    1545-0155
1.46-6.....................................................    1545-0155
1.46-8.....................................................    1545-0155
1.46-9.....................................................    1545-0155
1.46-10....................................................    1545-0118
1.47-1.....................................................    1545-0155
                                                               1545-0166
1.47-3.....................................................    1545-0155
                                                               1545-0166
1.47-4.....................................................    1545-0123
1.47-5.....................................................    1545-0092
1.47-6.....................................................    1545-0099
1.48-3.....................................................    1545-0155
1.48-4.....................................................    1545-0155
                                                               1545-0808
1.48-5.....................................................    1545-0155
1.48-6.....................................................    1545-0155
1.48-12....................................................    1545-0155
                                                               1545-1783
1.50A-1....................................................    1545-0895
1.50A-2....................................................    1545-0895
1.50A-3....................................................    1545-0895
1.50A-4....................................................    1545-0895
1.50A-5....................................................    1545-0895
1.50A-6....................................................    1545-0895
1.50A-7....................................................    1545-0895
1.50B-1....................................................    1545-0895
1.50B-2....................................................    1545-0895
1.50B-3....................................................    1545-0895
1.50B-4....................................................    1545-0895
1.50B-5....................................................    1545-0895
1.51-1.....................................................    1545-0219

[[Page 884]]

 
                                                               1545-0241
                                                               1545-0244
                                                               1545-0797
1.52-2.....................................................    1545-0219
1.52-3.....................................................    1545-0219
1.56(g)-1..................................................    1545-1233
1.57-5.....................................................    1545-0227
1.58-1.....................................................    1545-0175
1.59-1.....................................................    1545-1903
1.61-2.....................................................    1545-0771
1.61-4.....................................................    1545-0187
1.61-15....................................................    1545-0074
1.62-2.....................................................    1545-1148
1.63-1.....................................................    1545-0074
1.66-4.....................................................    1545-1770
1.67-2T....................................................    1545-0110
1.67-3.....................................................    1545-1018
1.67-3T....................................................    1545-0118
1.71-1T....................................................    1545-0074
1.72-4.....................................................    1545-0074
1.72-6.....................................................    1545-0074
1.72-9.....................................................    1545-0074
1.72-17....................................................    1545-0074
1.72-17A...................................................    1545-0074
1.72-18....................................................    1545-0074
1.74-1.....................................................    1545-1100
1.79-2.....................................................    1545-0074
1.79-3.....................................................    1545-0074
1.83-2.....................................................    1545-0074
1.83-5.....................................................    1545-0074
1.83-6.....................................................    1545-1448
1.103-10...................................................    1545-0123
                                                               1545-0940
1.103A-2...................................................    1545-0720
1.105-4....................................................    1545-0074
1.105-5....................................................    1545-0074
1.105-6....................................................    1545-0074
1.108-4....................................................    1545-1539
1.108-5....................................................    1545-1421
1.108-7....................................................    1545-2155
1.108(i)-1.................................................    1545-2147
1.108(i)-2.................................................    1545-2147
1.110-1....................................................    1545-1661
1.117-5....................................................    1545-0869
1.118-2....................................................    1545-1639
1.119-1....................................................    1545-0067
1.120-3....................................................    1545-0057
1.121-1....................................................    1545-0072
1.121-2....................................................    1545-0072
1.121-3....................................................    1545-0072
1.121-4....................................................    1545-0072
                                                               1545-0091
1.121-5....................................................    1545-0072
1.127-2....................................................    1545-0768
1.132-2....................................................    1545-0771
1.132-5....................................................    1545-0771
1.132-9(b).................................................    1545-1676
1.141-1....................................................    1545-1451
1.141-12...................................................    1545-1451
1.142-2....................................................    1545-1451
1.142(f)(4)-1..............................................    1545-1730
1.148-0....................................................    1545-1098
1.148-1....................................................    1545-1098
1.148-2....................................................    1545-1098
                                                               1545-1347
1.148-3....................................................    1545-1098
                                                               1545-1347
1.148-4....................................................    1545-1098
                                                               1545-1347
1.148-5....................................................    1545-1098
                                                               1545-1490
1.148-6....................................................    1545-1098
                                                               1545-1451
1.148-7....................................................    1545-1098
                                                               1545-1347
1.148-8....................................................    1545-1098
1.148-11...................................................    1545-1098
                                                               1545-1347
1.149(e)-1.................................................    1545-0720
1.150-1....................................................    1545-1347
1.151-1....................................................    1545-0074
1.152-3....................................................    1545-0071
                                                               1545-1783
1.152-4....................................................    1545-0074
1.152-4T...................................................    1545-0074
1.162-1....................................................    1545-0139
1.162-2....................................................    1545-0139
1.162-3....................................................    1545-0139
1.162-4....................................................    1545-0139
1.162-5....................................................    1545-0139
1.162-6....................................................    1545-0139
1.162-7....................................................    1545-0139
1.162-8....................................................    1545-0139
1.162-9....................................................    1545-0139
1.162-10...................................................    1545-0139
1.162-11...................................................    1545-0139
1.162-12...................................................    1545-0139
1.162-13...................................................    1545-0139
1.162-14...................................................    1545-0139
1.162-15...................................................    1545-0139
1.162-16...................................................    1545-0139
1.162-17...................................................    1545-0139
1.162-18...................................................    1545-0139
1.162-19...................................................    1545-0139
1.162-20...................................................    1545-0139
1.162-24...................................................    1545-2115
1.162-27...................................................    1545-1466
1.163-5....................................................    1545-0786
                                                               1545-1132
1.163-8T...................................................    1545-0995
1.163-10T..................................................    1545-0074
1.163-13...................................................    1545-1491
1.163(d)-1.................................................    1545-1421
1.165-1....................................................    1545-0177
1.165-2....................................................    1545-0177
1.165-3....................................................    1545-0177
1.165-4....................................................    1545-0177
1.165-5....................................................    1545-0177
1.165-6....................................................    1545-0177
1.165-7....................................................    1545-0177
1.165-8....................................................    1545-0177
1.165-9....................................................    1545-0177
1.165-10...................................................    1545-0177
1.165-11...................................................    1545-0074
                                                               1545-0177
                                                               1545-0786
1.165-12...................................................    1545-0786
1.166-1....................................................    1545-0123
1.166-2....................................................    1545-1254
1.166-4....................................................    1545-0123
1.166-10...................................................    1545-0123
1.167(a)-5T................................................    1545-1021
1.167(a)-7.................................................    1545-0172
1.167(a)-11................................................    1545-0152
                                                               1545-0172
1.167(a)-12................................................    1545-0172
1.167(d)-1.................................................    1545-0172
1.167(e)-1.................................................    1545-0172
1.167(f)-11................................................    1545-0172
1.167(l)-1.................................................    1545-0172
1.168(d)-1.................................................    1545-1146
1.168(i)-1.................................................    1545-1331
1.168-5....................................................    1545-0172
1.169-4....................................................    1545-0172

[[Page 885]]

 
1.170-1....................................................    1545-0074
1.170-2....................................................    1545-0074
1.170-3....................................................    1545-0123
1.170A-1...................................................    1545-0074
1.170A-2...................................................    1545-0074
1.170A-4(A)(b).............................................    1545-0123
1.170A-8...................................................    1545-0074
1.170A-9...................................................    1545-0052
                                                               1545-0074
1.170A-11..................................................    1545-0074
                                                               1545-0123
                                                               1545-1868
1.170A-12..................................................    1545-0020
                                                               1545-0074
1.170A-13..................................................    1545-0074
                                                               1545-0754
                                                               1545-0908
                                                               1545-1431
1.170A-13(f)...............................................    1545-1464
1.170A-14..................................................    1545-0763
1.170A-15..................................................    1545-1953
1.170A-16..................................................    1545-1953
1.170A-17..................................................    1545-1953
1.170A-18..................................................    1545-1953
1.171-4....................................................    1545-1491
1.171-5....................................................    1545-1491
1.172-1....................................................    1545-0172
1.172-13...................................................    1545-0863
1.173-1....................................................    1545-0172
1.174-3....................................................    1545-0152
1.174-4....................................................    1545-0152
1.175-3....................................................    1545-0187
1.175-6....................................................    1545-0152
1.179-2....................................................    1545-1201
1.179-3....................................................    1545-1201
1.179-5....................................................    1545-0172
                                                               1545-1201
1.179B-1T..................................................    1545-2076
1.179C-1...................................................    1545-2103
1.179C-1T..................................................    1545-2103
1.180-2....................................................    1545-0074
1.181-1....................................................    1545-2059
1.181-2....................................................    1545-2059
1.181-3....................................................    1545-2059
1.182-6....................................................    1545-0074
1.183-1....................................................    1545-0195
1.183-2....................................................    1545-0195
1.183-3....................................................    1545-0195
1.183-4....................................................    1545-0195
1.190-3....................................................    1545-0074
1.194-2....................................................    1545-0735
1.194-4....................................................    1545-0735
1.195-1....................................................    1545-1582
1.197-1T...................................................    1545-1425
1.197-2....................................................    1545-1671
1.199-6....................................................    1545-1966
1.213-1....................................................    1545-0074
1.215-1T...................................................    1545-0074
1.217-2....................................................    1545-0182
1.243-3....................................................    1545-0123
1.243-4....................................................    1545-0123
1.243-5....................................................    1545-0123
1.248-1....................................................    1545-0172
1.261-1....................................................    1545-1041
1.263(a)-1.................................................    1545-2248
1.263(a)-3.................................................    1545-2248
1.263(a)-5.................................................    1545-1870
1.263(e)-1.................................................    1545-0123
1.263A-1...................................................    1545-0987
1.263A-1T..................................................    1545-0187
1.263A-2...................................................    1545-0987
1.263A-3...................................................    1545-0987
1.263A-8(b)(2)(iii)........................................    1545-1265
1.263A-9(d)(1).............................................    1545-1265
1.263A-9(f)(1)(ii).........................................    1545-1265
1.263A-9(f)(2)(iv).........................................    1545-1265
1.263A-9(g)(2)(iv)(C)......................................    1545-1265
1.263A-9(g)(3)(iv).........................................    1545-1265
1.265-1....................................................    1545-0074
1.265-2....................................................    1545-0123
1.266-1....................................................    1545-0123
1.267(f)-1.................................................    1545-0885
1.268-1....................................................    1545-0184
1.274-1....................................................    1545-0139
1.274-2....................................................    1545-0139
1.274-3....................................................    1545-0139
1.274-4....................................................    1545-0139
1.274-5....................................................    1545-0771
1.274-5A...................................................    1545-0139
                                                               1545-0771
1.274-5T...................................................    1545-0074
                                                               1545-0172
                                                               1545-0771
1.274-6....................................................    1545-0139
                                                               1545-0771
1.274-6T...................................................    1545-0074
                                                               1545-0771
1.274-7....................................................    1545-0139
1.274-8....................................................    1545-0139
1.279-6....................................................    1545-0123
1.280C-4...................................................    1545-1155
1.280F-3T..................................................    1545-0074
1.280G-1...................................................    1545-1851
1.281-4....................................................    1545-0123
1.302-4....................................................    1545-0074
1.305-3....................................................    1545-0123
1.305-5....................................................    1545-1438
1.307-2....................................................    1545-0074
1.312-15...................................................    1545-0172
1.316-1....................................................    1545-0123
1.331-1....................................................    1545-0074
1.332-4....................................................    1545-0123
1.332-6....................................................    1545-2019
1.336-2....................................................    1545-2125
1.336-4....................................................    1545-2125
1.337(d)-1.................................................    1545-1160
1.337(d)-2.................................................    1545-1160
                                                               1545-1774
1.337(d)-4.................................................    1545-1633
1.337(d)-5.................................................    1545-1672
1.337(d)-6.................................................    1545-1672
1.337(d)-7.................................................    1545-1672
1.338-2....................................................    1545-1658
1.338-5....................................................    1545-1658
1.338-10...................................................    1545-1658
1.338-11...................................................    1545-1990
1.338(h)(10)-1.............................................    1545-1658
1.338(i)-1.................................................    1545-1990
1.351-3....................................................    1545-2019
1.355-5....................................................    1545-2019
1.362-2....................................................    1545-0123
1.362-4....................................................    1545-2247
1.367(a)-1T................................................    1545-0026
1.367(a)-2T................................................    1545-0026
1.367(a)-3.................................................    1545-0026
                                                               1545-1478
1.367(a)-3T................................................    1545-2183
1.367(a)-6T................................................    1545-0026
1.367(a)-7.................................................    1545-2183
1.367(a)-7T................................................    1545-2183
1.367(a)-8.................................................    1545-1271
                                                               1545-2056
                                                               1545-2183
1.367(b)-1.................................................    1545-1271

[[Page 886]]

 
1.367(b)-3T................................................    1545-1666
1.367(d)-1T................................................    1545-0026
1.367(e)-1.................................................    1545-1487
1.367(e)-2.................................................    1545-1487
1.368-1....................................................    1545-1691
1.368-3....................................................    1545-2019
1.371-1....................................................    1545-0123
1.371-2....................................................    1545-0123
1.374-3....................................................    1545-0123
1.381(b)-1.................................................    1545-0123
1.381(c)(4)-1..............................................    1545-0123
                                                               1545-0152
                                                               1545-0879
1.381(c)(5)-1..............................................    1545-0123
                                                               1545-0152
1.381(c)(6)-1..............................................    1545-0123
                                                               1545-0152
1.381(c)(8)-1..............................................    1545-0123
1.381(c)(10)-1.............................................    1545-0123
1.381(c)(11)-1(k)..........................................    1545-0123
1.381(c)(13)-1.............................................    1545-0123
1.381(c)(17)-1.............................................    1545-0045
1.381(c)(22)-1.............................................    1545-1990
1.381(c)(25)-1.............................................    1545-0045
1.382-1T...................................................    1545-0123
1.382-2....................................................    1545-0123
1.382-2T...................................................    1545-0123
1.382-3....................................................    1545-1281
                                                               1545-1345
1.382-4....................................................    1545-1120
1.382-6....................................................    1545-1381
1.382-8....................................................    1545-1434
1.382-9....................................................    1545-1120
                                                               1545-1260
                                                               1545-1275
                                                               1545-1324
1.382-11...................................................    1545-2019
1.382-91...................................................    1545-1260
                                                               1545-1324
1.383-1....................................................    1545-0074
                                                               1545-1120
1.401-1....................................................    1545-0020
                                                               1545-0197
                                                               1545-0200
                                                               1545-0534
                                                               1545-0710
1.401(a)-11................................................    1545-0710
1.401(a)-20................................................    1545-0928
1.401(a)-31................................................    1545-1341
1.401(a)-50................................................    1545-0710
1.401(a)(9)-1..............................................    1545-1573
1.401(a)(9)-3..............................................    1545-1466
1.401(a)(9)-4..............................................    1545-1573
1.401(a)(9)-6..............................................    1545-2234
1.401(a)(31)-1.............................................    1545-1341
1.401(b)-1.................................................    1545-0197
1.401(f)-1.................................................    1545-0710
1.401(k)-1.................................................    1545-1039
                                                               1545-1069
                                                               1545-1669
                                                               1545-1930
1.401(k)-2.................................................    1545-1669
1.401(k)-3.................................................    1545-1669
1.401(k)-4.................................................    1545-1669
1.401(m)-3.................................................    1545-1699
1.401-14...................................................    1545-0710
1.402(c)-2.................................................    1545-1341
1.402(f)-1.................................................    1545-1341
                                                               1545-1632
1.402A-1...................................................    1545-1992
1.403(b)-1.................................................    1545-0710
1.403(b)-3.................................................    1545-0996
1.403(b)-7.................................................    1545-1341
1.403(b)-10................................................    1545-2068
1.404(a)-12................................................    1545-0710
1.404A-2...................................................    1545-0123
1.404A-6...................................................    1545-0123
1.408-2....................................................    1545-0390
1.408-5....................................................    1545-0747
1.408-6....................................................    1545-0203
                                                               1545-0390
1.408-7....................................................    1545-0119
1.408(q)-1.................................................    1545-1841
1.408A-2...................................................    1545-1616
1.408A-4...................................................    1545-1616
1.408A-5...................................................    1545-1616
1.408A-7...................................................    1545-1616
1.410(a)-2.................................................    1545-0710
1.410(d)-1.................................................    1545-0710
1.411(a)-11................................................    1545-1471
                                                               1545-1632
1.411(d)-4.................................................    1545-1545
1.411(d)-6.................................................    1545-1477
1.412(c)(1)-2..............................................    1545-0710
1.412(c)(2)-1..............................................    1545-0710
1.412(c)(3)-2..............................................    1545-0710
1.414(c)-5.................................................    1545-0797
1.414(r)-1.................................................    1545-1221
1.415-2....................................................    1545-0710
1.415-6....................................................    1545-0710
1.417(a)(3)-1..............................................    1545-0928
1.417(e)-1.................................................    1545-1471
                                                               1545-1724
1.417(e)-1T................................................    1545-1471
1.419A(f)(6)-1.............................................    1545-1795
1.422-1....................................................    1545-0820
1.430(f)-1.................................................    1545-2095
1.430(g)-1.................................................    1545-2095
1.430(h)(2)-1..............................................    1545-2095
1.432(e)(9)-1T.............................................    1545-2260
1.436-1....................................................    1545-2095
1.441-2....................................................    1545-1748
1.442-1....................................................    1545-0074
                                                               1545-0123
                                                               1545-0134
                                                               1545-0152
                                                               1545-0820
                                                               1545-1748
1.443-1....................................................    1545-0123
1.444-3T...................................................    1545-1036
1.444-4....................................................    1545-1591
1.446-1....................................................    1545-0074
                                                               1545-0152
1.446-4(d).................................................    1545-1412
1.448-1(g).................................................    1545-0152
1.448-1(h).................................................    1545-0152
1.448-1(i).................................................    1545-0152
1.448-2....................................................    1545-1855
1.448-2T...................................................    1545-0152
                                                               1545-1855
1.451-1....................................................    1545-0091
1.451-4....................................................    1545-0123
1.451-6....................................................    1545-0074
1.451-7....................................................    1545-0074
1.453-1....................................................    1545-0152
1.453-2....................................................    1545-0152
1.453-8....................................................    1545-0152
                                                               1545-0228
1.453A-1...................................................    1545-0152
                                                               1545-1134
1.453A-3...................................................    1545-0963
1.454-1....................................................    1545-0074
1.455-2....................................................    1545-0152
1.455-6....................................................    1545-0123

[[Page 887]]

 
1.456-2....................................................    1545-0123
1.456-6....................................................    1545-0123
1.456-7....................................................    1545-0123
1.457-8....................................................    1545-1580
1.458-1....................................................    1545-0879
1.458-2....................................................    1545-0152
1.460-1....................................................    1545-1650
1.460-6....................................................    1545-1031
                                                               1545-1572
                                                               1545-1732
1.461-1....................................................    1545-0074
1.461-2....................................................    1545-0096
1.461-4....................................................    1545-0917
1.461-5....................................................    1545-0917
1.463-1T...................................................    1545-0916
1.465-1T...................................................    1545-0712
1.466-1T...................................................    1545-0152
1.466-4....................................................    1545-0152
1.468A-3...................................................    1545-1269
                                                               1545-1378
                                                               1545-1511
1.468A-3(h), 1.468A-7, and 1.468A-8(d).....................    1545-2091
1.468A-4...................................................    1545-0954
1.468A-7...................................................    1545-0954
                                                               1545-1511
1.468A-8...................................................    1545-1269
1.468B-1...................................................    1545-1631
1.468B-1(j)................................................    1545-1299
1.468B-2(k)................................................    1545-1299
1.468B-2(l)................................................    1545-1299
1.468B-3(b)................................................    1545-1299
1.468B-3(e)................................................    1545-1299
1.468B-5(b)................................................    1545-1299
1.468B-9...................................................    1545-1631
1.469-1....................................................    1545-1008
1.469-2T...................................................    1545-0712
                                                               1545-1091
1.469-4T...................................................    1545-0985
                                                               1545-1037
1.469-7....................................................    1545-1244
1.471-2....................................................    1545-0123
1.471-5....................................................    1545-0123
1.471-6....................................................    1545-0123
1.471-8....................................................    1545-0123
1.471-11...................................................    1545-0123
                                                               1545-0152
1.472-1....................................................    1545-0042
                                                               1545-0152
1.472-2....................................................    1545-0152
1.472-3....................................................    1545-0042
1.472-5....................................................    1545-0152
1.472-8....................................................    1545-0028
                                                               1545-0042
                                                               1545-1767
1.475(a)-4.................................................    1545-1945
1.481-4....................................................    1545-0152
1.481-5....................................................    1545-0152
1.482-1....................................................    1545-1364
1.482-4....................................................    1545-1364
1.482-7....................................................    1545-1364
                                                               1545-1794
1.482-9(b).................................................    1545-2149
1.501(a)-1.................................................    1545-0056
                                                               1545-0057
1.501(c)(3)-1..............................................    1545-0056
1.501(c)(9)-5..............................................    1545-0047
1.501(c)(17)-3.............................................    1545-0047
1.501(e)-1.................................................    1545-0814
1.501(r)-3.................................................    1545-0047
1.501(r)-4.................................................    1545-0047
1.501(r)-6.................................................    1545-0047
1.503(c)-1.................................................    1545-0047
                                                               1545-0052
1.505(c)-1T................................................    1545-0916
1.506-1....................................................    1545-2268
1.507-1....................................................    1545-0052
1.507-2....................................................    1545-0052
1.508-1....................................................    1545-0052
                                                               1545-0056
1.509(a)-3.................................................    1545-0047
1.509(a)-4.................................................    1545-2157
1.509(a)-5.................................................    1545-0047
1.509(c)-1.................................................    1545-0052
1.512(a)-1.................................................    1545-0687
1.512(a)-4.................................................    1545-0047
                                                               1545-0687
1.521-1....................................................    1545-0051
                                                               1545-0058
1.527-2....................................................    1545-0129
1.527-5....................................................    1545-0129
1.527-6....................................................    1545-0129
1.527-9....................................................    1545-0129
1.528-8....................................................    1545-0127
1.533-2....................................................    1545-0123
1.534-2....................................................    1545-0123
1.542-3....................................................    1545-0123
1.545-2....................................................    1545-0123
1.545-3....................................................    1545-0123
1.547-2....................................................    1545-0045
                                                               1545-0123
1.547-3....................................................    1545-0123
1.561-1....................................................    1545-0044
1.561-2....................................................    1545-0123
1.562-3....................................................    1545-0123
1.563-2....................................................    1545-0123
1.564-1....................................................    1545-0123
1.565-1....................................................    1545-0043
                                                               1545-0123
1.565-2....................................................    1545-0043
1.565-3....................................................    1545-0043
1.565-5....................................................    1545-0043
1.565-6....................................................    1545-0043
1.585-1....................................................    1545-0123
1.585-3....................................................    1545-0123
1.585-8....................................................    1545-1290
1.597-2....................................................    1545-1300
1.597-4....................................................    1545-1300
1.597-6....................................................    1545-1300
1.597-7....................................................    1545-1300
1.611-2....................................................    1545-0099
1.611-3....................................................    1545-0007
                                                               1545-0099
                                                               1545-1784
1.612-4....................................................    1545-0074
1.612-5....................................................    1545-0099
1.613-3....................................................    1545-0099
1.613-4....................................................    1545-0099
1.613-6....................................................    1545-0099
1.613-7....................................................    1545-0099
1.613A-3...................................................    1545-0919
1.613A-3(e)................................................    1545-1251
1.613A-3(l)................................................    1545-0919
1.613A-5...................................................    1545-0099
1.613A-6...................................................    1545-0099
1.614-2....................................................    1545-0099
1.614-3....................................................    1545-0099
1.614-5....................................................    1545-0099
1.614-6....................................................    1545-0099
1.614-8....................................................    1545-0099
1.617-1....................................................    1545-0099
1.617-3....................................................    1545-0099
1.617-4....................................................    1545-0099
1.631-1....................................................    1545-0007
1.631-2....................................................    1545-0007

[[Page 888]]

 
1.641(b)-2.................................................    1545-0092
1.642(c)-1.................................................    1545-0092
1.642(c)-2.................................................    1545-0092
1.642(c)-5.................................................    1545-0074
1.642(c)-6.................................................    1545-0020
                                                               1545-0074
                                                               1545-0092
1.642(g)-1.................................................    1545-0092
1.642(i)-1.................................................    1545-0092
1.645-1....................................................    1545-1578
1.663(b)-2.................................................    1545-0092
1.664-1....................................................    1545-0196
1.664-1(a)(7)..............................................    1545-1536
1.664-1(c).................................................    1545-2101
1.664-2....................................................    1545-0196
1.664-3....................................................    1545-0196
1.664-4....................................................    1545-0020
                                                               1545-0196
1.665(a)-0A through
1.665(g)-2A................................................    1545-0192
1.666(d)-1A................................................    1545-0092
1.671-4....................................................    1545-1442
1.671-5....................................................    1545-1540
1.701-1....................................................    1545-0099
1.702-1....................................................    1545-0074
1.703-1....................................................    1545-0099
1.704-2....................................................    1545-1090
1.706-1....................................................    1545-0074
                                                               1545-0099
                                                               1545-0134
1.706-1T...................................................    1545-0099
1.706-4(f).................................................    1545-0123
1.707-3(c)(2)..............................................    1545-1243
1.707-5(a)(7)(ii)..........................................    1545-1243
1.707-6(c).................................................    1545-1243
1.707-8....................................................    1545-1243
1.708-1....................................................    1545-0099
1.732-1....................................................    1545-0099
                                                               1545-1588
1.736-1....................................................    1545-0074
1.743-1....................................................    1545-0074
                                                               1545-1588
1.751-1....................................................    1545-0074
                                                               1545-0099
                                                               1545-0941
1.752-2....................................................    1545-1905
1.752-5....................................................    1545-1090
1.752-7....................................................    1545-1843
1.754-1....................................................    1545-0099
1.755-1....................................................    1545-0099
1.761-2....................................................    1545-1338
1.801-1....................................................    1545-0123
                                                               1545-0128
1.801-3....................................................    1545-0123
1.801-5....................................................    1545-0128
1.801-8....................................................    1545-0128
1.804-4....................................................    1545-0128
1.811-2....................................................    1545-0128
1.812-2....................................................    1545-0128
1.815-6....................................................    1545-0128
1.818-4....................................................    1545-0128
1.818-5....................................................    1545-0128
1.818-8....................................................    1545-0128
1.819-2....................................................    1545-0128
1.822-5....................................................    1545-1027
1.822-6....................................................    1545-1027
1.822-8....................................................    1545-1027
1.822-9....................................................    1545-1027
1.826-1....................................................    1545-1027
1.826-2....................................................    1545-1027
1.826-3....................................................    1545-1027
1.826-4....................................................    1545-1027
1.826-6....................................................    1545-1027
1.831-3....................................................    1545-0123
1.832-4....................................................    1545-1227
1.832-5....................................................    1545-0123
1.848-2(g)(8)..............................................    1545-1287
1.848-2(h)(3)..............................................    1545-1287
1.848-2(i)(4)..............................................    1545-1287
1.851-2....................................................    1545-1010
1.851-4....................................................    1545-0123
1.852-1....................................................    1545-0123
1.852-4....................................................    1545-0123
                                                               1545-0145
1.852-6....................................................    1545-0123
                                                               1545-0144
1.852-7....................................................    1545-0074
1.852-9....................................................    1545-0074
                                                               1545-0123
                                                               1545-0144
                                                               1545-0145
                                                               1545-1783
1.852-11...................................................    1545-1094
1.853-3....................................................    1545-2035
1.853-4....................................................    1545-2035
1.854-2....................................................    1545-0123
1.855-1....................................................    1545-0123
1.856-2....................................................    1545-0123
                                                               1545-1004
1.856-6....................................................    1545-0123
1.856-7....................................................    1545-0123
1.856-8....................................................    1545-0123
1.857-8....................................................    1545-0123
1.857-9....................................................    1545-0074
1.858-1....................................................    1545-0123
1.860-2....................................................    1545-0045
1.860-4....................................................    1545-0045
                                                               1545-1054
                                                               1545-1057
1.860E-1...................................................    1545-1675
1.860E-2(a)(5).............................................    1545-1276
1.860E-2(a)(7).............................................    1545-1276
1.860E-2(b)(2).............................................    1545-1276
1.860G-2...................................................    1545-2110
1.861-2....................................................    1545-0089
1.861-3....................................................    1545-0089
1.861-4....................................................    1545-1900
1.861-8....................................................    1545-0126
1.861-8(e)(6) and (g)......................................    1545-1224
1.861-9T...................................................    1545-0121
                                                               1545-1072
1.861-18...................................................    1545-1594
1.863-1....................................................    1545-1476
1.863-3....................................................    1545-1476
                                                               1545-1556
1.863-3A...................................................    1545-0126
1.863-4....................................................    1545-0126
1.863-7....................................................    1545-0132
1.863-8....................................................    1545-1718
1.863-9....................................................    1545-1718
1.864-4....................................................    1545-0126
1.871-1....................................................    1545-0096
1.871-6....................................................    1545-0795
1.871-7....................................................    1545-0089
1.871-10...................................................    1545-0089
                                                               1545-0165
1.874-1....................................................    1545-0089
1.881-4....................................................    1545-1440
1.882-4....................................................    1545-0126
1.883-0....................................................    1545-1677
1.883-1....................................................    1545-1677
1.883-2....................................................    1545-1677
1.883-3....................................................    1545-1677
1.883-4....................................................    1545-1677

[[Page 889]]

 
1.883-5....................................................    1545-1677
1.884-0....................................................    1545-1070
1.884-1....................................................    1545-1070
1.884-2....................................................    1545-1070
1.884-2T...................................................    1545-0126
                                                               1545-1070
1.884-4....................................................    1545-1070
1.884-5....................................................    1545-1070
1.892-1T...................................................    1545-1053
1.892-2T...................................................    1545-1053
1.892-3T...................................................    1545-1053
1.892-4T...................................................    1545-1053
1.892-5T...................................................    1545-1053
1.892-6T...................................................    1545-1053
1.892-7T...................................................    1545-1053
1.897-2....................................................    1545-0123
                                                               1545-0902
1.897-3....................................................    1545-0123
1.897-5T...................................................    1545-0902
1.897-6T...................................................    1545-0902
1.901-2....................................................    1545-0746
1.901-2A...................................................    1545-0746
1.901-3....................................................    1545-0122
1.902-1....................................................    1545-0122
                                                               1545-1458
1.904-1....................................................    1545-0121
                                                               1545-0122
1.904-2....................................................    1545-0121
                                                               1545-0122
1.904-3....................................................    1545-0121
1.904-4....................................................    1545-0121
1.904-5....................................................    1545-0121
1.904-7....................................................    1545-2104
1.904-7T...................................................    1545-2104
1.904(f)-1.................................................    1545-0121
                                                               1545-0122
1.904(f)-2.................................................    1545-0121
1.904(f)-3.................................................    1545-0121
1.904(f)-4.................................................    1545-0121
1.904(f)-5.................................................    1545-0121
1.904(f)-6.................................................    1545-0121
1.904(f)-7.................................................    1545-1127
1.905-2....................................................    1545-0122
1.905-3T...................................................    1545-1056
1.905-4T...................................................    1545-1056
1.905-5T...................................................    1545-1056
1.911-1....................................................    1545-0067
                                                               1545-0070
1.911-2....................................................    1545-0067
                                                               1545-0070
1.911-3....................................................    1545-0067
                                                               1545-0070
1.911-4....................................................    1545-0067
                                                               1545-0070
1.911-5....................................................    1545-0067
                                                               1545-0070
1.911-6....................................................    1545-0067
                                                               1545-0070
1.911-7....................................................    1545-0067
                                                               1545-0070
1.913-13...................................................    1545-0067
1.921-1T...................................................    1545-0190
                                                               1545-0884
                                                               1545-0935
                                                               1545-0939
1.921-2....................................................    1545-0884
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1.927(d)-2T................................................    1545-0935
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1.6073-4...................................................    1545-0087
1.6074-1...................................................    1545-0123
1.6074-2...................................................    1545-0123
1.6081-1...................................................    1545-0066
                                                               1545-0148
                                                               1545-0233
                                                               1545-1057
                                                               1545-1081
1.6081-2...................................................    1545-0148
                                                               1545-1036
                                                               1545-1054
1.6081-3...................................................    1545-0233
1.6081-4...................................................    1545-0188
                                                               1545-1479
1.6081-6...................................................    1545-0148
                                                               1545-1054
1.6081-7...................................................    1545-0148
                                                               1545-1054
1.6091-3...................................................    1545-0089
1.6107-1...................................................    1545-0074
                                                               1545-1231
1.6109-1...................................................    1545-0074
1.6109-2...................................................    1545-2176
1.6115-1...................................................    1545-1464
1.6151-1...................................................    1545-0074
1.6153-1...................................................    1545-0087
1.6153-4...................................................    1545-0087
1.6161-1...................................................    1545-0087
1.6162-1...................................................    1545-0087
1.6164-1...................................................    1545-0135
1.6164-2...................................................    1545-0135
1.6164-3...................................................    1545-0135
1.6164-5...................................................    1545-0135
1.6164-6...................................................    1545-0135
1.6164-7...................................................    1545-0135
1.6164-8...................................................    1545-0135
1.6164-9...................................................    1545-0135
1.6302-1...................................................    1545-0257
1.6302-2...................................................    1545-0098
                                                               1545-0257
1.6411-1...................................................    1545-0098
                                                               1545-0135
                                                               1545-0582
1.6411-2...................................................    1545-0098
                                                               1545-0582
1.6411-3...................................................    1545-0098
                                                               1545-0582
1.6411-4...................................................    1545-0582
1.6414-1...................................................    1545-0096
1.6425-1...................................................    1545-0170
1.6425-2...................................................    1545-0170
1.6425-3...................................................    1545-0170
1.6654-1...................................................    1545-0087
                                                               1545-0140
1.6654-2...................................................    1545-0087
1.6654-3...................................................    1545-0087
1.6655(e)-1................................................    1545-1421
1.6662-3(c)................................................    1545-0889
1.6662-4(e) and (f)........................................    1545-0889
1.6662-6...................................................    1545-1426
1.6694-1...................................................    1545-0074
1.6694-2...................................................    1545-0074
1.6694-2(c)................................................    1545-1231
1.6694-2(c)(3).............................................    1545-1231
1.6694-3(e)................................................    1545-1231
1.6695-1...................................................    1545-0074
                                                               1545-1385
1.6696-1...................................................    1545-0074
                                                               1545-0240
1.6851-1...................................................    1545-0086
                                                               1545-0138
1.6851-2...................................................    1545-0086
                                                               1545-0138
1.7476-1...................................................    1545-0197
1.7476-2...................................................    1545-0197
1.7519-2T..................................................    1545-1036
1.7520-1...................................................    1545-1343
1.7520-2...................................................    1545-1343
1.7520-3...................................................    1545-1343
1.7520-4...................................................    1545-1343
1.7701(l)-3................................................    1545-1642
1.7872-15..................................................    1545-1792
1.9100-1...................................................    1545-0074
1.9101-1...................................................    1545-0008
2.1-4......................................................    1545-0123
2.1-5......................................................    1545-0123
2.1-6......................................................    1545-0123
2.1-10.....................................................    1545-0123
2.1-11.....................................................    1545-0123
2.1-12.....................................................    1545-0123
2.1-13.....................................................    1545-0123
2.1-20.....................................................    1545-0123
2.1-22.....................................................    1545-0123
2.1-26.....................................................    1545-0123
3.2........................................................    1545-0123
4.954-1....................................................    1545-1068
4.954-2....................................................    1545-1068
5.6411-1...................................................    1545-0042
                                                               1545-0074
                                                               1545-0098
                                                               1545-0129
                                                               1545-0172
                                                               1545-0582
                                                               1545-0619
5c.44F-1...................................................    1545-0619
5c.128-1...................................................    1545-0123
5c.305-1...................................................    1545-0110
5c.442-1...................................................    1545-0152
5f.103-1...................................................    1545-0720
5f.6045-1..................................................    1545-0715

[[Page 894]]

 
6a.103A-2..................................................    1545-0123
                                                               1545-0720
6a.103A-3..................................................    1545-0720
7.465-1....................................................    1545-0712
7.465-2....................................................    1545-0712
7.465-3....................................................    1545-0712
7.465-4....................................................    1545-0712
7.465-5....................................................    1545-0712
7.936-1....................................................    1545-0217
7.999-1....................................................    1545-0216
7.6039A-1..................................................    1545-0015
7.6041-1...................................................    1545-0115
11.410-1...................................................    1545-0710
11.412(c)-7................................................    1545-0710
11.412(c)-11...............................................    1545-0710
12.7.......................................................    1545-0190
12.8.......................................................    1545-0191
12.9.......................................................    1545-0195
14a.422A-1.................................................    1545-0123
15A.453-1..................................................    1545-0228
16A.126-2..................................................    1545-0074
16A.1255-1.................................................    1545-0184
16A.1255-2.................................................    1545-0184
18.1371-1..................................................    1545-0130
18.1378-1..................................................    1545-0130
18.1379-1..................................................    1545-0130
18.1379-2..................................................    1545-0130
20.2010-2..................................................    1545-0015
20.2011-1..................................................    1545-0015
20.2014-5..................................................    1545-0015
                                                               1545-0260
20.2014-6..................................................    1545-0015
20.2016-1..................................................    1545-0015
20.2031-2..................................................    1545-0015
20.2031-3..................................................    1545-0015
20.2031-4..................................................    1545-0015
20.2031-6..................................................    1545-0015
20.2031-7..................................................    1545-0020
20.2031-10.................................................    1545-0015
20.2032-1..................................................    1545-0015
20.2032A-3.................................................    1545-0015
20.2032A-4.................................................    1545-0015
20.2032A-8.................................................    1545-0015
20.2039-4..................................................    1545-0015
20.2051-1..................................................    1545-0015
20.2053-3..................................................    1545-0015
20.2053-9..................................................    1545-0015
20.2053-10.................................................    1545-0015
20.2055-1..................................................    1545-0015
20.2055-2..................................................    1545-0015
                                                               1545-0092
20.2055-3..................................................    1545-0015
20.2056(b)-4...............................................    1545-0015
20.2056(b)-7...............................................    1545-0015
                                                               1545-1612
20.2056A-2.................................................    1545-1443
20.2056A-3.................................................    1545-1360
20.2056A-4.................................................    1545-1360
20.2056A-10................................................    1545-1360
20.2106-1..................................................    1545-0015
20.2106-2..................................................    1545-0015
20.2204-1..................................................    1545-0015
20.2204-2..................................................    1545-0015
20.6001-1..................................................    1545-0015
20.6011-1..................................................    1545-0015
20.6018-1..................................................    1545-0015
                                                               1545-0531
20.6018-2..................................................    1545-0015
20.6018-3..................................................    1545-0015
20.6018-4..................................................    1545-0015
                                                               1545-0022
20.6036-2..................................................    1545-0015
20.6060-1(a)(1)............................................    1545-1231
20.6061-1..................................................    1545-0015
20.6065-1..................................................    1545-0015
20.6075-1..................................................    1545-0015
20.6081-1..................................................    1545-0015
                                                               1545-0181
                                                               1545-1707
20.6091-1..................................................    1545-0015
20.6107-1..................................................    1545-1231
20.6161-1..................................................    1545-0015
                                                               1545-0181
20.6161-2..................................................    1545-0015
                                                               1545-0181
20.6163-1..................................................    1545-0015
20.6166-1..................................................    1545-0181
20.6166A-1.................................................    1545-0015
20.6166A-3.................................................    1545-0015
20.6324A-1.................................................    1545-0754
20.7520-1..................................................    1545-1343
20.7520-2..................................................    1545-1343
20.7520-3..................................................    1545-1343
20.7520-4..................................................    1545-1343
22.0.......................................................    1545-0015
25.2511-2..................................................    1545-0020
25.2512-2..................................................    1545-0020
25.2512-3..................................................    1545-0020
25.2512-5..................................................    1545-0020
25.2512-9..................................................    1545-0020
25.2513-1..................................................    1545-0020
25.2513-2..................................................    1545-0020
                                                               1545-0021
25.2513-3..................................................    1545-0020
25.2518-2..................................................    1545-0959
25.2522(a)-1...............................................    1545-0196
25.2522(c)-3...............................................    1545-0020
                                                               1545-0196
25.2523(a)-1...............................................    1545-0020
                                                               1545-0196
25.2523(f)-1...............................................    1545-0015
25.2701-2..................................................    1545-1241
25.2701-4..................................................    1545-1241
25.2701-5..................................................    1545-1273
25.2702-5..................................................    1545-1485
25.2702-6..................................................    1545-1273
25.6001-1..................................................    1545-0020
                                                               1545-0022
25.6011-1..................................................    1545-0020
25.6019-1..................................................    1545-0020
25.6019-2..................................................    1545-0020
25.6019-3..................................................    1545-0020
25.6019-4..................................................    1545-0020
25.6060-1(a)(1)............................................    1545-1231
25.6061-1..................................................    1545-0020
25.6065-1..................................................    1545-0020
25.6075-1..................................................    1545-0020
25.6081-1..................................................    1545-0020
25.6091-1..................................................    1545-0020
25.6091-2..................................................    1545-0020
25.6107-1..................................................    1545-1231
25.6151-1..................................................    1545-0020
25.6161-1..................................................    1545-0020
25.7520-1..................................................    1545-1343
25.7520-2..................................................    1545-1343
25.7520-3..................................................    1545-1343
25.7520-4..................................................    1545-1343
26.2601-1..................................................    1545-0985
26.2632-1..................................................    1545-0985
                                                               1545-1892
26.2642-1..................................................    1545-0985
26.2642-2..................................................    1545-0985
26.2642-3..................................................    1545-0985
26.2642-4..................................................    1545-0985

[[Page 895]]

 
26.2642-6..................................................    1545-1902
26.2652-2..................................................    1545-0985
26.2654-1..................................................    1545-1902
26.2662-1..................................................    1545-0015
                                                               1545-0985
26.2662-2..................................................    1545-0985
26.6060-1(a)(1)............................................    1545-1231
26.6107-1..................................................    1545-1231
31.3102-3..................................................    1545-0029
                                                               1545-0059
                                                               1545-0065
31.3121(b)(19)-1...........................................    1545-0029
31.3121(d)-1...............................................    1545-0004
31.3121(i)-1...............................................    1545-0034
31.3121(r)-1...............................................    1545-0029
31.3121(s)-1...............................................    1545-0029
31.3121(v)(2)-1............................................    1545-1643
31.3302(a)-2...............................................    1545-0028
31.3302(a)-3...............................................    1545-0028
31.3302(b)-2...............................................    1545-0028
31.3302(e)-1...............................................    1545-0028
31.3306(c)(18)-1...........................................    1545-0029
31.3401(a)-1...............................................    1545-0029
31.3401(a)(6)..............................................    1545-1484
31.3401(a)(6)-1............................................    1545-0029
                                                               1545-0096
                                                               1545-0795
31.3401(a)(7)-1............................................    1545-0029
31.3401(a)(8)(A)-1 ........................................    1545-0029
                                                               1545-0666
31.3401(a)(8)(C)-1 ........................................    1545-0029
31.3401(a)(15)-1...........................................    1545-0182
31.3401(c)-1...............................................    1545-0004
31.3402(b)-1...............................................    1545-0010
31.3402(c)-1...............................................    1545-0010
31.3402(f)(1)-1............................................    1545-0010
31.3402(f)(2)-1............................................    1545-0010
                                                               1545-0410
31.3402(f)(3)-1............................................    1545-0010
31.3402(f)(4)-1............................................    1545-0010
31.3402(f)(4)-2............................................    1545-0010
31.3402(f)(5)-1............................................    1545-0010
                                                               1545-1435
31.3402(h)(1)-1............................................    1545-0029
31.3402(h)(3)-1............................................    1545-0010
                                                               1545-0029
31.3402(h)(4)-1............................................    1545-0010
31.3402(i)-(1).............................................    1545-0010
31.3402(i)-(2).............................................    1545-0010
31.3402(k)-1...............................................    1545-0065
31.3402(l)-(1).............................................    1545-0010
31.3402(m)-(1).............................................    1545-0010
31.3402(n)-(1).............................................    1545-0010
31.3402(o)-2...............................................    1545-0415
31.3402(o)-3...............................................    1545-0008
                                                               1545-0010
                                                               1545-0415
                                                               1545-0717
31.3402(p)-1...............................................    1545-0415
                                                               1545-0717
31.3402(q)-1...............................................    1545-0238
                                                               1545-0239
31.3404-1..................................................    1545-0029
31.3405(c)-1...............................................    1545-1341
31.3406(a)-1...............................................    1545-0112
31.3406(a)-2...............................................    1545-0112
31.3406(a)-3...............................................    1545-0112
31.3406(a)-4...............................................    1545-0112
31.3406(b)(2)-1............................................    1545-0112
31.3406(b)(2)-2............................................    1545-0112
31.3406(b)(2)-3............................................    1545-0112
31.3406(b)(2)-4............................................    1545-0112
31.3406(b)(2)-5............................................    1545-0112
31.3406(b)(3)-1............................................    1545-0112
31.3406(b)(3)-2............................................    1545-0112
31.3406(b)(3)-3............................................    1545-0112
31.3406(b)(3)-4............................................    1545-0112
31.3406(b)(4)-1............................................    1545-0112
31.3406(c)-1...............................................    1545-0112
31.3406(d)-1...............................................    1545-0112
31.3406(d)-2...............................................    1545-0112
31.3406(d)-3...............................................    1545-0112
31.3406(d)-4...............................................    1545-0112
31.3406(d)-5...............................................    1545-0112
31.3406(e)-1...............................................    1545-0112
31.3406(f)-1...............................................    1545-0112
31.3406(g)-1...............................................    1545-0096
                                                               1545-0112
                                                               1545-1819
31.3406(g)-2...............................................    1545-0112
31.3406(g)-3...............................................    1545-0112
31.3406(h)-1...............................................    1545-0112
31.3406(h)-2...............................................    1545-0112
31.3406(h)-3...............................................    1545-0112
31.3406(i)-1...............................................    1545-0112
31.3501(a)-1T..............................................    1545-0771
31.3503-1..................................................    1545-0024
31.3504-1..................................................    1545-0029
31.3511-1..................................................    1545-2266
31.6001-1..................................................    1545-0798
31.6001-2..................................................    1545-0034
                                                               1545-0798
31.6001-3..................................................    1545-0798
31.6001-4..................................................    1545-0028
31.6001-5..................................................    1545-0798
31.6001-6..................................................    1545-0029
                                                               1459-0798
31.6011(a)-1...............................................    1545-0029
                                                               1545-0034
                                                               1545-0035
                                                               1545-0059
                                                               1545-0074
                                                               1545-0256
                                                               1545-0718
                                                               1545-2097
31.6011(a)-2...............................................    1545-0001
                                                               1545-0002
31.6011(a)-3...............................................    1545-0028
31.6011(a)-3A..............................................    1545-0955
31.6011(a)-4...............................................    1545-0034
                                                               1545-0035
                                                               1545-0718
                                                               1545-1413
                                                               1545-2097
31.6011(a)-5...............................................    1545-0028
                                                               1545-0718
                                                               1545-2097
31.6011(a)-6...............................................    1545-0028
31.6011(a)-7...............................................    1545-0074
31.6011(a)-8...............................................    1545-0028
31.6011(a)-9...............................................    1545-0028
31.6011(a)-10..............................................    1545-0112
31.6011(b)-1...............................................    1545-0003
31.6011(b)-2...............................................    1545-0029
31.6051-1..................................................    1545-0008
                                                               1545-0182
                                                               1545-0458
                                                               1545-1729
31.6051-2..................................................    1545-0008
31.6051-3..................................................    1545-0008
31.6053-1..................................................    1545-0029
                                                               1545-0062
                                                               1545-0064
                                                               1545-0065

[[Page 896]]

 
                                                               1545-1603
31.6053-2..................................................    1545-0008
31.6053-3..................................................    1545-0065
                                                               1545-0714
31.6053-4..................................................    1545-0065
                                                               1545-1603
31.6060-1(a)(1)............................................    1545-1231
31.6065(a)-1...............................................    1545-0029
31.6071(a)-1...............................................    1545-0001
                                                               1545-0028
                                                               1545-0029
31.6071(a)-1A..............................................    1545-0955
31.6081(a)-1...............................................    1545-0008
                                                               1545-0028
31.6091-1..................................................    1545-0028
                                                               1545-0029
31.6107-1..................................................    1545-1231
31.6157-1..................................................    1545-0955
31.6205-1..................................................    1545-0029
                                                               1545-2097
31.6301(c)-1AT.............................................    1545-0035
                                                               1545-0112
                                                               1545-0257
31.6302-1..................................................    1545-1413
31.6302-2..................................................    1545-1413
31.6302-3..................................................    1545-1413
31.6302-4..................................................    1545-1413
31.6302(c)-2...............................................    1545-0001
                                                               1545-0257
31.6302(c)-2A..............................................    1545-0955
31.6302(c)-3...............................................    1545-0257
31.6402(a)-2...............................................    1545-0256
                                                               1545-2097
31.6413(a)-1...............................................    1545-0029
                                                               1545-2097
31.6413(a)-2...............................................    1545-0029
                                                               1545-0256
                                                               1545-2097
31.6413(c)-1...............................................    1545-0029
                                                               1545-0171
31.6414-1..................................................    1545-0029
                                                               1545-2097
32.1.......................................................    1545-0029
                                                               1545-0415
32.2.......................................................    1545-0029
35a.3406-2.................................................    1545-0112
35a.9999-5.................................................    1545-0029
36.3121(l)(1)-1............................................    1545-0137
36.3121(l)(1)-2............................................    1545-0137
36.3121(l)(3)-1............................................    1545-0123
36.3121(1)(7)-1............................................    1545-0123
36.3121(1)(10)-1...........................................    1545-0029
36.3121(1)(10)-3...........................................    1545-0029
36.3121(1)(10)-4...........................................    1545-0257
40.6060-1(a)(1)............................................    1545-1231
40.6107-1..................................................    1545-1231
40.6302(c)-3(b)(2)(ii).....................................    1545-1296
40.6302(c)-3(b)(2)(iii)....................................    1545-1296
40.6302(c)-3(e)............................................    1545-1296
40.6302(c)-3(f)(2)(ii).....................................    1545-1296
41.4481-1..................................................    1545-0143
41.4481-2..................................................    1545-0143
41.4483-3..................................................    1545-0143
41.6001-1..................................................    1545-0143
41.6001-2..................................................    1545-0143
41.6001-3..................................................    1545-0143
41.6060-1(a)(1)............................................    1545-1231
41.6071(a)-1...............................................    1545-0143
41.6081(a)-1...............................................    1545-0143
41.6091-1..................................................    1545-0143
41.6107-1..................................................    1545-1231
41.6109-1..................................................    1545-0143
41.6151(a)-1...............................................    1545-0143
41.6156-1..................................................    1545-0143
41.6161(a)(1)-1............................................    1545-0143
44.4401-1..................................................    1545-0235
44.4403-1..................................................    1545-0235
44.4412-1..................................................    1545-0236
44.4901-1..................................................    1545-0236
44.4905-1..................................................    1545-0236
44.4905-2..................................................    1545-0236
44.6001-1..................................................    1545-0235
44.6011(a)-1...............................................    1545-0235
                                                               1545-0236
44.6060-1(a)(1)............................................    1545-1231
44.6071-1..................................................    1545-0235
44.6091-1..................................................    1545-0235
44.6107-1..................................................    1545-1231
44.6151-1..................................................    1545-0235
44.6419-1..................................................    1545-0235
44.6419-2..................................................    1545-0235
46.4371-4..................................................    1545-0023
46.4374-1..................................................    1545-0023
46.4375-1..................................................    1545-2238
46.4376-1..................................................    1545-2238
46.4701-1..................................................    1545-0023
                                                               1545-0257
48.4041-4..................................................    1545-0023
48.4041-5..................................................    1545-0023
48.4041-6..................................................    1545-0023
48.4041-7..................................................    1545-0023
48.4041-9..................................................    1545-0023
48.4041-10.................................................    1545-0023
48.4041-11.................................................    1545-0023
48.4041-12.................................................    1545-0023
48.4041-13.................................................    1545-0023
48.4041-19.................................................    1545-0023
48.4041-20.................................................    1545-0023
48.4041-21.................................................    1545-1270
48.4042-2..................................................    1545-0023
48.4052-1..................................................    1545-1418
48.4061(a)-1...............................................    1545-0023
48.4061(a)-2...............................................    1545-0023
48.4061(b)-3...............................................    1545-0023
48.4064-1..................................................    1545-0014
                                                               1545-0242
48.4071-1..................................................    1545-0023
48.4073-1..................................................    1545-0023
48.4073-3..................................................    1545-0023
                                                               1545-1074
                                                               1545-1087
48.4081-2..................................................    1545-1270
                                                               1545-1418
48.4081-3..................................................    1545-1270
                                                               1545-1418
                                                               1545-1897
48.4081-4(b)(2)(ii)........................................    1545-1270
48.4081-4(b)(3)(i).........................................    1545-1270
48.4081-4(c)...............................................    1545-1270
48.4081-6(c)(1)(ii)........................................    1545-1270
48.4081-7..................................................    1545-1270
                                                               1545-1418
48.4082-1T.................................................    1545-1418
48.4082-2..................................................    1545-1418
48.4082-6..................................................    1545-1418
48.4082-7..................................................    1545-1418
48.4101-1..................................................    1545-1418
48.4101-1T.................................................    1545-1418
48.4101-2..................................................    1545-1418
48.4161(a)-1...............................................    1545-0723
48.4161(a)-2...............................................    1545-0723
48.4161(a)-3...............................................    1545-0723
48.4161(b)-1...............................................    1545-0723
48.4216(a)-2...............................................    1545-0023

[[Page 897]]

 
48.4216(a)-3...............................................    1545-0023
48.4216(c)-1...............................................    1545-0023
48.4221-1..................................................    1545-0023
48.4221-2..................................................    1545-0023
48.4221-3..................................................    1545-0023
48.4221-4..................................................    1545-0023
48.4221-5..................................................    1545-0023
48.4221-6..................................................    1545-0023
48.4221-7..................................................    1545-0023
48.4222(a)-1...............................................    1545-0014
                                                               1545-0023
48.4223-1..................................................    1545-0023
                                                               1545-0257
                                                               1545-0723
48.6302(c)-1...............................................    1545-0023
                                                               1545-0257
48.6412-1..................................................    1545-0723
48.6416(a)-1...............................................    1545-0023
                                                               1545-0723
48.6416(a)-2...............................................    1545-0723
48.6416(a)-3...............................................    1545-0723
48.6416(b)(1)-1............................................    1545-0723
48.6416(b)(1)-2............................................    1545-0723
48.6416(b)(1)-3............................................    1545-0723
48.6416(b)(1)-4............................................    1545-0723
48.6416(b)(2)-1............................................    1545-0723
48.6416(b)(2)-2............................................    1545-0723
48.6416(b)(2)-3............................................    1545-0723
                                                               1545-1087
48.6416(b)(2)-4............................................    1545-0723
48.6416(b)(3)-1............................................    1545-0723
48.6416(b)(3)-2............................................    1545-0723
48.6416(b)(3)-3............................................    1545-0723
48.6416(b)(4)-1............................................    1545-0723
48.6416(b)(5)-1............................................    1545-0723
48.6416(c)-1...............................................    1545-0723
48.6416(e)-1...............................................    1545-0023
                                                               1545-0723
48.6416(f)-1...............................................    1545-0023
                                                               1545-0723
48.6416(g)-1...............................................    1545-0723
48.6416(h)-1...............................................    1545-0723
48.6420(c)-2...............................................    1545-0023
48.6420(f)-1...............................................    1545-0023
48.6420-1..................................................    1545-0162
                                                               1545-0723
48.6420-2..................................................    1545-0162
                                                               1545-0723
48.6420-3..................................................    1545-0162
                                                               1545-0723
48.6420-4..................................................    1545-0162
                                                               1545-0723
48.6420-5..................................................    1545-0162
                                                               1545-0723
48.6420-6..................................................    1545-0162
                                                               1545-0723
48.6421-0..................................................    1545-0162
                                                               1545-0723
48.6421-1..................................................    1545-0162
                                                               1545-0723
48.6421-2..................................................    1545-0162
                                                               1545-0723
48.6421-3..................................................    1545-0162
                                                               1545-0723
48.6421-4..................................................    1545-0162
                                                               1545-0723
48.6421-5..................................................    1545-0162
                                                               1545-0723
48.6421-6..................................................    1545-0162
                                                               1545-0723
48.6421-7..................................................    1545-0162
                                                               1545-0723
48.6424-0..................................................    1545-0723
48.6424-1..................................................    1545-0723
48.6424-2..................................................    1545-0723
48.6424-3..................................................    1545-0723
48.6424-4..................................................    1545-0723
48.6424-5..................................................    1545-0723
48.6424-6..................................................    1545-0723
48.6427-0..................................................    1545-0723
48.6427-1..................................................    1545-0023
                                                               1545-0162
                                                               1545-0723
48.6427-2..................................................    1545-0162
                                                               1545-0723
48.6427-3..................................................    1545-0723
48.6427-4..................................................    1545-0723
48.6427-5..................................................    1545-0723
48.6427-8..................................................    1545-1418
48.6427-9..................................................    1545-1418
48.6427-10.................................................    1545-1418
48.6427-11.................................................    1545-1418
49.4251-1..................................................    1545-1075
49.4251-2..................................................    1545-1075
49.4251-4(d)(2)............................................    1545-1628
49.4253-3..................................................    1545-0023
49.4253-4..................................................    1545-0023
49.4264(b)-1...............................................    1545-0023
                                                               1545-0224
                                                               1545-0225
                                                               1545-0226
                                                               1545-0230
                                                               1545-0257
                                                               1545-0912
49.4271-1(d)...............................................    1545-0685
49.5000B-1.................................................    1545-2177
51.2(f)(2)(ii).............................................    1545-2209
51.7.......................................................    1545-2209
52.4682-1(b)(2)(iii).......................................    1545-1153
52.4682-2(b)...............................................    1545-1153
                                                               1545-1361
52.4682-2(d)...............................................    1545-1153
                                                               1545-1361
52.4682-3(c)(2)............................................    1545-1153
52.4682-3(g)...............................................    1545-1153
52.4682-4(f)...............................................    1545-0257
                                                               1545-1153
52.4682-5(d)...............................................    1545-1361
52.4682-5(f)...............................................    1545-1361
53.4940-1..................................................    1545-0052
                                                               1545-0196
53.4942(a)-1...............................................    1545-0052
53.4942(a)-2...............................................    1545-0052
53.4942(a)-3...............................................    1545-0052
53.4942(b)-3...............................................    1545-0052
53.4945-1..................................................    1545-0052
53.4945-4..................................................    1545-0052
53.4945-5..................................................    1545-0052
53.4945-6..................................................    1545-0052
53.4947-1..................................................    1545-0196
53.4947-2..................................................    1545-0196
53.4948-1..................................................    1545-0052
53.4958-6..................................................    1545-1623
53.4961-2..................................................    1545-0024
53.4963-1..................................................    1545-0024
53.6001-1..................................................    1545-0052
53.6011-1..................................................    1545-0049
                                                               1545-0052
                                                               1545-0092
                                                               1545-0196
53.6060-1(a)(1)............................................    1545-1231
53.6065-1..................................................    1545-0052
53.6071-1..................................................    1545-0049
53.6081-1..................................................    1545-0066

[[Page 898]]

 
                                                               1545-0148
53.6107-1..................................................    1545-1231
53.6161-1..................................................    1545-0575
54.4975-7..................................................    1545-0575
54.4977-1T.................................................    1545-0771
54.4980B-6.................................................    1545-1581
54.4980B-7.................................................    1545-1581
54.4980B-8.................................................    1545-1581
54.4980F-1.................................................    1545-1780
54.6011-1..................................................    1545-0575
54.6011-1T.................................................    1545-0575
54.6060-1(a)(1)............................................    1545-1231
54.6107-1..................................................    1545-1231
54.9801-3..................................................    1545-1537
54.9801-4..................................................    1545-1537
54.9801-5..................................................    1545-1537
54.9801-6..................................................    1545-1537
54.9812-1T.................................................    1545-2165
54.9815-1251T..............................................    1545-2178
54.9815-2711T..............................................    1545-2179
54.9815-2712T..............................................    1545-2180
54.9815-2714T..............................................    1545-2172
54.9815-2715...............................................    1545-2229
54.9815-2719AT.............................................    1545-2181
54.9815-2719T..............................................    1545-2182
55.6001-1..................................................    1545-0123
55.6011-1..................................................    1545-0123
                                                               1545-0999
                                                               1545-1016
55.6060-1(a)(1)............................................    1545-1231
55.6061-1..................................................    1545-0999
55.6071-1..................................................    1545-0999
55.6107-1..................................................    1545-1231
56.4911-6..................................................    1545-0052
56.4911-7..................................................    1545-0052
56.4911-9..................................................    1545-0052
56.4911-10.................................................    1545-0052
56.6001-1..................................................    1545-1049
56.6011-1..................................................    1545-1049
56.6060-1(a)(1)............................................    1545-1231
56.6081-1..................................................    1545-1049
56.6107-1..................................................    1545-1231
56.6161-1..................................................    1545-0257
                                                               1545-1049
57.2(e)(2)(i)..............................................    1545-2249
145.4051-1.................................................    1545-0745
145.4052-1.................................................    1545-0120
                                                               1545-0745
                                                               1545-1076
145.4061-1.................................................    1545-0224
                                                               1545-0230
                                                               1545-0257
                                                               1545-0745
156.6001-1.................................................    1545-1049
156.6011-1.................................................    1545-1049
156.6060-1(a)(1)...........................................    1545-1231
156.6081-1.................................................    1545-1049
156.6107-1.................................................    1545-1231
156.6161-1.................................................    1545-1049
157.6001-1.................................................    1545-1824
157.6011-1.................................................    1545-1824
157.6060-1(a)(1)...........................................    1545-1231
157.6081-1.................................................    1545-1824
157.6107-1.................................................    1545-1231
157.6161-1.................................................    1545-1824
301.6011-2.................................................    1545-0225
                                                               1545-0350
                                                               1545-0387
                                                               1545-0441
                                                               1545-0957
301.6011(g)-1..............................................    1545-2079
301.6017-1.................................................    1545-0090
301.6034-1.................................................    1545-0092
301.6036-1.................................................    1545-0013
                                                               1545-0773
301.6047-1.................................................    1545-0367
                                                               1545-0957
301.6056-1.................................................    1545-2251
301.6056-2.................................................    1545-2251
301.6057-1.................................................    1545-0710
301.6057-2.................................................    1545-0710
301.6058-1.................................................    1545-0710
301.6059-1.................................................    1545-0710
301.6103(c)-1..............................................    1545-1816
301.6103(n)-1..............................................    1545-1841
301.6103(p)(2)(B)-1........................................    1545-1757
301.6104(a)-1..............................................    1545-0495
301.6104(a)-5..............................................    1545-0056
301.6104(a)-6..............................................    1545-0056
301.6104(b)-1..............................................    1545-0094
                                                               1545-0742
301.6104(d)-1..............................................    1545-1655
301.6104(d)-2..............................................    1545-1655
301.6104(d)-3..............................................    1545-1655
301.6109-1.................................................    1545-0003
                                                               1545-0295
                                                               1545-0367
                                                               1545-0387
                                                               1545-0957
                                                               1545-1461
                                                               1545-2242
301.6109-3.................................................    1545-1564
301.6110-3.................................................    1545-0074
301.6110-5.................................................    1545-0074
301.6111-1T................................................    1545-0865
                                                               1545-0881
301.6111-2.................................................    1545-0865
                                                               1545-1687
301.6112-1.................................................    1545-0865
                                                               1545-1686
301.6112-1T................................................    1545-0865
                                                               1545-1686
301.6114-1.................................................    1545-1126
                                                               1545-1484
301.6222(a)-2..............................................    1545-0790
301.6222(b)-1..............................................    1545-0790
301.6222(b)-2..............................................    1545-0790
301.6222(b)-3..............................................    1545-0790
301.6223(b)-1..............................................    1545-0790
301.6223(c)-1..............................................    1545-0790
301.6223(e)-2..............................................    1545-0790
301.6223(g)-1..............................................    1545-0790
301.6223(h)-1..............................................    1545-0790
301.6224(b)-1..............................................    1545-0790
301.6224(c)-1..............................................    1545-0790
301.6224(c)-3..............................................    1545-0790
301.6227(c)-1..............................................    1545-0790
301.6227(d)-1..............................................    1545-0790
301.6229(b)-2..............................................    1545-0790
301.6230(b)-1..............................................    1545-0790
301.6230(e)-1..............................................    1545-0790
301.6231(a)(1)-1...........................................    1545-0790
301.6231(a)(7)-1...........................................    1545-0790
301.6231(c)-1..............................................    1545-0790
301.6231(c)-2..............................................    1545-0790
301.6316-4.................................................    1545-0074
301.6316-5.................................................    1545-0074
301.6316-6.................................................    1545-0074
301.6316-7.................................................    1545-0029
301.6324A-1................................................    1545-0015
301.6361-1.................................................    1545-0024
                                                               1545-0074
301.6361-2.................................................    1545-0024
301.6361-3.................................................    1545-0074

[[Page 899]]

 
301.6402-2.................................................    1545-0024
                                                               1545-0073
                                                               1545-0091
301.6402-3.................................................    1545-0055
                                                               1545-0073
                                                               1545-0091
                                                               1545-0132
                                                               1545-1484
301.6402-5.................................................    1545-0928
301.6404-1.................................................    1545-0024
301.6404-2T................................................    1545-0024
301.6404-3.................................................    1545-0024
301.6405-1.................................................    1545-0024
301.6501(c)-1..............................................    1545-1241
                                                               1545-1637
301.6501(d)-1..............................................    1545-0074
                                                               1545-0430
301.6511(d)-1..............................................    1545-0024
                                                               1545-0582
301.6511(d)-2..............................................    1545-0024
                                                               1545-0582
301.6511(d)-3..............................................    1545-0024
                                                               1545-0582
301.6652-2.................................................    1545-0092
301.6685-1.................................................    1545-0092
301.6689-1T................................................    1545-1056
301.6707-1T................................................    1545-0865
                                                               1545-0881
301.6708-1T................................................    1545-0865
301.6712-1.................................................    1545-1126
301.6903-1.................................................    1545-0013
                                                               1545-1783
301.6905-1.................................................    1545-0074
301.7001-1.................................................    1545-0123
301.7101-1.................................................    1545-1029
301.7207-1.................................................    1545-0092
301.7216-2.................................................    1545-0074
301.7216-2(o)..............................................    1545-1209
301.7425-3.................................................    1545-0854
301.7430-2(c)..............................................    1545-1356
301.7502-1.................................................    1545-1899
301.7507-8.................................................    1545-0123
301.7507-9.................................................    1545-0123
301.7513-1.................................................    1545-0429
301.7517-1.................................................    1545-0015
301.7605-1.................................................    1545-0795
301.7623-1.................................................    1545-0409
                                                               1545-1534
301.7654-1.................................................    1545-0803
301.7701-3.................................................    1545-1486
301.7701-4.................................................    1545-1465
301.7701-7.................................................    1545-1600
301.7701-16................................................    1545-0795
301.7701(b)-1..............................................    1545-0089
301.7701(b)-2..............................................    1545-0089
301.7701(b)-3..............................................    1545-0089
301.7701(b)-4..............................................    1545-0089
301.7701(b)-5..............................................    1545-0089
301.7701(b)-6..............................................    1545-0089
301.7701(b)-7..............................................    1545-0089
                                                               1545-1126
301.7701(b)-9..............................................    1545-0089
301.7705-1.................................................    1545-2266
301.7705-2.................................................    1545-2266
301.7805-1.................................................    1545-0805
301.9000-5.................................................    1545-1850
301.9001-1.................................................    1545-0220
301.9100-2.................................................    1545-1488
301.9100-3.................................................    1545-1488
301.9100-4T................................................    1545-0016
                                                               1545-0042
                                                               1545-0074
                                                               1545-0129
                                                               1545-0172
                                                               1545-0619
301.9100-6T................................................    1545-0872
301.9100-7T................................................    1545-0982
301.9100-8.................................................    1545-1112
301.9100-11T...............................................    1545-0123
301.9100-12T...............................................    1545-0026
                                                               1545-0074
                                                               1545-0172
                                                               1545-1027
301.9100-14T...............................................    1545-0046
301.9100-15T...............................................    1545-0046
301.9100-16T...............................................    1545-0152
302.1-7....................................................    1545-0024
305.7701-1.................................................    1545-0823
305.7871-1.................................................    1545-0823
420.0-1....................................................    1545-0710
Part 509...................................................    1545-0846
Part 513...................................................    1545-0834
Part 514...................................................    1545-0845
Part 521...................................................    1545-0848
601.104....................................................    1545-0233
601.105....................................................    1545-0091
601.201....................................................    1545-0019
                                                               1545-0819
601.204....................................................    1545-0152
601.401....................................................    1545-0257
601.504....................................................    1545-0150
601.601....................................................    1545-0800
601.602....................................................    1545-0295
                                                               1545-0387
                                                               1545-0957
601.702....................................................    1545-0429
------------------------------------------------------------------------


[T.D. 8011, 50 FR 10222, Mar. 14, 1985]

    Editorial Note: For Federal Register citations affecting Sec.  
602.101, see the List of CFR Sections Affected, which appears in the 
Finding Aids section of the printed volume and at www.govinfo.gov.

[[Page 901]]



List of CFR Sections Affected



All changes in this volume of the Code of Federal Regulations (CFR) that 
were made by documents published in the Federal Register since January 
1, 2015 are enumerated in the following list. Entries indicate the 
nature of the changes effected. Page numbers refer to Federal Register 
pages. The user should consult the entries for chapters, parts and 
subparts as well as sections for revisions.
For changes to this volume of the CFR prior to this listing, consult the 
annual edition of the monthly List of CFR Sections Affected (LSA). The 
LSA is available at www.govinfo.gov. For changes to this volume of the 
CFR prior to 2001, see the ``List of CFR Sections Affected, 1949-1963, 
1964-1972, 1973-1985, and 1986-2000'' published in 11 separate volumes. 
The ``List of CFR Sections Affected 1986-2000'' is available at 
www.govinfo.gov.

                                  2015

26 CFR
                                                                   80 FR
                                                                    Page
Chapter I
1.6011-8 (a) revised...............................................78977
1.6033-2 (k)(4) correctly revised..................................25230
1.6038B-1 (g)(6) correctly revised...................................167
1.6045-1 (m)(2)(ii) revised; (n)(4)(iv) and (5)(i) amended; 
        (n)(11) added..............................................13238
1.6045-1T (h) through (p) revised..................................13238
1.6045A-1 (a)(1)(vi) removed; (e) and (f) added....................13238
1.6045A-1T Added...................................................13238
    (f) correctly amended..........................................31996
1.6049-5 (f) amended...............................................13239
1.6049-9 Added.....................................................13239
1.6049-9T Removed..................................................13239
1.6049-10T Added...................................................13239
1.6081-8 Revised; eff. 7-1-16......................................48435
1.6081-8T Added; eff. 7-1-16.......................................48435
1.7874-3 Added.....................................................31841
1.7874-3T Removed..................................................31841

                                  2016

26 CFR
                                                                   81 FR
                                                                    Page
Chapter I
1.5000C-0 Undesignated center heading and section added............55137
1.5000C-1 Added....................................................55138
1.5000C-2 Added....................................................55138
1.5000C-3 Added....................................................55138
1.5000C-4 Added....................................................55138
1.5000C-5 Added....................................................55138
1.5000C-6 Added....................................................55138
1.5000C-7 Added....................................................55138
1.6011-8 Revised...................................................91768
1.6035-2 Revised...................................................86955
1.6035-2T Added....................................................11432
    Removed........................................................86955
1.6038-2 (j)(3) and (m) revised....................................95470
1.6038-2T Removed..................................................95470
1.6038-4 Added.....................................................42489
    (d)(3)(iv) correctly revised...................................64061
1.6038A-0 Amended..................................................89850
1.6038A-1 (c)(1), (h), (i)(1), (n)(1) and (2) amended..............89850
1.6038A-2 (a)(2), (b)(3)(ix), (x), (d) and (e)(3) amended; 
        (b)(3)(vii) and (e)(4) revised; undesignated text 
        following (b)(3)(x) removed; (b)(3)(xi) and (9) added......89851
1.6038B-1 (c)(4)(ii) amended; (f)(3) revised.......................15169
    (b)(1)(i) and (g)(1) amended; (c)(1) through (5) and (d) 
revised; (g)(7) added..............................................91031
1.6038B-1T (c)(4)(ii)(A), (B) and (f)(3) amended...................15169
    (c)(4)(i) through (5) introductory text, (d)(1)(iv) and (vii) 
removed............................................................91032

[[Page 902]]

1.6038D-0 Amended...................................................8838
1.6038D-1 (a)(12) revised...........................................8838
1.6038D-2 (a)(6) redesignated as (a)(6)(i); new (a)(6)(i) heading 
        and (ii) added; (g) revised.................................8838
1.6038D-6 Added.....................................................8838
1.6041-10 Added....................................................96377
1.6045-1 (n)(4) introductory text, (iv), (5)(i), (6)(i), (ii), 
        (7)(iii) and (9) amended; (n)(11) revised; (n)(12) added 
                                                                    8153
    (n)(4) correctly amended.......................................24702
    (c)(3)(vi) revised.............................................44515
1.6045-1T (h) through (p) revised...................................8153
1.6045A-1 (b)(3)(viii), (ix), (4)(ii) and (iii) amended; (b)(3)(x) 
        and (4)(iv) added; (e) and (f) removed......................8154
    (b)(3)(ix) and (4)(iii) correctly amended......................24702
1.6045A-1T Removed..................................................8154
1.6046-1 (e)(5) revised; (l)(3) added..............................95470
1.6046-1T Removed..................................................95470
1.6049-9 (c) correctly amended.....................................24702
1.6049-10 Added.....................................................8154
1.6049-10T Removed..................................................8154
1.6050P-1 (b)(2)(i)(F) and (G) amended; (b)(2)(i)(H), (iv) and (v) 
        removed; (h) revised.......................................78911
1.6695-2 Heading, (a), (b)(1)(i) introductory text, (ii), (2), 
        (3)(i), (ii), (4)(i)(B), (C) and (c)(3) revised............87446
1.6695-2T Added....................................................87446
1.7701-1 Added.....................................................60616
1.7701(l)-4T Added.................................................20888
    (a) and (g) Examples 3 and 11 correctly amended................40811
1.7874-1 (f) and (g) redesignated as (g) and (h); (h) further 
        redesignated as (h)(1); (c)(2)(iii), new (f), new (h) 
        heading and (2) added; new (h)(1) heading revised; new 
        (h)(1) amended.............................................20894
1.7874-1T Added....................................................20894
    (i) correctly revised..........................................40811
1.7874-2 (l) redesignated as (l)(1); (a), (b) introductory text, 
        (c)(2), (f)(1) introductory text and new (l)(1) heading 
        revised; (b)(5) through (9) redesignated as new (b)(2) 
        through (6); new (b)(7) through (13), (c)(4), (f)(1)(iv), 
        (k)(2) Example 21, (l) heading, (2) added; (b)(2), (3), 
        (4), new (6), (d)(e), (e), (g)(2)(i), (ii), (6), 
        (h)(3)(i), (ii), (4)(ii), (i)(2)(i), (ii), (j)(1), (3), 
        (k)(2) Examples 7, 11 through 16, 19 and 20 and (l) 
        amended....................................................20894
1.7874-2T Added....................................................20895
    (c)(4)(iii) and (m) correctly revised..........................40811
1.7874-3 (f) redesignated as (f)(1); (a) amended; (b) introductory 
        text, (d)(10) and new (f)(1) heading revised; (b)(4), (f) 
        heading and (2) added......................................20896
1.7874-3T Added....................................................20896
    (g) correctly revised..........................................40811
1.7874-4T (j) Example 3 through Example 8 redesignated as Example 
        4 through Example 9; (d)(1)(i), (i)(6), (7)(iv) and (k)(1) 
        revised; (j) new Example 3, (9), (10) and (11) added; 
        (c)(1)(i), (ii)(B), (2), (d)(1)(ii), (h), (i)(7)(iii)(C), 
        (j) Examples 1, 2, new Examples 4, 5, 6 and 9, (7) and (8) 
        amended....................................................20897
1.7874-6T Added....................................................20898
    (f)(3) and (i) correctly revised...............................40811
1.7874-7T Added....................................................20900
    (g) Example 2 correctly amended; (i) correctly revised.........40811
1.7874-8T Added....................................................20902
    (h) Examples 1, 2 and 3 correctly amended; (j) correctly 
revised............................................................40812
    (h) Example 3 correctly amended................................46833
1.7874-9T Added....................................................20904
    (e)(1) and (h) correctly revised; (f) Example correctly 
amended............................................................40812
1.7874-10T Added...................................................20905
    (d)(2) and (j) correctly revised...............................40812
1.7874-11T Added...................................................20907
    (b)(1), (2) and (g) correctly revised..........................40812
1.7874-12T Added...................................................20908
    (c) correctly revised..........................................40812

[[Page 903]]

                                  2017

26 CFR
                                                                   82 FR
                                                                    Page
Chapter I
1.6012-6 (a)(1) revised............................................33444
1.6012-6T Added....................................................33444
1.6031(a)-1 (e)(2) revised.........................................33444
1.6031(a)-1T Added.................................................33444
1.6032-1 Revised...................................................33444
1.6032-1T Added....................................................33444
1.6032-9T Added....................................................33447
1.6033-2 (e) revised...............................................33445
1.6033-2T Added....................................................33445
1.6038B-2 (a)(1)(i), (ii), (3), (c)(6), (7)(v), (h)(1) 
        introductory text and (3) revised; (a)(1)(iii), (c)(8), 
        (9), (j)(4) and (5) added...................................7610
1.6038B-2T Added....................................................7611
1.6041-1 (d)(5)(i), (ii) and (j) revised............................2106
1.6041-1T Removed...................................................2106
1.6041-2 (a)(3)(ii) revised........................................33445
1.6041-2T Added....................................................33445
1.6041-4 (a)(1), (2), (3), (7), (b) and (d) revised.................2106
1.6041-4T Removed...................................................2106
1.6041-6 Revised...................................................33445
1.6041-6T Added....................................................33445
1.6042-2 (a)(1)(i) and (f) revised..................................2106
1.6042-2T Removed...................................................2107
1.6042-3 (b)(1)(iii), (iv), (vi) and (3) revised; (b)(5) removed; 
        (d) added...................................................2107
1.6042-3T Removed...................................................2108
1.6045-1 (c)(3)(ii), (xiv), (g)(1)(i), (3)(iv), (4), (m)(2)(ii) 
        and (n)(12)(ii) revised; (c)(3)(xv), (7)(v) and (g)(5) 
        removed; (q) added..........................................2108
    (m)(2)(ii) and (n)(12)(ii) revised.............................29727
1.6045-1T Removed...................................................2110
1.6045-4 Amended; CFR correction...................................46672
1.6049-4 (b)(1), (c)(4), (f)(3), (4)(ii), (5) through (16) and (h) 
        revised.....................................................2110
1.6049-4T Removed...................................................2112
1.6049-5 (b)(6), (7), (8), (10) through (11)(ii)(A), (12), (14), 
        (15), (c)(1)(i), (ii), (iii), (2), (3) , (4) introductory 
        text, (i), (5)(i)(F), (6), (d)(1), (2), (3)(i) through 
        (iii)(A), (4), (e) and (g) revised; (c)(1)(iv) added; 
        (c)(4)(ii) removed; (c)(4)(iii) and (iv) redesignated as 
        new (c)(4)(ii) and (iii)....................................2112
    (c)(1) through (4) revised.....................................29727
1.6049-5T Removed...................................................2120
1.6050N-1 (c)(1)(ii) revised........................................2120
1.6072-2 (a), (d)(1) and (2) revised...............................33445
1.6072-2T Added....................................................33445
1.6081-1 (a) revised...............................................33446
1.6081-1T Added....................................................33446
1.6081-2 (a)(1) revised............................................33446
1.6081-2T Added....................................................33446
1.6081-3 (e) redesignated as (g); new (e) and (f) added; (a) 
        introductory text and new (g) heading revised..............33446
1.6081-3T Added....................................................33446
1.6081-5 (a)(1) revised............................................33447
1.6081-5T Added....................................................33447
1.6081-6 (a)(1) revised............................................33447
1.6081-6T Added....................................................33447
1.6081-9 (a), (b)(1), (3), (c), (d) and (e) revised................33447
1.7704-4 Added......................................................8338
1.7874-1 (c)(1) amended.............................................5401
1.7874-4 Added......................................................5394
    (i)(2)(iii)(A), (C) introductory text, and (2) revised.........42233
1.7874-4T Removed...................................................5400
1.7874-5 Added......................................................5400
1.7874-5T Removed...................................................5400
1.7874-6T (g) Example 4 amended.....................................5401
1.7874-7T (c)(2) and (h) revised....................................5400
    (b)(1), (c)(1), (f)(1)(i), (2) introductory text, (3)(i), 
(ii), (g) Examples 1, 2 and 3 amended...............................5401
1.7874-9T (e)(3) introductory text amended..........................5401
1.7874-10T (d)(2) and (i) revised...................................5400
    (d)(1) introductory text and (f)(3)(iii)(B) amended.............5401
1.7874-12T (a) introductory text revised............................5401

                                  2018

26 CFR
                                                                   83 FR
                                                                    Page
Chapter I
1.6050L-1 (a)(2)(i), (e), and (f)(2)(ii) amended; (c)(4)(i) 
        introductory text and (d)(2) revised; (h) added............36427
1.6081-8 Revised...................................................38028
1.6081-8T Removed..................................................38029

[[Page 904]]

1.6695-2 Heading, (a), (b)(1)(i) introductory text, (ii), (2), 
        (3), (4)(i)(B), (C), (c)(3), and (e) revised...............55635
    Second (b)(3)(ii)(D) redesignated as (b)(3)(ii)(E).............64459
1.6695-2T Removed..................................................55636
1.7701(l)-4 Added..................................................32538
1.7701(l)-4T Removed...............................................32543
1.7874-1 (a), (b), (c)(1), (2) introductory text, (i), (ii), (3), 
        new (e)(2), new (h) Example 6, new (i)(1) amended; (d) 
        through (h) redesignated as (e) through (i); new (d) 
        added; (c)(2)(iii), new (g), and new (i)(2) revised........32543
1.7874-1T Removed..................................................32544
1.7874-2 (a), (b)(7) through (13), (c)(2), (4), (f)(1) 
        introductory text, (iv), (k)(2) Example 21 and (l)(2) 
        revised; (b) introductory text amended.....................32544
1.7874-2T Removed..................................................32546
1.7874-3 (d)(1) and (4) removed; (d)(2), (3), and (5) through (13) 
        redesignated as new (d)(1), (2), (3) through (10), and 
        (12); (b)(4), (d) introductory text, new (d)(8), and 
        (f)(2) revised; (d)(11) added; (b) introductory text, 
        (c)(1)(iii), new (d)(1)(i), (ii), (3), (9), (f)(1) amended
                                                                   32546
1.7874-3T Removed..................................................32546
1.7874-4 (d)(1)(ii) revised; (h) removed; (i), (j), and (k) 
        redesignated as (h), (i), and (j); (a), (c)(1)(i), 
        (ii)(A), (2), (d)(1)(i), (ii), new (h), introductory text, 
        (1), (2), introductory text, (ii), (iii)(A), (C)(2), (iv), 
        new (i)(10), (11), (i) Example 1 through Example 9, new 
        (j)(1), (2) and (3) amended................................32547
1.7874-5 (c) and (d) amended.......................................32548
1.7874-6 Added.....................................................32548
1.7874-6T Removed..................................................32550
1.7874-7 Added.....................................................32551
1.7874-7T Removed..................................................32553
1.7874-8 Added.....................................................32553
1.7874-8T Removed..................................................32555
1.7874-9 Added.....................................................32555
1.7874-9T Removed..................................................32557
1.7874-10 Added....................................................32557
1.7874-10T Removed.................................................32559
1.7874-11 Added....................................................32559
1.7874-11T Removed.................................................32560
1.7874-12 Added....................................................32560
1.7874-12T Removed.................................................32561

                                  2019

26 CFR
                                                                   84 FR
                                                                    Page
Chapter I
1 Authority citation amended.........................29334, 58478, 67017
1.6012-2 (k) revised................................................9237
1.6012-4 Amended....................................................9237
1.6035-1 Removed....................................................9237
1.6035-3 Removed....................................................9237
1.6038A-1 (n)(2) redesignated as (n)(2)(i); new (n)(2)(i) and 
        (n)(3) amended; new (n)(2)(i) heading and (ii) added.......67044
1.6038A-2 (a) heading, (1) heading, (2), (b)(1)(ii), (2)(iv), and 
        (c) revised; (b)(3), (d), and (g) amended; (b)(6) through 
        (9) redesignated as (b)(8) through (11); (a)(3), new 
        (b)(6), and (7) added......................................67044
1.6038A-4 (a)(1), (3), (d)(1), (4), and (f) amended; (f) Examples 
        1 and 2 redesignated as (f)(1) and (2).....................67045
1.6038-2 Heading, (a) introductory text, and (m) revised...........29369
1.6038-2T Added (temporary)........................................28423
1.6038-5 Added.....................................................29369
1.6049-7T Removed...................................................9237
1.6050H-1 (g)(1) amended............................................9237
1.6050H-1T Removed..................................................9237
1.6050H-2 (g)(1) amended............................................9237
1.6050Y-1 Added....................................................58484
1.6050Y-1(b) Correction: introductory text amended.................68043
1.6050Y-2 Added....................................................58486
1.6050Y-3 Added....................................................58487
1.6050Y-4 Added....................................................58488
1.6052-2 (a), (c), and (d) revised; (b), (f), and (g) removed; (e) 
        redesignated as new (b)....................................31719
1.6071-1 (c)(5) removed.............................................9237
1.6072-4 (b) removed................................................9237
1.6091-1 (b)(5) removed.............................................9237
1.6654-4 Removed....................................................9237
1.6655-0 Table amended.............................................33692
1.6655-2 (f)(3)(i) heading and (A) removed; (f)(3)(i)(B) 
        redesignated as (f)(3)(i)..................................33692
1.6655-5 (e) Examples 1 through 13 redesignated as (e)(1) through 
        (13).......................................................67045

[[Page 905]]

1.6655-6 (c) Example 1 removed; Example 2 redesignated as (c)(1); 
        heading, introductory text, and new (c)(1) heading revised
                                                                   33692

                                  2020

   (Regulations published from January 1, 2020, through April 1, 2020)

26 CFR
                                                                   85 FR
                                                                    Page
Chapter I
1.6012-6 (a)(1) revised; (c) added..................................5324
1.6012-6T Removed...................................................5324
1.6031(a)-1 (e)(2) and (f) revised..................................5324
1.6031(a)-1T Removed................................................5324
1.6032-1 Revised....................................................5324
1.6032-1T Removed...................................................5325
1.6033-2 (e) and (k) revised........................................5325
1.6033-2T Removed...................................................5325
1.6038A-2 Correction: (g) amended...................................9370
1.6038B-2 (h)(1) introductory text amended; (a)(1)(iii), (3), 
        (c)(8), (9), (h)(3), (j)(4), and (5) revised................3851
1.6038B-2T Removed..................................................3852
1.6041-2 (a)(3)(ii) revised; (d) added..............................5325
1.6041-2T Removed...................................................5325
1.6041-6 Revised....................................................5325
1.6041-6T Removed...................................................5325
1.6049-6 (e)(4) and (5) amended......................................206
1.6072-2 (a), (d)(1), and (2) revised; (g) added....................5325
1.6072-2T Removed...................................................5326
1.6081-1 (a) and (c) revised........................................5326
1.6081-1T Removed...................................................5326
1.6081-2 (a) and (h) revised........................................5326
1.6081-2T Removed...................................................5326
1.6081-3 (a) introductory text, (e), (f), and (g) revised...........5326
1.6081-3T Removed...................................................5326
1.6081-5 (a)(1) and (f) revised.....................................5326
1.6081-5T Removed...................................................5326
1.6081-6 (a)(1) and (g) revised.....................................5326
1.6081-6T Removed...................................................5327
1.6081-9 (a), (b)(1), (3), and (c) through (f) revised..............5327
1.6081-9T Removed...................................................5327


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